Blockchain and the Internet of Things: the IoT blockchain opportunity and challenge

Blockchain, a form of Distributed Ledger Technology, has been gaining enormous attention in areas beyond its cryptocurrency roots since more or less 2014: blockchain and IoT (the Internet of Things), blockchain and security, blockchain and finance, blockchain and logistics, you name it. In this article we look at the IoT blockchain opportunities, evolutions and challenges.

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

As we wrote before it seems as if blockchain technology or, better, Distributed Ledger Technology, is about to change all aspects of digital business and according to some such as Don Tapscott, blockchain is a bigger deal than the Internet. Combine blockchain and IoT and you have two bigger deals than the Internet who need eachother for numerous reasons we explain in this IoT blockchain overview.

Blockchain (there are many blockchains in fact and it’s more than the technology powering Bitcoin), has been mentioned by virtually all research firms as a rapidly accelerating evolution and it’s not just about financial services companies, the scope in which we tackled blockchain outside of its cryptocurrency roots the first time (namely FinTech or financial technology). In fact, the convergence of blockchain and the Internet of Things is on the agenda for many companies and there are existing implementations, solutions and initiatives in several areas, outside of IoT and financial services too.

Blockchain and the Internet of Things

The distributed Internet of Things meets Distributed Ledger Technology

As Frank Gens said in IDC’s 2017 worldwide IT technology FutureScape webcast (report here), blockchain is also becoming important in third generation security, to name just one example.

And since quite some time blockchain is increasingly being looked upon in an Internet of Things context. Blockchains have many benefits. They are not the answer to all challenges of the digital economy as sometimes is said but it’s certain that they will play an increasing role in the Internet of Things.

Forrester’s Dan Bieler mentioned blockchain’s potential for IoT solutions. In a nutshell:

Dan Bieler - analyst at Forrester co-authored the report Disentangle Hype From Reality: Blockchain's Potential For IoT Solutions
Dan Bieler – analyst at Forrester co-authored the report “Disentangle Hype From Reality: Blockchain’s Potential For IoT Solutions

As Internet of Things applications are by definition distributed it’s only normal that the distributed ledger technology, which blockchain is, will play a role in how devices will communicate directly between eachother (keeping a ledger and thus trail of not just devices but also how they interact and, potentially, in which state they are and how they are ‘handled’ in the case of tagged goods).

Blockchain is designed as a basis for applications that involve transaction and interactions. These can include smart contracts (smart contracts are automatically carried out when a specific condition is met, for instance regarding the conditions of goods or environmental conditions) or other smart applications that support specific Internet of Things processes. This way blockchain technology can improve not just compliance in the IoT but also IoT features and cost-efficiency.

The industry is not waiting and takes initiatives

It is still early days, Bieler says. That is certainly true. However, at the same time big tech companies are not waiting, probably one of the reasons Bieler advices to start looking at the combination of blockchain(s) and the Internet of Things. And they did and will continue to in 2018 and beyond.

IBM Blockchain, for instance, already allows to extend (private) blockchain into cognitive Internet of Things. In fact, ultimately it will be the combination of AI, IoT and blockchain that will prove most interesting across industries and in myriad possible IoT applications. With blockchain we are pretty much adding to the changing digital infrastructure that powers so many evolutions and impacts so many areas, from analytics to security, in an environment that thus far was centralized.

To illustrate the benefits of blockchain and Internet of Things convergence, IBM gives the example of complex trade lanes and logistics whereby smart contracts can follow (and via blockchain technology register), everything that has happened to individual items and packages. The benefits: audit trails, accountability, new forms of contracts and speed, to name a few.

In the image below from an IBM infographic, the company sums up three key benefits of using blockchain for IoT. They are also often mentioned as other blockchain benefits but in other parts of the infographic and the IBM video below, there is more in-depth information about the topic. The three benefits of blockchain for IoT, according to IBM: building trust, cost reduction and the acceleration of transactions.

