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How to Make Public Blockchains Safe for Enterprise Use

Paul Brody is EY’s global innovation leader for blockchain. The views expressed are his own.

At the beginning of this year, I wrote a column predicting that companies would find the allure of public blockchains irresistible. While a world of private blockchains provides many enterprises, regulators and central banks with the comfort that there are accountable, centralized entities involved, these permissioned networks will never match the innovation or network effects that public, permissionless networks offer.

If the world of enterprise commerce remains committed to private networks, then they will have only substituted one intermediary (financial institutions) for another (software companies and hosting organizations). However, it is possible, and essential, to bring these two worlds together, and to do so on public, permissionless and decentralized networks.

In order for public networks to deliver on their promise, two key things must happen. First, regulators must provide a clear set of rules around how tokens, assets and smart contracts that exist on public blockchains will be assessed. And second, companies must implement these regulatory rules in the decentralized environment of the public networks.

The first of these is off and running. Regulators in the U.S., Europe and around the world are defining what is an asset, a currency or a security. It shouldn’t be expected that all regulators will come to precisely the same conclusions, but it does look like some early convergence is taking place: Utility Settlement Coins are being characterized as securities while cryptocurrencies are being treated more like currencies or assets.

One gap that we regard as particularly important going forward is how tokenized fiat currency will be regulated: If you have a $1 token on a public blockchain, and that is backed by one U.S. dollar in an escrow account, will that be a security or a currency and what rules might apply? So far, no regulator has specifically addressed this emerging category of blockchain tokens.

The second is that whatever the regulatory rules are, they must be implemented in tokens and smart contracts. In particular, it’s important that while the blockchain as a whole may be decentralized, a central bank should be able to issue and cancel its own currency on a blockchain and companies should be able to manage their own assets when they are tokenized.

Know your carton?

To illustrate how important this is, let’s come back to the question of how companies will do business with each other on public blockchain networks: The exchange of product or asset tokens for money tokens. Once a company starts to tokenize its inventories and assets and use those in contracts and financial services, they are disintermediating traditional financial entities. They are also, consequently, taking on some of the regulatory responsibilities of those intermediaries.

Tokens, if they have value, can be moved around as easily as money, for example. While a consumer packaged goods (CPG) company may never have had cause to think about this before, once they tokenize packages of detergent, those tokens have an effective exchange rate with real money and other goods that makes them perfectly suitable for any kind of deal, legal and otherwise. That means even CPG companies will become responsible for know-your-customer (KYC) and anti-money-laundering (AML) compliance.

Is this a deal-breaker for public networks and enterprises? No, it isn’t.

One of the great benefits of smart contracts and blockchain tokens is that they are programmable. Going forward, audit, KYC and AML regulations can and will be written into smart contracts and tokens. Combined with exchange controls and other checks, it will be possible to control how and when tokens are used on public blockchains without resorting to the centralization of the blockchain as a whole. This will even include canceling and issuing new tokens to handle theft and loss.

There are, no doubt, many who will mourn the end of public blockchains as systems wholly outside of regulatory control. For blockchains to deliver on their promise, this is inevitable, but how this happens matters a great deal.

If regulatory compliance is delivered through centralization, then there will be a great loss to innovation and we may see the dream of a re-decentralized internet die. I didn’t call my original paper on blockchain technology “Device democracy” for nothing. It’s my dream, too.

There is another option, however: regulatory compliance within a decentralized framework. An opt-in model based on voluntary agreement to smart contracts means that companies can use blockchains for business without embracing undue risk. But at the same time, individuals and startups can continue to pursue radical experiments without having to ask anyone for permission.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Why Blockchain Is Becoming the 'New Normal' In Enterprise

Richard Gendal Brown is the CTO at R3.

After years of discussion and planning, enterprise blockchain is now becoming a reality across industries as diverse as insurance, healthcare, gold, oil and gas, finance and more. But it’s worth taking a step back and reflecting on the reasons why.

Have you ever stopped to think about the difference between the way businesses function and the way the markets in which these businesses operate function?

