The frequent reader of this blog knows that I’m not blogging every other week in order to boost the Google ranking of this blog, but I rather try to dive deep into topics that may matter and provide as much information as possible to explain the topic. My goal is to create the articles of this blog as a one-stop shop in order to get a comprehensive overview of the topic. So, this time I want to touch another hype topic: Blockchain (in travel).
This is a rather long writing, but it is structured as follows:
Table of contents
General Explanation of What a Blockchain Is
Who has not heard of blockchain by now? Probably nobody. Who can explain in two sentences what it is and why we need it, is a different story. Bitcoin and Ethereum are two of the most famous representatives of blockchain technology. Even though no government or bank backs cryptocurrencies their value increased quite a bit of the past years. And since the goldrush where people dug for gold has been over for a while, there may be a remake in the digital age, where you can virtually mine by providing computer power or solving complex algorithms in exchange of cryptocurrency – the Dagobert Duck of the 21st century.
What is a blockchain and why do we need it (or not)?
A blockchain is a decentralized ledger of facts or transactions, replicated across several computers assembled in a peer-to-peer (P2P) network. Using this technology, participants can confirm transactions without the need for a central certifying authority. Members of the network are anonymous (strictly spoken it is not anonymous but identified by pseudonyms) individuals called nodes. All communication inside the network takes advantage of cryptography to securely identify the sender and receiver.
When a node wants to add a fact to the ledger, a consensus forms in the network to determine if this fact should appear in the ledger as a valid block or orphan (which will eventually be abandoned). When a node wants to add a fact to the ledger, a consensus forms in the network to determine if this fact should appear in the ledger as part of a valid block. In case of two blocks being generated at the same time, a consensus also decides which block should become an orphan (which will eventually be abandoned). Aha – everything is clear now? Well, let’s stay with a decentralized record of all transactions across a P2P network, where members confirm transactions without the need of a trusted 3rd party.
Decentralized peer-to-peer networks aren’t new. Napster was for example a P2P network. Instead of exchanging music, members of a blockchain network exchange facts. So, what is new then? While Napster was initially great (at least for the community – not so much for the artists and record labels) to share music at zero cost, the moment you do not share for free but rather exchange good or facts for money, there is a need for a trustful 3rd party which wants a piece of the cake. In the case of music sharing it was primarily Apple, who became this trusted entity eventually one in four songs were sold through. If you look at retail, Amazon became the party you trust with your money expecting they will make sure you get what you ‘want’ and you don’t get upset. eBay became the entity two individuals trust for a transaction between the two ‘untrusted’ individuals – again making sure money only exchanges hands once goods or services have been delivered to the receiver’s satisfaction. If things go sideways the trusted 3rd party mediates between the parties – something I experienced personally, to my satisfaction, when I bought a brand-name golf club set which was actually a counterfeit (claimed titanium club heads where made of magnetic steel). I ended up being able to donate the counterfeit and get my money back – the seller wasn’t anywhere near to be ‘found’. In banking, the bank is the trusted 3rd party. In travel, GDSs along with all the clearing houses are those trusted 3rd parties. Now, blockchain is expected to eliminate the need of a trusted 3rd party as well as replicate unchangeable transaction data in multiple locations.
Many successful businesses on the internet today are intermediaries. Think about Google: Google managed to become the intermediary between you and the entire internet. Think about Amazon: they became the intermediary between sellers and buyers for any type of good. That’s why some advocates consider blockchain technology that allows to remove (potentially costly) intermediaries a revolution that can potentially disrupt the entire internet.
The workflow of a blockchain
As mentioned above, blockchain resembles facts in P2P networks. P2P networks, like other distributed systems, have to solve a very difficult computer science problem: the resolution of (speed-) conflicts or reconciliation. There is a saying that all roads lead to Rome. However, not on all roads you will arrive there at the same time. Same in a P2P network, two facts sent roughly at the same time (e.g. two buyers decide at about the same time to buy a unique product) may arrive in different orders in distant nodes. Then how can the entire network agree on the first fact – respectively who gets the product or service? To guarantee integrity over a P2P network, a way to make everyone agree on the ordering of facts is needed – a consensus system. Blockchain primarily implements the Proof of work or Proof of stake consensus, using blocks. Other methods include Proof of burn (you have to invest first to create a block) or Proof of elapsed time, which are not further described in this writing. Facts are grouped into blocks, and there is only a single chain of blocks in the end, replicated in the entire network. Each block references the previous one. Before being added to a block, facts are pending, i.e. unconfirmed. The network validates the transaction as well as the user’s status using known algorithms. Once verified, through mining this transaction will be added to a block , which is then replicated in the entire network. It may depend on the bid whether or not a transaction results in a block. The idea is that every digital signature, transaction or order is protected in blockchain and attackers are prevented by having to solve mathematical problems in a race against the entire network.