Three key benefits of using blockchain for IoT according to IBM - source
Three key benefits of using blockchain for IoT according to IBM – source IBM infographic

IoT and blockchain challenges to solve

Forrester’s Martha Bennet confirmed that it’s time to start looking at that IoT and blockchain convergence, even if the combination of both might not be for today.

Forrester analyst Martha Bennett co-authored the report Disentangle Hype From Reality: Blockchain's Potential For IoT Solutions
Forrester analyst Martha Bennett co-authored the report “Disentangle Hype From Reality: Blockchain’s Potential For IoT Solutions

She defines three categories of challenges that Internet of Things and blockchain ecosystems participants must address.

In a nutshell the key challenges for IoT and blockchain ecosystems participants, according to Forrester, are:

Technology, whereby mainly security comes in the picture. In an Internet of Things context where security is already a challenge, it’s clear that security needs to be even more looked at. It is important to note though that blockchain is also seen as a way to secure the Internet of Things and, as mentioned, security overall but that is another discussions with several opinions and aspects to cover.

Operational challenges: the business model and the practical aspects as this requires many agreements and of course many actors too in a broad ecosystem. Just think about that IBM logistics example.

Legal and compliance issues. Bennet among others refers to responsibility issues in case of actions that are taken by devices, based on a rule that is automatically executed by a blockchain-based application, triggered by another blockchain-based application (you see the complexity). And then there is the mentioned example of smart contracts. As you know contracts are far from easy, even outside this IoT and blockchain context.

More in Martha Bennet’s post.

Why blockchain is a game changer for IoT according to the IBM infographic
Why blockchain is a game changer for IoT according to the IBM infographic
The future of blockchain

Blockchain as the answer to IoT challenges

In the Spring of 2017, Nicolas Windpassinger, author of ‘Digitize or Die‘, an IoT book for digital transformation leaders, wrote about the practical aspects blockchain can address in IoT and how blockchain can accelerate the evolution of IoT.

To enable message exchanges, IoT devices will leverage smart contracts which then model the agreement between the two parties

Windpassinger: blockchain technology promises to be the missing link enabling peer-to-peer contractual behavior without any third party to “certify” the IoT transaction. It answers the challenge of scalability, single point of failure, time stamping, record, privacy, trust and reliability in a very consistent way.

Blockchain technology could provide a simple infrastructure for two devices to directly transfer a piece of property such as money or data between one another with a secured and reliable time-stamped contractual handshake. To enable message exchanges, IoT devices will leverage smart contracts which then model the agreement between the two parties. This feature enables the autonomous functioning of smart devices without the need for centralized authority. If you then extend this peer-to-peer transaction to human to human or human to objects/platforms, you end up with a fully distributed trustworthy digital infrastructure.

Blockchain + IoT across industries: the insurance example

Blockchain is being tested in several industries. And sometimes we see that in those industries there is a link between blockchain and IoT within the specific industry. Point in case: blockchain and IoT in insurance.

The main use case of blockchain in insurance are smart contracts and the enhancement of several processes such as claims management. Other applications include fraud management, legally required applications (blockchain is thoroughly looked at in the legal sector as well) and even the usage of technologies in an insurance context.

IoT data and blockchain can lead to intelligent automated insurance policy applications

In the scope of blockchain and IoT it’s interesting to look at the combination of blockchain and the Internet of Things as it’s used in insurance and will increasingly be, moving beyond the pure telematics model to the connection of real-time IoT data in various perspectives for various intelligent automated insurance policy applications.

Although this might seem like a very future application of blockchain in the insurance industry it is worth noting that from an IoT investment perspective, early 2017 IDC forecasted that insurance would be among the fastest growing industries in the period until 2021, albeit with a major focus on telematics (where smart contracts of course make sense too), especially as we’ll see ever more smart cars and so forth.

Understanding the convergence of blockchain and IoT: resources

Below is a list with additional resources on blockchain and IoT. Feel free to add a link to a good source yourself.


Top image: Shutterstock – Copyright: Ditty_about_summer – All other images are the property of their respective mentioned owners. This article was first published in September 2016 and was updated in September 2017 with additional information.