We are in the midst of a technological revolution. Born from the mysterious creation of the Bitcoin cryptocurrency in 2008, blockchain technologies fundamentally change how business transactions are made.
It can be applied to virtually any application involving transactions or the tracking of assets – either tangible or intangible. The promise of blockchain has led to much research, development and investment particularly in the realms of finance and supply chains. Many organizations are either experimenting with it or have fully deployed it in their day-to-day business operations.
In fact, almost 15% of financial institutions are using blockchain to some extent today already. Like any new tech trend, however, there is also hype and confusion. This article will provide a simple explanation of the technology, its benefits, and will discuss ideas on how data centres could be impacted and benefit from it in the coming years.
What is blockchain?
Blockchain has been the underlying technology for cryptocurrencies like Bitcoin. Some liken blockchain to being the operating system while Bitcoins could be considered a program or app….one of dozens, if not, hundreds of potential apps that blockchain can offer.
IBM describes blockchain as “a shared, distributed ledger that facilitates the process of recording transactions and tracking assets in a business network…virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.”
The technology offers a high degree of trust, accuracy, autonomy, traceability, and security
Describing the technology in another way Forbes contributor, Bernard Marr says, “blockchain is an open, decentralized ledger that records transactions between two parties in a permanent way without needing third-party authentication. This creates an extremely efficient process and one people predict will dramatically reduce the cost of transactions.” Beyond just the traditional buy-sell transactions and tracking of assets, blockchain is being used as a means for tracking and executing Smart Contracts. These are digital contracts that have their terms and execution criteria built into the blockchain itself. They auto execute when required conditions are met.
Prior to the existence of distributed ledger technologies, credible transactions required trusted, third party authorities or ‘instruments of trust’ (minted coins, banking system, letter of credit, loan institutions, the government, etc) that would serve to verify identities, govern transaction terms, validate status of contract terms, provide a physical currency, etc. The need for a ‘middle man’, of course, adds time, complexity, and cost; in other words: a lot of inefficiency.
There are also greater risks in terms of fraud and cyberattacks where the instrument of trust might be a single point of failure. Technology improvements have served to reduce these inefficiencies over the years…think broadband communications, mobile technologies, etc. But these gains are mitigated by an explosion in transaction volumes. The Internet of Things (IoT), Big Data, spread of mobile tech, digitization of healthcare, micro-grids, and the growth of the ‘sharing economy’ as a global economic force is creating a strong market need for a stream-lined, ‘low friction’ transaction process.
Blockchain serves this market demand well. It eliminates the need the for a trusted third party authority. Duplication of efforts are greatly reduced and transaction time is shortened from days or weeks to mere minutes. Being open, transparent, and immutable this peer-to-peer ledger system mostly eliminates the old inefficiencies. The technology offers a high degree of trust, accuracy, autonomy, traceability, and security. But how?
How does it work?
Fundamentally, as the name implies, transaction data is stored in blocks that are then linked together to form a chain. These transactions are time/date stamped and the sequence of these transactions are recorded. Each block has a unique identifier called a “hash”. It also contains the previous block’s hash, and, thereby, links the blocks together to form a chain. The figure below illustrates these concepts. In this way, blocks are prevented from being altered or a new block inserted between two existing blocks. This ‘tamper-proof’ immutability is a key trust feature of the technology.
This blockchain acts as a ledger that is open and shared across the network in a peer-to-peer fashion. While it is shared, there is only one ledger. It is the system of record…or the one and only version of the truth.
In the traditional system, each transaction participant and entity would have its own ledger. This duplicates a lot of effort and can result in discrepancies and conflict. Blockchain avoids this. The sharing of the ledger is done through replication therefore Blockchains can be permissioned so that participants only see what they are allowed to see.
In business networks where participants are known and trusted, adding transactions is achieved through various forms of consensus mechanisms including the requirement for a majority of validators, using cryptographic proof of work methods (eg, cryptocurrencies) or a validator needing to show a certain percentage of ownership (proof of stake) and so on.