Money and cryptocurrencies: In order to form a new block, a miner uses a huge amount of computer resources such as Graphical Processing Unit (GPU) and storage. Note that instead of Central Processing Unit (CPU), for mining graphic cards are used due to their speed. This is why one must pay to store facts in a blockchain. Reading facts, on the other hand, is free. Mining a block brings in the money of all the fees of the facts included in the block. Each blockchain has its own (crypto-)currency. It’s called Bitcoin (BTC) in the Bitcoin network, Ether (ETH) on the Ethereum network. Miners receive a gratification for keeping the network working and safe. Each time they successfully mine a block, they receive a fixed amount of cryptocurrency (Bitcoin: 25 BTC per block, Ethereum: 5 ETH per block). Hence, the blockchain generates its own money. Cryptocurrencies can be converted into real money based on offer and demand – which has shown a rollercoaster ride in the past. Essentially it can be said that this is turning electricity into money, which is fine as long as you can earn more money than you pay in energy and hardware costs.
Smart contracts: Agreements are turning from Microsoft Word documents written by attorneys and recognized by notaries into agreements bound by code, transacting assets that are digital such as software, cryptocurrencies, music or digital books, but also real assets transformed into digital goods, such as shipped goods (e.g. Amazon) or transformed by the Internet of Things (IoT). Smart contracts are contracts written in software rather than legal text. Because you can encode them directly on the blockchain, they can involve the transfer of value based directly on the cryptographic consent of the parties involved – in other words, they are “self-executing.” And in theory, contracts written in software are cheaper to interpret – because their operation is literally mathematical and automatic, there are no two ways to interpret them, which means there’s no need for expensive legal battles.
Today you can rent a house from AirBnB – or you rent it by signing a contract which was drafted by a lawyer and you need a bank to secure payment and security deposit – and all these 3rd parties take a fee. If something gets broken the owner needs to fight (potentially in court) to get compensation. Now with blockchain it is defined in a program how much money should be transferred in response to certain conditions: e.g. two weeks before the beginning of a rental: transfer $500 from loaner to owner, end of the rental period: transfer $500 from loaner to owner, proof of physical degradation after the rental period: transfer $5,000 from loaner to owner. The proof of physical degradation is the key: that’s where the Internet of Things (IoT) comes into play. In order to interact with the real world, blockchains need sensors and actuators. Blockchains won’t be successful unless the IoT revolution comes first. Such applications relying on smart contracts are called Decentralized Apps, or DApps. Smart contracts (and for that matter smart property) means “no intermediaries” or technically-enforced”. In a sharing community, cutting out AirBnB or Uber as the middleman and replace it with technology may sound like a revolutionary idea. Would be interesting to hear their thoughts about blockchain. By the way, I don’t consider AirBnB or Uber sharing organizations. They capitalize. St. Martin on the other hand shared and did not rent his coat in times he didn’t need it.
Critics say that (for legal transactions) the company itself, its transfer agent of record, a clearinghouse, or an exchange are all trusted intermediaries and typically provide value-added services. Already in 1994 Bill Gates once stated “Banking is necessary, Banks are not”, however, banks are still around. The reason NASDAQ is the right home for a blockchain-driven exchange is that they are the expert in the compliance and security aspects of trading stock. Cut out the middleman (here, NASDAQ itself) and the government and you will ultimately be limited to companies that choose to make an end-run around the legal, compliance, and tracking systems common to the mainstream market. As people who trade in unlisted stocks will tell you, that’s a recipe for getting your money stolen.
Indeed, there are also already problematic examples: an investment vehicle Distributed Autonomous Organization (DAO) was used to invest directly with their private cryptographic keys. No lawyers, no management fees, no opaque boardrooms. The DAO removed the ability of directors and fund managers to misdirect and waste investor funds. However, the DAO itself “decided” to “invest” $50 million (a third of its members’ money), into a vehicle controlled by clever programmers. No point in arguing if this was a hack, exploit, bug, or the fact that every participant should have known that the software made decisions autonomously. In the end, the Ethereum Foundation got together and voted to retroactively amend the software contract and move the money back to its original owners, by moving forward with a hard fork, allowing them to claw back the stolen funds. This caused a split within the Ethereum community and it broke off into two blockchains: Ethereum (ETH) and Ethereum Classic (ETC). This may be a possibility for an incident of this magnitude, but, to create forks for every small little fraud or hack may not be an effective option. And what if the bad guy already materialized the cryptocurrency into real money and left? New ideas do not mandate smart contracts any longer as there may be bugs (e.g. Parity bug).
ICO: An Initial Coin Offering (ICO) is similar to an unregulated crowdfunding centered around cryptocurrency, which can be a source of capital for startup companies. It’s like the IPO (Initial Public Offering, in which investors purchase shares of a company) for internet startups based on cryptocurrency. In an ICO, a quantity of the crowdfunded cryptocurrency is pre-allocated to investors in the form of “tokens”, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. These tokens supposedly become functional units of currency if or when the ICO’s funding goal is met and the project launches. A lot of money flushed into ICOs and I’m not sure if it won’t be flushed away. Today, as it is mostly unregulated, companies raise millions in minimal time but in many cases, there is only a concept (if any), and to my knowledge at least in many cases, there is no guarantee that the founders just don’t walk away.
