The development of blockchain technology (‘blockchain’) has been accelerating since its introduction in 2009 and is likely to be foundational technology similar to the Internet when it became widely adopted in 1993. Blockchain is expected to be used by 15% of large banks by 2017. It is important for organisations to be aware of the potential and likely impact of blockchain to their business and the increasingly crowded patent landscape that is developing.
Patents provide businesses with a competitive advantage in the market among other competitive advantages such as first mover advantage, superior distribution channels and operational excellence (to achieve cost leadership). Also, patents are a valuable source of information for competitive intelligence because they offer an insight into technologies and business models that particular businesses have expressed interested in. Regular monitoring of the patent landscape can also minimise or avoid duplicate R&D expenditure and identify opportunities or freedom-to-operate obstacles in the earlier stages of the product development cycle.
Blockchain is the evolution of six major technologies combined to interact in a novel way to securely transfer value from one party to another without an intermediary. These six technologies are: asymmetric encryption (US patent 4,405,829), hash functions (Hans Peter Luhn in 1960s), Merkle trees (US patent 4,309,569), key-value database (Charles Bachman in 1960s), P2P communication protocol (Tom Truscott and Jim Ellis in 1979), and proof of work (Cynthia Dwork and Moni Naor in 1993).
Blockchain disintermediates trusted third parties because the technology now codifies the trust. Therefore the cost and risk of transactions and their execution time can be reduced using blockchain. Typical activities such as due diligence and policing costs (e.g. adherence to contractual terms) can also be reduced. Transaction cost may account for 0.1% to 5% of the average selling price depending on the industry. Trusted third parties include government agencies, financial institutions, lawyers/notaries, stock exchanges, auction houses, etc, that are at most risk of being disrupted by the blockchain.
Blockchain is a decentralised and distributed peer-to-peer system formed of chains of blocks of data. There are two types of blockchain: public and private. A public blockchain network is completely open and anyone can join and participate in the network. A private blockchain network requires an invitation and is permissioned meaning there are restrictions on who is allowed to participate in the network, and only in certain transactions. When a transaction is made using blockchain, it is packaged with other transactions into a block and recorded across a decentralised system of computers, and a majority of the network is required to confirm the transaction in order for it to be accepted as legitimate (i.e. consensus). This block is time-stamped with a cryptographic hash. Each block contains:
- a timestamp,
- a reference to the previous block’s hash (i.e. chaining) which creates a chain of records that is considered impossible to falsify, and
- transactions that are being confirmed in this block and a statement of a new complex mathematical problem to be solved.
The key advantage of this blockchain is that no trusted third party is required to approve a transaction because transactions are based on cryptographic proof instead of trust. Consequently, parties of transactions are protected from fraud. See illustration of the chaining of blocks below:
Currently, the most well known implementations of blockchain are Bitcoin and Ethereum. Bitcoins are a digital bearer asset (a cryptocurrency) and for Ethereum the digital bearer asset is Ether. Fiat money can be exchanged for Bitcoins or Ether. The purpose of Ether is to reward/compensate participants for the computing power (electricity, bandwidth, etc) required to process/complete transactions on the Ethereum network.
Ethereum differs from Bitcoin because it allows developers to program, using the Solidity language, their own smart contracts or autonomous agents. Smart contracts are self-executing meaning that if certain conditions are met, value (e.g. money, Bitcoin, tangible/intangible assets) can be automatically transferred from one party to another without a middleman. Smart contracts can define rules (e.g. time limits, release of funds in escrow upon an event occurring, etc) and penalties (e.g. late surcharges, cancellation of delivery, transfer of deposit funds held in escrow, etc) similar to conventional contracts but a smart contract is able to automatically enforce the obligations.
Stay tuned for Part 2 on what to expect next and tips on protecting blockchain inventions.