Most businesses are centralized, with the standard corporate structure of a CEO, a board of directors and all the departments necessary in order to run effectively; yet most markets are decentralized, with no central body in charge. As a result, these two inextricably linked entities function in entirely opposite ways.

When the IT revolution began many decades ago, it was natural for companies and other centralized organizations to be early adopters of the technology: there was a competitive advantage to be gained by optimizing a firm’s operations, and a command-and-control mechanism was required to get the technology adopted and working practices changed.

As a result, it’s no surprise that if we now look back on the achievements of the IT industry over recent decades we see that technology platforms have mostly been deployed within firms and have mostly been used to optimize those firms alone.

However, when you raise your attention to the level of industries and markets, you see an entirely different scenario. It’s really quite remarkable how little has changed in so many markets. International trade today would be easily understandable by a merchant from three hundred years ago. The mechanics of how a complex reinsurance contract is negotiated would look little different from a century ago. The list goes on.

Costs of centralization

In fact, it’s only when markets have introduced centralization, such as with the creation of highly regulated centralized infrastructure in the financial markets, that we’ve seen a transformational change at the level of an entire industry.

The results have often been spectacular. But they have come at the cost of new intermediaries, greater risk concentration and a resulting regulatory need to ensure these new institutions do not become rent-seekers or stifle innovation once established.

Until recently, we simply haven’t had the technology that would allow us to make such changes without introducing new points of centralization and control. The deepest assumptions of most of the software that exists today are that it will be deployed within a firm, that it will be controlled by that firm, and that, because it is run by or for that firm, its outputs can be trusted by people in that firm.

And so we find ourselves in today’s world, where each company in a market has an insanely complex IT estate with hundreds or thousands of corporate applications, many of which do the same thing as their competitors. Except the reality is, in fact, worse.

Not only do we have a mass of duplicated systems, none of them are ever in sync. They constantly have to be reconciled and checked to make sure that every party to a deal or contract is in sync with each other.

Bitcoin’s lesson

However, the advent of bitcoin taught us something very interesting – it was possible to build systems that are deployed between multiple entities, who don’t fully trust each other but desire to transact with each other, and to do so without introducing a new centralized party they must all trust.

It could be a massively powerful breakthrough to apply the same logic to other areas such as legal contracts and healthcare records, or reinsurance policies and complex loans. It could be the Holy Grail for optimizing entire markets without forcing these markets to reshape themselves to conform to the badly-fitting centralized models that today’s software would demand. It would be the best of both worlds and could unleash a productivity revolution.

This is what we at R3 believe is the potential of the application of blockchain technology to business. Used correctly, it offers the ability for anybody to transact directly with anybody else on an open network, with total assurance that “what I see is what you see,” with guaranteed privacy and scalability.

Now, thanks to enterprise blockchain technology, entire markets are in the process of being transformed and it’s happening without forcing new intermediaries into the mix or driving these riotously decentralized markets into inappropriate centralized models.

Blockchain is decentralized software for today’s markets, and over the next decade, it will become the new normal in industries across the globe.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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UK Food Watchdog Trials Blockchain for Meat Inspection

The United Kingdom’s Food Standards Agency (FSA), a safety watchdog, announced Monday it had successfully piloted a blockchain-based supply chain monitoring system.

The trial tracked meat produced in an unnamed cattle slaughterhouse, providing “improved transparency” throughout the supply chain, according to a press release. Both the slaughterhouse and the FSA tracked data provided in the trial.

FSA head of information management Sian Thomas said in a statement that his agency thought “blockchain technology might add real value to a part of the food industry.”

A slaughterhouse in particular was chosen because its “work requires a lot of inspection and collation of results,” he said.

He added:

“Our approach has been to develop data standards with industry that will make theory reality and I’m delighted that we’ve been able to show that blockchain does indeed work in this part of the food industry. I think there are great opportunities now for industry and government to work together to expand and develop this approach.”

Following the pilot, additional programs will be tested to give farmers access to data about their animals in July.

While this trial may have been the first time the regulatory agency used a blockchain to monitor food supply chains, various retailers have already begun experimenting with the use case. Walmart,, Alibaba, Cargill and CBH Group are just some of the firms which are using blockchain to track food items.