The U.S. Securities and Exchange Commission (SEC) has reached a decision regarding the status of tokens issued in the infamous previously mentioned DAO ICO which has forced many projects and investors to re-examine the funding models of many ICOs. The most important criteria to consider is whether or not the token passes the Howey Test. If it does, it must be treated as a security and is subject to certain restrictions imposed by the SEC. Several projects used a crowd sale model to try and fund their development work in 2013. Ripple pre-mined 1 billion XRP tokens and sold them to willing investors in exchange for fiat currencies or bitcoin. Ethereum raised a little over $18 million in early 2014 – the largest ICO ever completed at that time. There is also a legal question whether ICOs are legal which remains unanswered to date (at least to my knowledge).
Some conclusion about blockchain
A blockchain allows to securely share and/or process data between multiple parties that currently require a trusted third-party to exchange. Examples include money (requires a bank), a proof or property (requires a lawyer), a loan certificate, etc. In essence, the blockchain removes the need for a trusted third party.
From a technical point of view, the blockchain is an innovation relying on three concepts:
- peer-to-peer networks,
- public-key cryptography and
- distributed consensus (not one party or a jury decides who is right or wrong but the entire network) based on the resolution of e.g. a random mathematical challenge.
All single concepts have been around for years, only the combined usage of these concepts is new. It is not essential to understand how a blockchain works to be able to use it – similar to that you don’t need to know HTML in order to surf the web, however, you may want to think twice before you invest in blockchains. There is a huge amount of ICOs and some of them have no obligation to do anything – essentially, they can take your money and walk away.
Blockchain can be compared to a database replicated as many times as there are nodes and (loosely) synchronized, or as a supercomputer formed by the combination of the CPUs/GPUs of all its nodes. You can use this supercomputer to store and process data, just like you would with a remote API, except you don’t need to own the backend. The idea is that the data is safe and processed properly by the network. However, there are documented breaches with Bitcoin and other, so, in my eyes security remains to be seen. One thing is for sure, however, facts stored in the blockchain can’t be lost. They are there forever, replicated as many times as there are nodes. Even more, the blockchain doesn’t simply store a final state, it stores the history of all passed states, so that everyone can check the correctness of the final state by replaying the facts from the beginning. Facts in the blockchain can be trusted, as they are verified by a technically enforceable consensus. Even if the network contains black sheep, you can trust its judgement as a whole. Storing data in the blockchain isn’t fast, as it requires a distributed consensus. Besides the cost of energy and hardware for such a network (more later), there is another problem: speed – especially when it comes to travel.
Does everybody have to create their own blockchain? No! The technology behind the blockchain uses advanced cryptography, custom network protocols, and performance optimizations. This is all too sophisticated to be redeveloped each time a project needs a blockchain. Fortunately, aside of Bitcoin, there are several open-source blockchain implementations including
- Ethereum – an open-source blockchain platform by the Ethereum Foundation, or
- Hyperledger – another open-source implementation, this time by the Linux Foundation.
Bitcoin isn’t a good choice to build an application upon. It was designed for money transactions and nothing else. The Bitcoin network currently suffers a serious growth crisis, transactions wait in line for up to one hour to get inserted in a block. Miners often select transactions with the highest fees, so money transfers in Bitcoin become more expensive than they are in a bank. The developer community is at war, and the speculation on the cryptocurrency makes the face value move too much.
Bitcoin vs. Ethereum
Bitcoin is the pioneer of blockchain which started in 2009. Some say it is like MySpace. Ethereum is much newer – started in 2015, but again in internet age things can go fast and any blockchain technology can be easily replaced by a newer more robust and faster one – however, as we have seen with Facebook, at some point you are here to stay and if enough people jump on e.g. Ethereum, it might already be the one. A big disadvantage of Bitcoin is its electric consumption and hardware cost. It is estimated that the Bitcoin electric consumption will trend toward equivalent consumption of the country of Denmark by 2020. The bitcoin blockchain has consumed almost a billion dollars’ worth of electricity to hash an amount of data equivalent to about 20 % of what one can get for a ten dollar a month dropbox subscription. Ethereum came up with alternative methods such as Proof of stake in its Casper implementation. Critics are also concerned that Bitcoin is actually not that good of a payment system – Visa can handle 60,000 transactions per second, while Bitcoin historically can only manage on average 7 per second as of 2018. Technical modifications may increase that number (Lighting Network on Bitcoin or Plasma initiative on Ethereum), but as a starting point, you have something that’s about 0.01 % as good at clearing transactions. In addition, for those 7 transactions a second Bitcoin is already estimated to use 35 times as much energy as Visa. If you brought Bitcoin’s transaction volume up to Visa’s it would be using as much electricity as the rest of the world put together.
So, how is Ethereum different than Bitcoin? Ethereum is an open-source public service that uses blockchain technology to facilitate smart contracts and cryptocurrency trading securely without a third party. There are two accounts available through Ethereum: externally owned accounts (controlled by private keys influenced by human users) and contract accounts. Ethereum allows developers to deploy all kinds of decentralized apps. So, while Bitcoin is essentially a currency, Ethereum is a development platform for others to build on top of it.
- Bitcoin is the widely adopted cryptocurrency. Proponents of Ethereum believe its main advantage over Bitcoin is that it allows individuals and companies to do much more than just transfer money between entities.
- Bitcoin trades in cryptocurrency, while Ethereum offers several methods of exchange, including cryptocurrency (Ethereum’s is called Ether), smart contracts and the Ethereum Virtual Machine (EVM).