Impact on data centres
If you google ‘blockchain’ and ‘data centres’ you’ll find many stories of global data centre deployments serving as cryptocurrency mining operations. There are stories about the tremendous amount of energy consumed when mining for Bitcoins using the “proof of work” consensus method. Although, I should hasten to add, much work and testing is underway to dramatically reduce this compute burden reducing both the time and the energy needed to add blocks to the chain. In fact, just recently, Internet Giant Baidu announced a new “Super Chain” blockchain that is claiming to dramatically reduce energy consumption.
Distributed ledger technologies are expected to fundamentally change the energy market, which will have a positive impact on data centre economics
Regardless, one obvious impact of distributed ledger technologies on data centres is that it is now a significant driver for data centre demand. What began with people mining in their homes and basements has evolved into mature, large-scale operations. There are now hosting and data centre colocation firms that are dedicated to cryptocurrency mining and related services such as renting “miners” (i.e., the server hardware designed to do perform the cryptography work necessary to add blocks to the chain) or offering “mining pools”.
Cloud mining is also now a thing where people become miners by paying for mining infrastructure as a service through the cloud. To give a sense of the scale of this trend, the energy consumed for Bitcoin mining (alone) is estimated to be about 20,000 gigawatt hours of electricity per year which is approximately .1% of total global generation.
This gives colocation data centres a new customer to appeal to and serve. Many mining operations, however, may decide that they do not require the high levels of redundancy and security that more traditional enterprise customers may demand. A few hours of downtime per year for miners likely would not lead to the loss of hundreds of thousands or millions of dollars in revenue, nor the costly loss of customers. So, to compete in this market, it may be necessary to offer in your portfolio lower-cost options that have a bare bones power infrastructure, perhaps with a Tier II or even a Tier I level of redundancy.
New demand aside, blockchain is expected to have a profound impact on virtually every industry. It’s ability to automate, accelerate, simplify, and secure transactions makes it interesting to just about anyone. So as transaction inefficiencies are eliminated in adjacent businesses and industries, data centres that interact with them will benefit from these improvements. For example, let’s consider blockchain’s potential impact on the renewable energy market.
Distributed ledger technologies are expected to fundamentally change the energy market, which will have a positive impact on data centre economics. The energy market overall is beginning to move away from centralized utilities and large fossil-fueled generation power plants towards a landscape that is more decentralized and increasingly made up of distributed energy grids (DEG) and resources. A government-driven push to de-carbonize energy production combined with advances in renewable energy and energy storage technologies has led to a huge increase in renewable energy capacity and declining prices.
Future DCIM or DMaaS tools could rely on distributed ledger technologies to assist with capacity management across many sites and tenants
More and more consumers are also becoming producers of energy through wind and solar power and, thereby, interacting with the larger grid in new and unique ways.
According to MIT Technology Review, a remaining impediment to new entrants and investments in the renewable market is how generated units of energy are accounted for and managed. A very complex system of tradeable certificates is used to keep track of how much renewable energy is created. This complexity raises costs and opens the system to errors and fraud. This old system is expected to be replaced by blockchain which would eliminate the inefficiencies and weaknesses of the current system.
This would eliminate a significant barrier to entry, which would increase investment, that would then presumably lead to lower renewable energy prices. Blockchain’s automated, fast recording of transactions is also expected to facilitate things like consumer-to-consumer sale of energy and laying the groundwork for automated software that allows consumers “to sell and buy power to and from the grid in response to real-time price signals”. These capabilities enabled by blockchain tech will remove market inefficiencies and ultimately lead to lower cost renewable energy for data centres and a smaller carbon footprint.
One could also imagine blockchain tech applied to data centre operations. In an era of edge computing, IoT, exponential data growth, and continuous pressure to reduce latency, blockchain technologies could help IT keep pace while maintaining data security.
Perhaps future DCIM or DMaaS tools could rely on distributed ledger technologies to assist with capacity management across many sites and tenants. IT assets, power, cooling and space resources could be tracked and linked together along with work order management system data using blockchain technologies that could reduce human error by providing one version of the “truth” through its shared ledger system and automated, rule-based approach. And finally, we may find that blockchain-based smart contracts could be used to govern colo SLAs with tenants, energy contracts with utilities, or even in cloud infrastructure transactions.
As the technology continues to evolve it’s important to highlight that no-one has all the answers yet, but it’s fair to say that Blockchain will have significant impact on the data centres and the energy grids of the future.