Food Standards Agency’s website image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Not Sold On Blockchains for Business? Just You Wait

Paul Brody is a principal and the global blockchain leader at EY

We were promised a global financial and industrial revolution. We got a mango tracker.

Three years since enterprises started exploring the possibilities in blockchain, it’s perfectly understandable to be disappointed with what we’ve got so far.

But believe it or not, the seemingly banal applications for blockchain we’re seeing, from food traceability to software licenses, are a big deal and rightly worth celebrating.

The biggest journeys take place one step at a time, and when it comes to enterprises, it’s a particularly long journey. That 22,000-word software license agreement you clicked “yes” to without reading? Enterprises are reading every word of those things and arguing over the details. Adoption of technology inside the enterprise is sticky and durable, but it is also very slow as these systems are fragile and have many decision makers.

If you want to beg forgiveness rather than ask for permission a la Uber, that’s your call. If you want to put a Fortune 500 company’s cars into an asset-sharing system, be prepared to spend the next year locked up with the legal team.

As important as the milestones achieved so far have been, there’s a much longer way to go and in this series of articles, I will examine the key transformations that need to take place for blockchains to go from interesting prototypes to production systems solving niche problems to general-purpose tools for moving value of all kinds around.

We’re just transitioning from the interesting prototype into the niche problem-solving category, with things like food and wine traceability and software licenses leading the way as good case examples.

Going public…

Right now, nearly all enterprise blockchain examples are confined to private networks and, typically, non-financial systems. To get from niche use cases to general-purpose transactions suitable for all businesses, four transitions must happen.

The first is a shift from private, permissioned blockchains to their chaotic, public and permissionless counterparts. Like the move from private company systems to the internet, it looks scary now, but in a few years, we will all look back upon it as inevitable.

There’s a good reason, however, that nearly all enterprise solutions today run on private networks: privacy. Public, permissionless blockchains, though they are based on key principles of cryptography, actually run most data in the “clear” – which is to say unencrypted. If you want to buy raw materials from suppliers and partners and you do so over the public networks like ethereum today, your pricing deals and volumes and partners will all be easily visible to your competition. Not very attractive.

And so companies have opted for private networks. But private networks, even industry consortia, don’t scale very well. If you form a private network for food traceability and you want to ship the food and insure that shipment, you’ll end up needing half a dozen different blockchain connections to complete the whole transaction.

Some companies are working hard on connecting up lots of different private blockchains. That’s going to be expensive and our fear is that hackers will have a field day with those interoperable systems. This isn’t a strategy that has worked in other industries and eras, and we don’t see it having a better fate this time around either.

If you’ve been around long enough, you remember when companies had point-to-point connections for their email systems. It worked, just barely, but only for a few companies to talk to each other.

…while keeping data private

The internet and public key encryption made it possible for us to email everyone, everywhere securely without any predefined interconnections. With zero knowledge proofs, we believe the same will be possible for blockchain transactions.

This technology, which has been proven in a number of prototypes, is now being industrialized. It will allow all companies to work on public blockchains and to enter into contracts with each other securely and privately.

The mathematical principles that underpin zero-knowledge proofs are very complex, but the effect is very simple. I can prove to you something is true (e.g. I have a certain number of mangos, or I have delivered them to a certain customer or location) without enabling anyone else to understand the underlying data.

This means you can preserve the immutability and redundancy of a blockchain by allowing anyone to verify the truth of information and approve a transaction – something that is critical to consensus algorithms in decentralized systems – without exposing the details for all to see.

The same scenario we discussed before (buying product, shipping it, insuring it and tracking it and paying for it) can not only be done with a single contract with multiple parties, it can all take place on the same blockchain and be executed securely, privately and reliably.

Getting on to a shared, public infrastructure is critical for blockchains to scale globally and to move from very specific industry solutions into general purpose tools for moving value and enabling business agreements.

Though we think it will take some time to fully industrialize the implementation of zero-knowledge proofs, the payoff will enormous.

In my next article, I will take a look at the second key revolution we expect in blockchain technology: the transition from notarization to tokenization.