- They are based on different security protocols: Ethereum now uses a Proof of stake system as opposed to the Proof of work system used by Bitcoin.
- Bitcoin allows only public (permissionless or censor-proof) transactions to take place, which means users are anonymous and each user has a copy of the ledger and participates in confirming transactions; Ethereum allows both permissioned (users are not anonymous and permission is required for users to have a copy of the ledger and participate in confirming transactions) as well as permissionless transactions. Public blockchains eliminate the middleman, while in private blockchains the middleman maintains control.
- The average block time for Ethereum is significantly less than Bitcoin’s: 12 seconds versus 10 minutes. This translates into more block confirmations, which allows Ethereum’s miners to complete more blocks and receive more Ether.
- It is estimated that by 2021 only half of the Ether coins will be mined (a supply of more than 90 million tokens), but the majority of Bitcoins already have been mined (its supply is capped at 21 million).
- For Bitcoin, miners running the platform and verifying the transactions receive rewards. Basically, the first computer that solves each new block gets Bitcoins (or a fraction of one) as a reward. Ethereum does not offer block rewards and instead allows miners to take a transaction fee.
- The key differentiator from Bitcoin is Ethereum’s ability to trade more than just cryptocurrency.
- There have been dramatic fluctuations in the price of Ether, but the Ethereum currency grew more than 13,000 percent in 2017. This tremendous growth is attractive to many investors, but the volatility makes other investors cautious.
- Both have experienced growing pains, suffer from scalability, and are questioned about the platform’s security (see DAO mentioned earlier).
- Ethereum is still a very young platform, with a lot of potential. The open approach for applications could be limitless. Ethereum’s infrastructure was enhanced over the last few years when it was challenged with security issues and since it’s less monopolistic than Bitcoin, it is more open to reform measures that might ultimately make it a superior solution to Bitcoin.
|Block time||approx. 10 minutes||10 seconds|
|Cryptocurrency earned for each mined block||12.5 BTC/block (soon to be divided in half again)||5|
|Number of blocks mined||over 400,000||over 1,400,000|
|Number of transactions per block/day||over 1,200||over 30,000|
|Number of nodes in the network (as of May 2018)||∼ 10,000 (see here)||∼ 16,000 (see here)|
|Value as of 4/27/2018 (recent significant high/low)||1 Bitcoin = $9,267|
($19k Dec/2017, $6.6k Apr/2018)
|1 ETH = $680|
(varies a lot, e.g. $1,200 Jan/2018, $368 Apr/2018)
Interaction with Other Trend Topics Such as Artificial Intelligence
Artificial intelligence (AI) is a term used for machines capable of performing tasks that require intelligence. Technologies trying to achieve this goal include machine learning, artificial neural networks and deep learning. We had our own experiments trying to sort the shopping results for flights into an order like a customer would pick, supported by personalization, and in less than 13 % were we successful picking the flight that was in the end picked. While it can even be argued that to pick the right flight which was later chosen by the user in 13 % is not even that bad – we are not talking about a fifty-fifty chance here – still in 87 % of the cases the user would have been disappointeC.
Meanwhile, blockchain is essentially a new filing system for digital information, which stores data in an encrypted, distributed ledger format. Because data is encrypted and distributed across many different computers, it enables the creation of tamper-proof, highly robust databases which can be read and updated only by those with permission.
I read an article explaining why AI and blockchain are made for each other:
- Data in blockchains is supposedly highly secure due to cryptography, hence blockchains are supposedly safe to store sensitive data such as PII (Personal Identifiably Information) which is expensive to store safely for large companies today (and still data breaches occur). As blockchains hold their database in an encrypted state, only the private keys have to be kept safe – reducing the amount of data stored in a safe environment immensely. AI is working on building algorithms to be able to work with encrypted data.
- Blockchain can help humans understand AI decisions. Due to fact that blockchains are recorded one-by-one there may be a way to assess and/or audit decisions AI systems have made.
- Computers today are fast but not intelligent. Hence, hashing algorithm require large amount of computing power. AI is an attempt to make computers intelligent, hence, they may become dangerous to crack such security algorithms. However, if AI is also included in the blockchain, then it’s a fair game again.
Pros and Cons of Blockchain and What Critics Say
You hear everything from “blockchain is most revolutionary technology to arrive in decades” to the “most over-hyped technology”. Depending on who you talk to, it will change “everything” or “nothing”. Well, one thing certain is, that the truth will be somewhere in between.
Blockchain may be favorable to classical transaction as they are anonymous, have a potentially lower transaction cost and are separated from governments – hence, it is a community and no government can manipulate the ‘currency’ (by e.g. printing more money). However, challenges are the difficulty to exchange such currency into real currency and its potential to be used for illegal activity including tax fraud, which may cause governments to ban them.
