Cloud-based interconnection is key to improving blockchain scalability

blockchain interconnection settle PoC
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The second annual Blockchain Conference held in Hong Kong last month was set to lay the foundations to build a vibrant blockchain ecosystem across industries in the city. The event came hot on the heels of the recently published white paper from the Hong Kong Blockchain Society (HKBCS) that revealed the significant influence and growth of blockchain in the local financial technology landscape, despite the technology being at a relatively early stage.

This rapid adoption is partly because, in the digital age, keeping financial transactions on track and above board is more complicated than paper money ever was. Today, along with the ubiquitous Bitcoin, there are nearly 700 other cryptocurrencies trading on the market. And they are being employed for everything from smart contracts to proof of ownership, voting system and a myriad other decentralized use cases.

To ensure the legitimacy and security of each transaction using distributed ledger technology, a shared public ledger, or transaction record called the “blockchain,” is kept. Blockchain records and verifies all transactions across a public network of distributed participants in a chain that is open and visible to all.

This may sound like a risky proposition, but it’s worth it. Goldman Sachs estimates the potential cost savings to the financial services industry through blockchain technology could be worth as much as $12 billion a year globally.

Interest in blockchain is soaring all over the world, especially in Asia. For example, the professional services firm Deloitte has just launched a new Asia-Pacific blockchain lab in Hong Kong to help clients in the region adopt distributed ledger technology. According to the firm, the lab will be used to conduct client workshops, develop prototype services, provide production support and deliver innovative ideas for deployed blockchain networks in the financial services industry.

A growing network of blockchain nodes and emerging cryptocurrencies are also acting as catalysts for the increase in the banking and insurance industry’s demand for interconnection. Based on the findings of the Global Interconnection Index, a recent market study published by Equinix, banking and insurance companies in Asia-Pacific are expected to see a surge in demand for interconnection bandwidth capacity, anticipated to grow at an average of 71% per year to 2020, and account for 13% of the total interconnection bandwidth in the region.

Scalability is key for blockchain success

As brilliant as the idea of creating a decentralized cryptocurrency using blockchains undoubtedly was, it also creates scalability issues that impact throughput and cost. Scalability limits include constraints on the number of transactions per second and the amount of data that can be processed through the system. However, the compute power to validate each transaction progressively costs more in real money.

Some major banks and cloud service providers have launched initiatives designed to overcome such scalability hurdles and harness the potential of blockchain technology. These mainly involve creating secure and scalable private blockchain environments.

Take the R3/Microsoft Azure Partnership. This worldwide consortium of over 40 banks is working to design and apply distributed ledger technologies to global financial markets. The R3 banks will have open access to Microsoft Azure and 45 cloud-based tools on the Azure platform, as well as dedicated Microsoft staff and resources to, as R3’s CEO David Rutter puts it, “scale the use of distributed ledger technology in a way that will change the entire financial services industry.”

There is also the partnership between Amazon Web Services (AWS) and the Digital Currency Group (DCG) to offer a cloud-based blockchain experimentation environment for enterprises. Based in New York City, one of the world’s most important financial services hubs, DCG is already one of the biggest investors in blockchain firms. By providing such a service, its own portfolio of over 70 blockchain providers across more than 20 countries can work in a secure and scalable cloud environment.

An interconnected financial services and cloud ecosystem

The advantages of blockchain are tremendous. It provides essential financial transaction services more efficiently and securely, and at less cost than current tools. As well as enabling the digital transfer of money without a high risk of falsification, it can reduce the time required to settle financial transactions from days to minutes.

However, to turn this potential into a cost-effective and revenue-generating reality, global financial services companies and cloud service providers need an open and secure colocation and interconnection platform to produce cloud-based blockchain services can be developed, tested and deployed. That platform must include a secure, scalable and interconnected architecture that enables direct and private access to multiple cloud providers, a choice of peering networks and a growing ecosystem of financial institutions.

Blockchain is a decentralized but interconnected technology – anything that happens in a blockchain network happens to the network as a whole. In other words, it is a more distributed rather than a centralized process. A secure, scalable and interconnected framework shifts IT infrastructures away from centralized to a distributed approach that increases proximity to all the elements needed to complete the highest-performing digital wallet transactions possible. With interconnection bandwidth capacity growth increasingly critical in the banking and insurance industry, the right architecture can enable a transformative approach to IT, maximizing the ability of the firms to leverage performance, scalability and security when performing critical data exchanges such as blockchain.

With an increasing number of organizations betting on blockchain, interconnection has a key role to play in providing the scalability, security and speed needed for all parties to collaborate. We will all be living in a cashless world very soon.

Written by Alex Tam, managing director of Equinix Hong Kong

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