This year has seen a massive growth in curiosity about blockchain technology in both the world of finance and technology, and especially from those who are interested in both. Millions of dollars has been invested in various blockchain project, and have created a new category of technology: blockchain as a service.
Almost every major financial institution or technology provider for these (such as EVRY where I work) either has a blockchain application in process or hopes to have one soon. The common theme seems to be that they don’t want to use the original bitcoin Block chain, just the general blockchain technology. In other words, they wish to understand and employ a shared ledger that can be used to track things like stock sales, payments, loans, various contracts, and plenty of more use-cases.
Those experimenting with various blockchain use-cases face two serious challenges: 1) there is a scarce pool of talented developers with blockchain experience. 2) The cost of acquiring new software and teaching people how to use can be quite steep, especially if it is bought before the banks have a concrete business case for it.
To address these challenges there are several ambitious projects (see ch 3.3 in my report), which aim to provide packages of software tools and services which will power the value web services we will use in the close future. As I covered in my previous post, Microsoft seems to be the first to market, by partnering their Azure platform together with Ethereum and ConsenSys to provide what they call “blockchain as a service.” This “as a service” terminology was made popular by Salesforce in the early 2000s, and are part of the standard naming convention for both many cloud services.
Instead of relying on the Salesforce’s business model based on delivering pre-built software delivered over the web; This new EthBaaS ecosystem is designed so that companies like banks can build their own blockchain software. If they need help, they can rely on a team of developers with blockchain experience. This business model has been successfully employed by both IBM and RedHat in the past, and is considered one the staple ways of running an open-source based business.
The partnership with Microsoft will make it very easy for developers to create new applications, which can easily be deployed on the public blockchain of Ethereum, or more private blockchains if there is a need for stronger privacy/control/efficiency.
Microsoft calls it a way to fail fast and fail cheap at blockchain projects, while figuring out the best ways to leverage the technology. “’Fail fast’ means before you figure out how to do something the right way, you’re probably going to do it the wrong way ten times,” said Marley Gray, director of technology strategy in Microsoft’s U.S. financial services group. He followed up with a praise of the the low-cost, Azure-based offering, “If it blows up in your face, no harm no foul,” he said. “We’re building a worldwide, distributed lab environment for these large banks and consortia.”
Now adding inter-ledger operability
On Tuesday the 8th of December, Microsoft added Ripple as a new partner to its blockchain-as-a-service platform. Ripple has designed a new set of blockchain protocols specifically to handle cross-border payments, and they have aquired several bank clients the last year including Rabobank, Fidor Bank, Westpac, and more.
Part of the partnership deal has been that Microsoft will be operating a set of Ripple validating nodes for Ripple’s bank users. In return, Microsoft will be able to explore how the Ripple’s Interledger Protocol can be incorporated into the Azure enterprise solution.
Having had a look at the Interledger Protocol, I think this is a very smart move by Microsoft. With this move, they are taking a step towards incorporating a ledger-neutral technology that facilitates interoperability of the movement of money between various blockchain solutions. This will allow them to create a service that can interact with all types of blockchains in the future, no matter which one turns out to be the “winning” solution.
The Interledger Protocol (ILP) is designed by Ripple to be a technology-neutral arbiter for all types of ledgers, both those that are distributed and traditional centralized alternatives. Ripple CTO Stefan Thomas told Coindesk that ILP itself is not a ledger, as it does not seek consensus toward any state. Rather it provides a top-layer cryptographic escrow system that allows funds to move between ledgers with the help of intermediaries it calls “connectors”.
Further, ILP has no native token, so individual ledgers operating its protocol will still hold balances in their native units of account. Thomas contends such interoperability solves the issue of one specific payment network – be it Ripple or Visa – needing to reach global ubiquitousness.
Figure from Coindesk article on ILP, worth a read (click the image)
Is it useful?
During the last two weeks, there have been several demos on how a financial trade could be completed by using Ethereum as a platform. I’ve chosen to highlight two of them in this post.
The first demo was held by UBS, the Swiss banking giant, at the DEVCON1 conference in November. Here they presented a Smart Bonds platform built on Ethereum, which is their first blockchain prototype.
The demo was based on a bond issuer offer and a bond buyer interested in trading. Using a UBS issued token held in escrow for the exchange and built-in smart contracts, both on Ethereum, the proof of concept successfully traded a newly created bond between two parties.