Critics also say that after ten years, nobody has come up with a use for blockchain besides currency speculation and illegal transactions and wonder if the reason that nobody has adopted a distributed ledger at scale is because nobody wants it? As an example, payments and banking is provided. Blockchain was to power currencies like Bitcoin, because there was now a costless, instant way to exchange value without the middleman taking a cut. It didn’t take long for that dream to fall apart. For one thing, there’s already a costless, instant way to exchange value without a middleman: cash. When I wanted to sell my wife’s car, the moment I put it up on the internet for sale, a proclaimed ‘soldier’ wanted to buy that car for his father who coincidently happened to be a mechanic, hence be able to deal with the problems the car had. But the only way he was ‘able’ to pay was through PayPal as he was supposedly stationed outside of the country in Germany right now. So, I thought I can trust PayPal and wanted to pursue it, however, luckily, we still called PayPal and found out that it was a scam. PayPal does not secure car sales. So, I guess a person would have picked up the car and title and a few days later, the ‘buyer’ would have claimed they never received our car and asked for the money back (or it would have been transferred from a compromised PayPal account – which apparently there are many – but the thieves apparently cannot do anything with those accounts without raising red flags). We ended up giving the car to the dealership with a significant price drop, but at least we got our money. Our experience with cutting out the middleman would have been short lived.
But even if Bitcoins were considered a substitute for dollars, still Visa and MasterCard actually sit on top of dollar-based banking transactions, providing a set of additional value-added services like enabling banks to track fraud disputes, and verifying the identity of the buyer and seller. It turns out that for the person paying for a product, the key feature of a new payment system – think of PayPal – is the confidence that if the goods are not as described you will get your money back. And for the person accepting payment, basically the key feature is that their customer has money and is willing to use it. Now, if you add in points, cash-back, credit lines, free checked bags, insurance and other gimmicks the credit card companies offer, you have something that consumers choose and merchants accept. There are also no FDIC guarantees, reversibility of ACH, and if somebody’s Bitcoin account gets drained because their password got stolen, it is probably the last time this person uses a blockchain.
Other barriers for blockchain include speed (as mentioned above), concerns about an open network and volatility (like the rollercoaster ride of cryptocurrencies).
Finally, a huge threat for blockchain technology is the European privacy law. While organizations are planning different kinds of applications for blockchain such as executing contracts, modernizing land registries, even providing new systems for identity management, there is a big unknown on the horizon: the European privacy law.
The European General Data Protection Regulation (GDPR) says people must be able to demand that their personal data is rectified or deleted. A blockchain on the other hand is a growing, shared record of past activities. A blockchain is distributed across many computers. And a key factor for its reliability is that this chain of blocks (essentially transactions) is in practice unchangeable. Not exactly two ambitions which match very well. And with fines for violation of GDPR of up to €20 million or 4 percent of global revenues, blockchain may all of a sudden become a lot less attractive for large, global organizations.
A blockchain is not made for altering or deleting data. While rewriting data is theoretically possible by creating a new “fork” (branch or version) on a blockchain (if most nodes on the network agree) this is certainly only a possible solution for “private” blockchains (such as the Ripple blockchain which is designed to ease payments between a closed group of financial services providers), and nowhere near a solution for the public or “permissionless” blockchains under no-one’s control (such as the Bitcoin or Ethereum).
The GDPR works well in cloud services models, where I store my Personal Identifiable Information (PII) on Amazon Web Services for example. So, with my contract with Amazon I pass on my privacy obligations to them. With a handful provider this works well, but in a decentralized network having a contract with each node just doesn’t work.
Blockchain in Travel
While it still seems to be in its infancy and models are still being developed as well as hypotheses tested, there is a consensus that blockchain may provide a viable architecture to improve nearly any system that relies on a transaction, like the exchange of information, money or something else – which brings us to the travel industry that heavily relies on transactions.
Blockchain is supposed to provide a high level of security (fraud prevention) since it creates an immutable digital ledger of transactions. Actions can be defined and carried out by smart contracts, which ensure all parties are abiding by the same rules and which automate (and therefore expedite) transactions (such as settlement). And blockchain offers transparency because those involved can see every entry into the ledger of transactions, but at the same time it provides privacy since transaction details are shared only among participating parties.
The latter puts some question marks on my face: is that something all involved parties want? For example, today’s airline yield management is a big secret. Now, if passengers knew the actual number of empty seats on a flight – and I’m sure smart technology on top of blockchain will figure these things out by observing and analyzing public information available on blockchains (“the Kayak of blockchain”), they would probably delay a purchasing decision. On the other hand “only 2 seats left at that price” rather forces a purchasing decision. Or the price of a hotel has been recorded on the blockchain and cannot be changed any longer – is this a good thing or a bad thing? I was told the airlines could create empty blocks and consequently confuse these blockchain ‘scrapers’ – but it is at least something one needs to keep an eye on – at least on public blockchains.
GDSs, FlightStats, etc. – they all charge for data. Consequently, if that data is saved in a blockchain, theoretically these providers would go out of business – this may be even the idea, but the question becomes, who wants to share information for free? Is the idea, that data is actually not free and paid for by every transaction supported by smart contracts? Travel Risk Management firms would have to pay the blockchain to get data about the travelers of a company in order to provide duty of care?
Challenges and hurdles
Decentralized distribution may sound like a great alternative to the currently distribution oligopoly, however, transaction cost will be an issue to consider. As mentioned, blockchains typically require a lot of computing resources given that data is held multiple times and there is significant cryptographic computation to be undertaken. In systems like Bitcoin and Ethereum, this means there is often a prohibitive fee associated with each transaction, which can represent several percentages of the value being exchanged, making them inappropriate for certain use cases.