Scratch and reveal image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Axoni, Clearmatics Claim Milestone for Blockchain Interoperability

Two of the most prominent startups in enterprise blockchain are teaming up to tackle the hard, but now seemingly inescapable problem of interoperability.

At Consensus 2018 this week, Clearmatics and Axoni demonstrated how a financial derivative can be issued via a smart contract, trigger a payment and then instigate a cross-chain atomic transfer of value between two distinct networks. This marked the first time a derivatives contract has been originated on one enterprise blockchain and settled on another.

The milestone is important because interoperability is now emerging as a key design goal of distributed ledger technology (DLT).

While the financial world may be moving from a state of many ledgers to fewer ones, blockchain architects have come to realize that trades, deals and transactions will probably never be originated, processed and settled by a single, monolithic system.

Robert Sams, the CEO of Clearmatics, told CoinDesk:

“Facilitating end-to-end processing from point of trade to settlement, we need to make the assumption that that process is going travel through multiple systems, rather than a single monolithic settlement system, distributed or otherwise.”

The collaboration is significant also because of the clout of the players involved.

Axoni, based in New York, is working with a wide range of leading financial institutions and infrastructure providers to move trillions of notional value in U.S. dollars onto blockchain tech across a variety of asset classes.

Meanwhile, its partner in the demo, Clearmatics of London, is working with a consortium of banks and financial institutions to create digital fiat that is fully collateralized by cash at the corresponding central bank and transferable on a distributed ledger.

Axoni has also been doing a lot of work in the derivatives space and other areas of post-trade processes, while Clearmatics is focused on the settlement side of things, so the pairing was an obvious fit (both are building technology based on ethereum-derived architecture).

“If we can collaborate appropriately and facilitate linkage between those networks, what you end up with is a highly automated, highly transparent process all the way from trade agreement through to settlement finality,” said Greg Schvey, the CEO of Axoni.

Lessons from crypto

Stepping back, it’s fair to say blockchain interoperability is at the R&D stage.

To make sense of the problem involves a lot of requirements based on use cases and the domain applications, which all have to be considered together. Sams emphasized that the interoperability demo was just a proof of concept – but an important one, because it drives the spirit of open source collaboration.

“Interoperability needs to be tackled in a open and collaborative fashion and built around open standards and open source implementations,” he said, adding:

“There will probably be multiple types of interoperability solutions – not many, but more than one.”

The same spirit extends to the public blockchain community, where a lot of cutting-edge work is being done on the very technical aspects of the topic.

“There’s a lot of overlap between cross-chain atomic swaps in the cryptocurrency space and the stuff that we are doing,” said Sams. “Even though the domain application is entirely different, the underlying technological primitives are very similar.”

The contract in question was modeled using Axoni’s domain-specific language, AxLang, and then settlement finality of the resulting cash payments was achieved across different permissioned, ethereum-compatible ledgers.

Clearmatics’ contribution to the demo was Ion, an open source interoperability protocol, designed to perform atomic cross-chain transactions.

Lingua franca

The AxLang smart programing language used here was developed by Axoni to make working with smart contracts in an enterprise setting a sure thing, so to speak.

Axlang is based on Scala and enables formal verification of smart contracts, a rigorous mathematical method used to prove the correctness of computer programs. It can also compile to both the Java and the ethereum virtual machines.

However, developers are often asked, why another programing language?

Schvey said that doing lots of work with large-scale application design on blockchains revealed certain requirements not being met by Solidity, the first step into programming smart contracts among the ethereum community.

In particular, Solidity lacks formal verification, which is the ability to have mathematical proofs that the code written has compiled properly, Schvey said.

“Being able to check for certain error vectors is a very powerful concept, especially if you are deploying a large scale multi-party infrastructure with a lot of value going through it,” he said.

Indeed, the proof of concept marries two hard technical challenges: interoperability and formal verification. And there’s an important connection between the two, Sams pointed out.

“Imagine an end state of distributed market infrastructure where you have an end-to-end process flow, occurring through multiple systems,” he said.

“It’s obviously going to be very important that at the semantic layer, a system taking over a process from another system, and vice versa, understands and can demonstrate exactly what the business logic is that they are consuming or producing for another system to consume.”