Picture from UBS demo at the DEVCON1 conference
The second demo was made by Microsoft itself, during their Microsoft Connect conference two weeks ago. Here they previewed an upcoming DApp service they’ve called the Ethereum Total Return Swap (eTRS). The eTRS affords two counterparties whom do not know each other to enter into a total return swap, which is a financial contract that transfers both the credit risk and market risk of an underlying asset. In the demo, a bank with little blockchain experience was able to quickly install a blockchain environment in Azure. Within about 20 minutes, following a script, it wrote its first smart contract application
On the surface, the eTRS take on total return swaps functions similarly to existing agreements, wherein one party makes payments to another based on the return of a reference asset. Unique to the cryptoswap offering, however, is that it uses elements of the Ethereum blockchain that allow for referencing client accounts. This technology allows the banks to fulfill know-your-customer (KYC) and anti-money laundering (AML) requirements digitally.
In the words of James Slazas, Consensys CFO: “Upon electronic signing of the agreement both counterparties receive the T+0 execution and settlement confirmation via our Balanc3 triple entry accounting application. Each counterparty’s internal accounting system receives the proper debit/credit journals for the trade and collateral posted as well as an immutable entry on the blockchain. Throughout the swap term, risk is reduced by real-time automated collateral rebalancing from price and reputation changes. Balanc3 is incorporated at each rebalancing until expiration thereby providing the potential for real-time regulatory and audit transparency.”
This is a handful to swallow, but essentially Ethereum will reconcile the counterparties accounting records with triple-entry accounting, thereby reducing the possibility of fraud. Another feature is the T+0 execution, meaning that the trade will be settled close to real-time, instead of the T+3 (days) that are the industry standard at the moment.
What will it cost?
Looking back at Microsoft’s promise of “fail fast, fail cheap,” one question that springs to mind is: how much will this cost?
Microsoft says its basic blockchain services are included with a regular subscription to Azure at no additional cost. Partners may charge additional licensing or usage fees. No further pricing information seems to be revealed at this time.
Andrew Keys, director of enterprise business development at ConsenSys, told American Banker that they will have three levels of pricing based on service level: a do-it-yourself testing experimentation version, a mid-level service with some quality assurance provided, and a premium, full production environment with 24/7 white-glove customer support.
Why the Microsoft Partnership?
It’s worth clarifying here that Microsoft has not developed any blockchain-specific software. What they have done however, is make sure that the Azure public cloud comes with services suited to the blockchain. This includes services such as encrypted data storage, Active Directory for authentication, and Cortana Analytics for gleaning insights, predicting markets and optimizing transactions.
Blockchain technology is quickly maturing in a growing landscape, with high-profile companies like IBM, R3CEV, Chain, and Digital Asset Holdings competing to deliver products for both banks and the public in this space. What Ethereum has gained through this partnership, is not only legitimacy but also a world-wide network of data centers that makes it significantly easier to launch a blockchain application. Azure is available in 24 regions around the world, so that anyone anywhere can spin up a private blockchain with nodes in all corners of the world. Alternatively, they can use a simple gateway to access the public Ethereum network.
By adding the interoperability of Ripple’s protocols, this four-way partnership signals a great step towards the goal of an “Internet of Value”, where money will move as easily as information does today on the web.
If William Mougayar is to be believed, a significant number of banks that are impatient to start testing how blockchain technology can affect their business is already using Ethereum. In an interview with International Business Times (IBT) he said the following:
“There are probably a dozen banks doing stuff on Ethereum already without even being part of a consortium. You have to pay money to be part of it [R3] and it’s still at the blueprint architectural stage. […]But Ethereum is already in there without any consortium. It’s like a more natural way of adoption. The banks on their own are trying these Ethereum technologies and if you count them all up, they number between 12 and 24 – because half of them are not saying anything.”
He also followed up by saying that the Microsoft announcement was brilliant and popped everybody up. It is worth noting that Mougayar is an advisory board member of the Ethereum Foundation, but he proclaims neutrality towards any companies, calling himself “the Switzerland of blockchain”.
Conclusion
While it is still way too early to proclaim any winners in the race to create the Internet of Value, I feel like Ethereum has taken a big step with their recent partnerships. I’ve already had the chance to dabble a bit with Solidity, the smart contract code language that underpins Ethereum. With a syntax very similar to Javascript, I’ve found it relatively easy to get into, especially through the tutorials made available to the public (another one).
This ease-of-use is another major plus point of Ethereum, and one of the reasons why I’m so excited for the future of blockchain technology. By making it easy for developers to create applications on their platform, they are building the foundations of becoming a major “value ecosystem”. Blockchain-as-a-service is ready to go now, so get out there and start building the future.