Scalability is a major concern for travel as well: most existing blockchains (Bitcoin, Ethereum, etc.) have significant scalability challenges. For example, the Bitcoin network can only process about 7 transactions per second. In comparison, Amadeus processes 100,000 end-user transactions per second in peak times. The comparison may be unfair as Bitcoin chose the speed, when they decided that it should take miners 10 minutes to create a new block. Other protocols, such as Multichain can already process 1,000 transactions per second. In order to increase the performance, the intensity of the validation is supposed to be reduced or only portions of the blockchain are validated (“Sharding”).
Distribution would most likely be a public blockchain: This means, unless I understand something wrong, the only change is a shift of the dependency from a provider to a platform. If all the fares are in one blockchain (platform), you are dependent on that platform and what fees will be charged at some point. Is there any learning curve from recent incidents with Facebook? A platform which was supposedly misused to allow hackers to influence the democracy of some nations, and share ‘fake news’. Falsified user generated content could be a threat – even if the platform is ‘owned’ by the community and not by an organization. A positive example that it can work may be Wikipedia – but even in Wikipedia, how can it be assured that all the information is viable and every administrator is immune to bribery? Is the community a better police than the authority?
Travel uses lots of databases, think of traveler profiles, Passenger Name Records and Super-PNR, etc. a (private) blockchain may be an alternative, but I still would like to understand what is being gained compared to a database besides intrinsic auditing acceptability unless one goes for the full blown picture to cut out the middleman and only have market participants who do not trust each other.
Other areas of interest include payments: Many areas of the industry rely on settlements between parties. Consider a hotel booking where an aggregator, OTA and the hotel need to settle cash and commissions based on pre-defined agreements. Today this is an extremely complex process, and the introduction of smart contracts could automate settlements in many areas of the industry including credit- or debit memos of clearing houses such as ARC or IATA BSP.
Finally, integration with existing systems will be another major hurdle. Today it is hard to make blockchain interoperable with existing IT systems. If a hotel booking is made on a blockchain system, how will it integrate with a system that isn’t on blockchain?
Besides the fact that blockchain might not yet be mature enough with regards to performance, energy cost, privacy, and legality, the promise of a new method of storing data that is secure, immutable and decentralized is intriguing and there are plenty of initiatives already underway in the travel industry. Compare the use case of Winding Tree below as a replacement for the oligopoly-controlled travel industry.
Another use case is the use of blockchain technology to manage flight data. Specifically, the creation and storage of information for each flight which is handled by multiple entities, and hence may get out of sync as data is stored on separate databases. The desire is a “single version of truth.” Blockchain is built as a distributed ledger. The idea would be, commercial aspects of ‘who owns the data’ aside, that all have access to all transactions, and those transactions are cryptographically stored so they cannot be altered. Various entities can access and update the relevant data on a blockchain, and those actions are visible to all participants. This means that automated smart contracts control the transactions or data, rather than one entity. A test was done with four airports and one airline and up to 2 million changes recorded. The technology was considered immature for various reasons including ‘user friendliness’ and scalability (up to 500 airlines and 20,000 airports). Personally, I also have doubts of the amount of data created which cannot be altered for such use case and which needs to be stored redundantly on various servers. If a flight is delayed several times, it is maybe interesting when it finally took off and what the scheduled departure was, but who cares about all the numerous in between updates. I just compare it to my email inbox – and such information goes right to trash. But there is no trash in blockchain – is there?
Even the ‘expected to be eliminated’ GDSs have positive things to say about blockchains: Amadeus is confident that indirect distribution is the most cost-efficient solution for all parties to achieve that aim on a global scale. Amadeus is also confident that they bring so much to the table other than a ledger, that they will not be eliminated as the middleman – as well as the agencies won’t. They may however, be one of the users of blockchain technology if it makes sense – but this wouldn’t transform the industry, just giving them a chance to migrate ancient technology into new technology.
Blockchain in Travel: Use Case Winding Tree
The initiative Winding Tree seems to be the first initiative to replace classical (centric) GDS distribution in the travel industry. The Initial Coin Offering (ICO) of Winding Tree which took place in February 2018 brought Winding Tree almost (depending on the conversation rate) $10-$15 Million USD to be used for e.g. development (16,278 ETH by 7,082 backers in total – 13,860 ETH and 6,346 backers during ICO).
As many of you probably know, Winding Tree is an initiative to build a decentralized alternative to the current concentrated travel distribution landscape dominated by a “handful of companies”. This fact was long ago already explained in detail in my book “Value Creation for Travel Distribution”. Winding Tree claims that 95 % of the US Online Travel Agency (OTA) market is dominated by Booking.com and Expedia and 99 % of the non-direct inventory for air travel is handled by three GDSs: Amadeus, Sabre and Travelport – which makes it five companies in the travel industry to control the travel market. Besides record breaking profits, the lack of innovation is one of the concerns stating that some still use outdated mainframe computers (announced to be retired though). The dominated market position is stated in various papers and I also touched on this topic frequently:
- Going GUI: The Cost of Multi-Source Agent Desktops
- US Airways Sabre Verdict: No Winner – only Losers!