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AWS Moves to Simplify Production-Grade Business Blockchains

Cloud computing giant Amazon Web Services (AWS) is partnering with the ethereum design studio Consensys to make enterprise blockchains easier and faster to deploy.

Announced Tuesday at Consensus 2018, the two firms’ business blockchain cloud service, Kaleido, aims to smooth the onboarding process for enterprise consortium members – a major challenge in the space – while simplifying the operation of private blockchain networks.

“We have been following ethereum closely as it’s what many of our customers have been exploring, especially for enterprise use cases,” Matt Yanchyshyn, the global technical lead for AWS’ partner program, told CoinDesk.

However, he stressed that AWS is “protocol-agnostic,” noting that the company also supports Hyperledger’s Sawtooth and R3’s Corda platforms.

Indeed, AWS is no stranger to the space, having announced back in 2016 that it would start working with blockchain startups, offering dedicated technical support and infrastructure for the firms involved.

More recently, in April of this year AWS unveiled a new service for launching out-of-the-box blockchain networks for the ethereum and Hyperledger Fabric protocols.

Now, however, the unit of Amazon has aligned itself with one of the most influential organizations in the ethereum community. “Working with ConsenSys will allow us to further understand customer needs and help accelerate their blockchain efforts,” Yanchyshyn said.

Those who were around at Ethereum DevCon 1 back in 2015 might be reminded of ConsenSys’ first stab at offering ethereum in the cloud, via Microsoft’s Azure platform. But Kaleido aims to take the concept further.

Michael Dickson, the enterprise blockchain business development lead at ConsenSys, said Microsoft’s early blockchain-as-a-service was essentially a set of scripts to enable users to quickly stand up a sandbox environment for blockchains.

“This is great when you are starting out and you are experimenting, but it will only get you so far,” he said. “What we are seeing now is enterprises really have an appetite to try to get their projects all the way to production,” which Kaleido can handle.

Enterprise challenges

Stepping back, enterprises looking to participate in some kind of shared blockchain architecture face an array of physical networking and performance challenges around connecting their respective data centers.

In terms of managing participation in a blockchain consortium, one of the most commonly asked questions is how to onboard members. The process can take weeks, but a public cloud can reduce that time dramatically, according to Dickson.

Then there’s the complexity that goes with advanced cryptography and consensus algorithms, not to mention governance, another big area of concern going forward.

Kaleido’s “shared IT” approach can deal with changes such as defining a new version of a smart contract, for example, said Dickson.

“It’s about having the right tools and processes in place so that a consortium can set up policies that say ‘there need to be so many votes or signatures collected before this contract gets deployed,'” he said.

The AWS-Consensys venture also brings a step closer the goal, increasingly shared by enterprise blockchain professionals, of connecting their private blockchains to the ethereum mainnet.

The platform offers a “state relay” between a private chain that a group of enterprises can set up and operate and a public blockchain.

“This allows you to configure a time interval and based upon the time interval, it aggregates together hashes and writes those up to the mainnet, so on the public blockchain,” said Dickson.

In this way, the public blockchain serves as a ledger of last resort, as it were.

“So you get this permanent data point out on the mainnet that is irrefutable and acts as an objective arbitrator should a disagreement appear on the private chain,” Dickson said.

Quorum in the cloud

Kaleido allows users to switch between several consensus algorithms and choose between two packages: Geth, which is the most popular client for the ethereum blockchain app platform; and Quorum, the enterprise version of ethereum developed by JPMorgan Chase.

Offering JPMorgan’s Quorum as an alternative package within Kaleido is timely, given that the Wall Street giant is widely known to be considering a spin-out of the project.

According to sources familiar with JPMorgan’s thinking, IT management across a wide range of Quorum users was becoming burdensome to the bank. Kaleido seems to be designed to shoulder that task.

“In the enterprise ethereum space, Quorum is a very popular choice. It gives our users the ability to send private transactions between a certain subset of members on a private chain,” Dickson said.  “It was a no-brainer for us to include as an option on the platform.”

Amazon Web Services image via Shutterstock.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.