What opportunities and challenges will the Internet of Things face when it meets blockchain?

Internet of Things and Blockchain

Blockchain is a form of distributed ledger technology that has gained huge attention in areas beyond cryptocurrency since 2014: blockchain + Internet of Things (IoT), blockchain + security, blockchain + finance, blockchain + logistics, etc. In this article, we will analyze the opportunities, development history, and challenges of blockchain in the field of IoT.

Blockchain technology, or distributed ledger technology, seems to be changing every aspect of digital business, and according to people like Don Tapscott, the “father of the digital economy”, blockchain is more important than the Internet. Blockchain combined with the Internet of Things is also extremely important, and I will explain why further below.

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By 2019, 20% of IoT deployments will have basic blockchain services (IDC).

Blockchain (in fact there are many blockchains, not just the one used by Bitcoin), is mentioned by almost all research institutions as a rapidly evolving field, and not just limited to financial services companies, FinTech is the first application of blockchain outside of cryptocurrencies. In fact, the integration of blockchain and IoT has become the agenda of many companies, and there are several fields outside of IoT and financial services where blockchain solutions and initiatives have been implemented.

Distributed Internet of Things meets distributed ledger technology

As Frank Gens, an analyst at IDC, said, blockchain is also becoming increasingly important in next-generation security. Blockchain cannot meet all the challenges of the digital economy, but it will certainly play an increasingly important role in the Internet of Things. Forrester, a well-known market research company, mentioned the potential of blockchain for IoT solutions:

IoT applications are inherently distributed by definition, so distributed ledger technology (blockchain) can play a role in how devices communicate directly with each other (distributed ledger technology is not just about tracking devices, but also how they interact, and even what state they may be in, and how to "handle" different situations).

Blockchain is designed as the basis for applications involving transactions and interactions, including smart contracts (smart contracts are automatically executed when specific conditions are met) and other smart applications that support specific IoT. Therefore, blockchain technology can not only improve the compliance of IoT, but also improve the functionality and cost-effectiveness of IoT.

Don't wait and see, take action

It’s still early days, but big tech companies are already taking action.

For example, IBM Blockchain already allows the extension of (private) blockchains to cognitive IoT. In practice, this will ultimately be a combination of AI, IoT and blockchain. With blockchain, we are adding a more diversified digital infrastructure to the ever-changing digital infrastructure that is able to influence developments in many areas, such as analytics, security, etc., in a hitherto centralized environment.

Regarding the benefits of blockchain and IoT convergence, IBM applies smart contracts to complex trade corridors and logistics, tracking all individual items and packages through blockchain technology. Benefits: audit trails, accountability, new forms of contracts, speed, etc.

In the infographic below, IBM summarizes three key advantages of applying blockchain to IoT. The three major benefits of blockchain for IoT are: building trust, reducing costs and speeding up transactions.

Challenges that IoT and blockchain need to solve

Now is the time to start looking into the convergence of IoT and blockchain, even though the combination of the two may not be applicable in the current environment. IoT and blockchain ecosystem participants must address three categories of challenges:

• Technology, mainly security. Security has become a challenge for the Internet of Things and needs more attention. It is worth noting that blockchain is also a way to improve the security of the Internet of Things.
• The security flaw of IoT lies in the lack of a mutual trust mechanism between devices. All devices need to check the data with the IoT center. Once the database collapses, it will cause great damage to the entire IoT. The distributed network structure of blockchain allows devices to maintain consensus without the need to verify with the center. In this way, even if one or more nodes are breached, the data of the overall network system is still reliable and secure.
• Operational challenges: business model and practical aspects, because this requires consensus among multiple parties. Consider the example of IBM Logistics.

Blockchain technology can provide the Internet of Things with a point-to-point direct interconnection method to transmit data instead of through a central processor, so that distributed computing can handle hundreds of millions of transactions. At the same time, it can also make full use of the computing power, storage capacity and bandwidth of hundreds of millions of idle devices distributed in different locations for transaction processing, greatly reducing the cost of computing and storage.

Legal and compliance issues, some mentioned the issue of liability when a device takes action, which is a rule that is automatically executed by a blockchain-based application, triggered by another blockchain-based application. And then there's the example of smart contracts mentioned above. As you know, even outside of this IoT and blockchain, getting contracts is far from easy.

Blockchain is the answer to IoT challenges

In the book “Go Digital or Die”, the author describes the practical problems that blockchain can solve in the Internet of Things and how blockchain can accelerate the development of the Internet of Things:

Blockchain technology promises to bring about an Internet of Things without any third party “authentication.” It solves challenges such as scalability, single points of failure, time stamping, records, privacy, trust, and reliability in a very consistent way.

Blockchain technology can provide a simple infrastructure for two devices to directly transfer property such as currency or data to each other through a secure and reliable time-stamped contract. To achieve message exchange, IoT devices will utilize smart contracts, which will then simulate the agreement between the two parties. This feature enables the autonomous operation of smart devices without centralized authorization. If peer-to-peer transactions are extended to people and people or people and objects/platforms, what you get is a completely decentralized trusted digital infrastructure.

Blockchain + IoT cross-industry case: Insurance

There are several industries that are testing blockchain. In these industries, there is a connection between blockchain and IoT within a specific industry. For example: blockchain IoT and the insurance industry.

The main use cases of blockchain in the insurance business are smart contracts and enhancing processes such as claims management. Other applications include fraud management and legal compliance applications.

Within the scope of blockchain and IoT, the application of blockchain and IoT in the insurance sector will be very interesting and will increasingly move from a pure telematics model to the connection of real-time IoT data to various smart automated insurance policy applications.

While this may seem like a long way off for blockchain applications in the insurance industry, it is worth noting that in early 2017, IDC predicted that insurance would be one of the fastest growing industries by 2021 from an IoT investment perspective, albeit with a primary focus on telematics (to which smart contracts could be applied).