- Travel Technology for Dummies: What is Full Content?
- The reality behind NDC: Why NDC won’t break down the GDS oligopoly – yet
Another player that generates billions each year in advertising revenue and silently added searching and shopping capabilities through its acquisition of ITA Software to become a dominant position which should not be overlooked.
It is claimed that
- new market entrants are locked out and hence innovation is prevented (although one of the Winding Tree advisors Johnny Thorsen still managed to land a lucrative acquisition with Mezi by American Express), and
- the concept of a few trusted third parties to ensure the validity of transactions is a security concern as history has shown that those Mega companies have failed to keep data secure stating Sabre and Equifax as an example.
Contrary, Winding Tree will offer a decentralized alternative to GDS and OTA distribution claiming to reduce cost of distribution and allow more flexibility. It is probably more precise to understand Winding Tree rather as a marketplace instead of a platform, where supplier (e.g. airlines) and buyer (e.g. agencies as part of the traveler) come together. The concept is supported by some well-known supplier such as Lufthansa, who obviously love the fact that suppliers will not be charged any distribution fee. The question is what ‘support by Lufthansa’ means? Have they actually written a check or just allowed their brand to be used? Also, I know for fact that Lufthansa always wants to have several horses in the race. When Lufthansa still had a share in Amadeus they loved to have their own subsidiary Lufthansa Systems bid for and carry out the same projects like Amadeus. This was to fuel innovation by competition – eventually abandon one of the two initiatives.
So, while a main attraction factor is that there is no fee charged to the supplier in order to provide their offer to the market place – which means the whole model explained here is turned upside down. There will only be a “minuscule” transaction fee which will be calculated by the blockchain at the time of transaction without any correlation with the fare. The problem I see here is that you are dependent and these fees are not ‘regulated’ and could theoretically end up higher than todays’ transaction fees – and once you are hooked in, it’s always hard to get out again – at a minimum you spend all your integration efforts for nothing. Referral commissions are also possible, which just adds to the insecurity.
The role of blockchain
Transactions Deployment of Winding Tree is planned on public blockchains. Transactions won’t be confirmed by a central 3rd party, but by the generation of new blocks in a blockchain. Each block simulates a container which can contain multiple transactions (e.g. air-, car- and/or hotel booking). This means that each transaction is pending until somebody generates a new block, which transforms that pending transaction into a committed transaction. The question becomes why should anybody have an interest to generate a new block? The answer would be, because he/she will earn money from the transaction fee mentioned above.
As a technical platform it was decided to use Ethereum and the definition of a transaction is based on smart contracts (which are part of the Ethereum platform). A smart contract is basically a script/program, which will be executed once a transaction is triggered. It is probably a smart choice to build on Ethereum, which is besides Bitcoin and Ripple one platform which has a lot of attention, but at the same time offers more potential than Bitcoin.
Using blockchain technology also means, the typical previously mentioned concerns are (performance, etc.) also present. Similar to the Visa example earlier, it remains to be seen if a blockchain can handle the amount of traffic of a GDS. Security is a factor which is still in the air for blockchains. I want to see if the cost of energy for storing each booking (and its history) forever in multiple locations will cause any harm to our planet – maybe this is something that needs to be added to the carbon factor of a trip. At least with a six-digit letter code there is a mathematical end until the same booking code will be reused and thus the old one erased completely (see here) – how is this arranged in a blockchain?
The difference to a GDS
Similar to a GDS, also with Winding Tree, supplier provide their offers in a central platform. However, the transaction is not executed by the provider of the platform (GDS vs. Winding Tree), but rather by the creation of blocks by independent third parties. The confirmation of the transaction and its security against fraud is based on blockchain technology – hence, a decentralized system.
Winding Tree claims to create a platform (as I said, I think it’s rather a market place) which is built from engineers for engineers, which claims to simplify integration. This is great, however, they also say that each travel firm will have to become a software company – which may be true, but Winding Tree will be another intermediary in the mix, unless all the business moves from GDSs to Winding Tree. So, in the end the picture I drew here just became even more complicated. And if Winding Tree is not the only contestant for a future distribution platform (which wouldn’t make sense even in Winding Trees own words as otherwise Winding Tree controls the market and all the reasons above then apply to Winding Tree), there will be several platform one has to integrate with.
International flights have numerous aspects of different local currencies: point of sale or point of commencement (POS or POC) ticket, several airport charges (security, bag, government, embarkation, passenger service, etc.) of origination, potentially several stop-over and destination airport which Winding Tree claims to solve by blockchain technology (read blockchain currency). The only question is how many people today trust today a virtual computer currency?
Summary: Critical Success Factors for Blockchain in Travel
Besides questions asked in this article, and abstract risk factors, such as due to Moore’s law the used hash function may be comprised at some point, there are some critical success factors:
On a commercial side there is the question about the price to store the blockchain (as explained above), as well as, whether or not a decentralized blockchain system is indeed cheaper than a centralized GDS: a supplier may ‘voluntarily’ define ‘referral commissions’ which may be paid once a transaction is confirmed. Bitcoin supposedly has such a ‘feature’ that only those transactions become blocks – hence are confirmed – that promise a commission to the initiator of the block, depending on offer (= initiator of the block = agency) and demand (supplier).
