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Blockchain – Facts Behind the Hype

Spotting opportunities and exploiting them

In 2009, a person or group of people going by the name Satoshi Nakamoto introduced a digital currency called Bitcoin. Their aim was to cause disruption in the world of banking. Bitcoin is a high-profile example of so-called blockchain. Daniel Burkhardt, scientific assistant at the Ferdinand-Steinbeis-Institute in Stuttgart, explains the diversity of blockchain solutions and the factors that are important for their use.

Some companies, banks, and state institutions act as central intermediaries between customers and service providers. As such, they have established a lucrative position of power. Users have accepted this setup without even questioning their trustworthiness and they have increasingly become dependent on these intermediaries. In times when the customer is supposed to be king, this is somewhat paradoxical. A situation has evolved in which structures are based on a data monopoly and people feel their data is being analyzed. In the wake of the banking crisis of 2008, more and more people have been demanding transparency and new solutions. This is offered by blockchain, although this is just one part of the picture.

A blockchain is a digital ledger that keeps updating itself and is duplicated by the participants in a distributed network. A blockchain makes it possible to record currency transactions. Protocols are then based on the blockchain, as with Bitcoin, and these define how participants in the network reach consensus regarding the actual status of a transaction. Transactions are recorded alongside other transactions within the network to form blocks. This happens until a certain block size has been reached, as defined by the protocol. The blocks are kept inside the blockchain with the very latest encryption techniques. It’s important to make a distinction between two definitions of the term blockchain. Blockchain can be used to describe an overall area, but it can also refer to a technological approach, which is what we describe here.

The current status of the blockchain ecosystem is comparable to the internet before 1990. For example, the first generation of blockchain is reflected by systems such as Bitcoin, Ripple, or Dash. These make it possible to carry out financial transactions. But these systems have certain disadvantages when it comes to scalability and the speed at which transactions can be carried out. For example, with bitcoins a block with an average number of 2,050 transactions is stored in the blockchain every 5 to 20 minutes. This compares to a credit card company like Visa, which can achieve 2,537 transactions per second, and underscores how much catching up Bitcoin and other protocols have to do. The second blockchain generation includes protocols such as Ethereum. This particular solution makes it possible to offer functions such as autonomous programs (smart contracts) in a blockchain, thus automating entire steps within the process. This, in turn, makes it possible to run distributed platforms and thus cover a broader range of application scenarios. However, these blockchain concepts with extended functionality are still unable to offer solutions to the aforementioned weaknesses (such as the lack of scalability), although development work is already underway in this area.

The nature of blockchain does however make it possible to develop new application scenarios or adapt existing functions. One such field of application relates to the Industrial Internet of Things (IIoT). By merging operational technology (OT) (which works in areas such as sensors or enterprise resource planning) with IT processes, it is possible to come up with some completely new solutions. For example, data gathered by sensors on production lines can be analyzed in the cloud in order to work out what is happening and introduce measures to optimize manufacturing processes. By introducing blockchain, “things” such as autonomous objects, sensors, and actuators (at all stages of the value chain) can tap into certain services, and in essence this can happen without having to make a detour via central processing units for payment.

In Germany, a number of initiatives have started to make use of private or public blockchain. A position paper issued by the Federal Blockchain Association contains a list of companies and institutions actively involved in blockchain in Germany. To prevent the parallel development of heterogeneous blockchain systems and identify the potential of this technology to add value, the required approach needs to be considered from a variety of angles. This is the aim of a research project called “Distributed Ledger – Blockchain and IIoT” being carried out at the Ferdinand-Steinbeis-Institute (FSTI). Blockchain should not be seen as a technology of the “fourth industrial revolution” – such as additive manufacturing or artificial intelligence. As a virtual intermediary, the system has the potential to foster all of these technological developments itself, as well as carry out currency transactions and forge new links. As a result, the blockchain concept is fueling a technology revolution, also affecting change in social, legal, organizational, governmental, and other individual structures. Increasingly, concepts such as the shared economy, digital government, open ecosystems, data ownership, and digital trust are gaining in importance and becoming implementable.

A blockchain stack: A blockchain is a digital ledger that allows transactions to be recorded.
The protocols it adheres to determine the rules for validating transactions.

As a result, it is crucial that a variety of factors relating to blockchain be analyzed, not only in order to add value as blockchain is integrated into other processes, but also to make it possible to introduce or evolve new business models and ecosystems. The following factors have been identified, as well as certain issues that are important when analyzing these factors:

  • Technology: What technological aspects are important for blockchain systems, and how are they used and configured?
  • Concept and architecture: What subcomponents and layers does blockchain architecture encompass? How does the blockchain ecosystem build on this, and how is it arranged?
  • Business model and strategy: What business models are made possible by blockchain solutions, and what impact could this have on business strategies?
  • Functions: What functions or services are made available and can be implemented by using blockchain?
  • Processes and principles: What processes and principles are needed to implement a blockchain, and in what form?

By analyzing these factors in detail, it is possible to assess whether a blockchain can add value when implementing trustless peer-to-peer messaging or autonomous smart objects within the context of the IIoT, or whether it actually makes sense to use blockchain as component within such systems. The IIoT has certain vulnerabilities when it comes to identity and data protection. So perhaps a blockchain can make certain things better. Furthermore, a marketplace for technology data would be interesting in the future, as would a remote maintenance platform. Blockchain has dedicated features and these can be a crucial component when introducing new systems. Aside from its implications for the economy and social systems, blockchain comes in many forms and varieties, so the challenge now is to analyze this in detail. The experts at the FSTI have recognized this challenge and made the task a top priority.


Daniel Burkhardt

Daniel Burkhardt has been a scientific assistant at the Ferdinand- Steinbeis-Institute, a research institution for digital solutions and networking at the Steinbeis Foundation, since June 2017. The focus of his work lies in project implementation and research in the field of distributed ledger (blockchain and the Industrial Internet of Things). His current projects revolve around business model innovation and delivery, IT service architecture, business processes, and emerging technologies. One question interests him daily: “How can a distributed ledger be used to add value as a component within other technologies or models?“

Daniel Burkhardt
Ferdinand-Steinbeis-Institute (Stuttgart)