Also, the supported transaction rates of the blockchain technology is still too low, however, this problem could be solved in the near future with added blockchain features (such as Plasma) or change of philosophy (such as Sharding). In the airline industry there might be another challenge though: As one can read in the press, today, that nearly half of all airline traffic comes from bad bots. How will blockchain deal with this – especially when the energy consumption is already at the borderline? Such ‘bad traffic’ and potentially even ‘bad storage’ distributed all over the network may even increases such energy consumption beyond its limit of being carbon sensitive.
Final Words on Blockchain in Travel
I’m not against Winding Tree or blockchain technology in travel at all! Contrary, I love innovation and new technology. And, the initial situation (an undefined number of market participants who do not trust each other) seems to be an ideal scenario for blockchain technology. My research at this time did not yet fully convince me that blockchain travel technology is ripe, and I’m trying to ask the questions which bother me and may bother others – not to turn the idea down, but rather to get answers and understand solutions. I would love if the audience discussed these topics here on this blog. I personally know most of the advisors of Winding Tree and have done business with several of them in their past roles. And we still support several of their recent initiatives today. Simply the fact of this profound knowledge aboard makes me believe that this must be a success story. I just don’t want to only have my emotional feelings guide me, but also understand the risk and success factors of a blockchain technology in travel on an analytical level. I’m looking forward to hearing all your questions, answers, more concerns and solutions.
Frequently Asked Questions about Blockchain in Travel
If you take direct distribution through an airline’s web page (which may account for 50 % of their seats) out of the equation, air distribution is currently predominantly carried out through an oligopoly of three major GDSs globally (also taking China out of the equation in this case – otherwise with Travelsky it would be a fourth GDS). Like in every monopoly/oligopoly situation, innovation is slow and prices are dictated, etc. Blockchain could be an alternative way of distribution, reducing fees and fuel innovation. The disadvantage is that in order to be successful a wide adoption of a small amount of solutions (not too many) would need to be achieved on a global scale, which is highly unlikely at this point with little to no successful blockchains.
Blockchain supposedly eliminates the trusted intermediaries – which would be the GDS, Credit Card companies, Clearing houses and possibly a few more – so theoretically all this can be eliminated and replaced by smart contracts, however, honestly I’m still not sure if people wouldn’t want to have somebody to turn to in order to regulate if all of a sudden somebody else has their seat. It would be interesting to see if the majority of passengers would prefer that an online community should vote who has first right to the seat. After the incident with United bumping and dragging out a passenger, this might not be too far-fetched.
Traditional distribution technologies would be here to stay for a very long time. It’s illusionary to think that it will be replaced soon. You even see this with NDC – it’s not moving fast at all. If at all, there will be dual distribution environments and the challenge of an effective management of such dual environments will need to be resolved beforehand – by blockchain peers as the traditional distribution technology provider will not move a finger to enable new entrants to be successful.
Well the idea would be that it will be managed by smart contracts, however, in a dual environment this will be quite a challenge. The system would be maintained by enthusiasts taking a fee from the transaction. So, in other words there will always be a fee for distribution, however, it is expected to be less than traditional intermediaries take today (but nobody seems to understand that traditional intermediaries could just reduce the fees and/or add services to it – just think of all the points you can get from credit card companies). With regard to software platform: in my eyes Bitcoin is out. Ethereum may be a possibility but still there are lots of things to be resolved. One of which is the pure energy cost of a transaction.
I think some of the concerns of different parties I already mentioned above. Obviously, the cut-out middlemen would not provide much support for such technology. Airlines may not like the transparency, but obviously always try to find ways to cut down distribution cost. Airlines may be able to replace the PSS and GDS portion of distribution and inventory management and save double with regards to those providers (essentially Sabre, Amadeus, etc.) and credit card companies. So, they may be the drivers if they trust the technology and they won’t make the same mistake again that transaction fees may be a minor cost factor in the beginning, but once they are committed they are at the blockchain’s mercy (like they are more or less today with GDSs/CRSs). I would probably expect one or some of the LCC to jump on board first. Then, also Lufthansa is already on board with Winding Tree – but Lufthansa always have several horses in the race to improve their negotiation position, so I do not consider this yet as a signal for their future strategy. Who would benefit the most? For the CRS (= inventory managment) portion, everybody would benefit equally. For the GDS (= distribution) portion, I believe the network carrier would benefit as their portion of GDS distribution is larger. But the biggest question is, will they be able to reach the passenger via blockchain. If the users don’t trust the technology, it will fail.
Whether or not an airline lists all or some of their inventory in the GDS is a negotiation between the airline and the GDS. The airline may want to be in the GDS as GDSs offer a huge sales channel. However, the airline also has to pay commission and overrides for distribution via the GDS. The GDSs want to be a one-stop shop and hence prefer to have the full spectrum of all airlines with all fares. Some airlines only want to provide their higher priced fare in the GDS, which is not a preference of the GDSs.
My guess: 20+ years – if at all (performance, cost etc.). As you can read in my NDC article, you have 500 – 5,000 airlines, one needs to bring under one roof.
Picture source: Visual Generation / shutterstock