brussels hyperledger meetup - ibm blockchain explained

1Page© 2016 IBM Corporation© 2016 IBM Corporation

Making Blockchain Real for Business

Explained

David SmitsIT Architect

Contents

is Blockchain?

is it relevant for our business?

can IBM help

us apply Blockchain?

2Page© 2016 IBM Corporation


Business networks, wealth & markets

– Business Networks benefit from connectivity

• Participants are customers, suppliers,

banks, partners

• Cross geography & regulatory boundary

– Wealth is generated by the flow of

goods & services across business

network in transactions and contracts

– Markets are central to this process:

• Public (fruit market, car auction), or

• Private (supply chain financing, bonds)


Transferring assets, building value

Two fundamental types of asset

Intangible assets subdivide

Cash is also an asset

– Tangible, e.g. a house

– Intangible, e.g. a mortgage

– Financial, e.g. bond

– Intellectual, e.g. patents

– Digital, e.g. music

– Has property of anonymity

Anything that is capable of being owned or controlled to produce value, is an asset


Ledgers are key …

Ledger is THE system of record for a business.

Business will have multiple ledgers for multiple business networks in which they participate.

– Transaction – an asset transfer onto or off the ledger

• John gives a car to Anthony (simple)

– Contract – conditions for transaction to occur

• If Anthony pays John money, then car passes from John to Anthony (simple)

• If car won't start, funds do not pass to John (as decided by third party arbitrator) (more complex)


Introducing BlockchainA shared ledger technology allowing any participant in the business network

to see THE system of record (ledger)



Problem …

… Inefficient, expensive, vulnerable

Bank records

Party A’s records

Party C’s records

Auditor records

Party B’s records

Party D’s records


Solution …

… Consensus, provenance, immutability, finality

Party C’s records

Auditor records

Party B’s records

Party D’s records

Bank records

Party A’s records

Shared, replicated, permissioned


– Unregulated, censorship-

resistant shadow currency

– First Blockchain application

• Pioneer of Blockchain

technology

Blockchain underpins Bitcoin …

… Digital currencies different from cryptocurrency9Page© 2016 IBM Corporation

BUT

is not bitcoin


Blockchain for business …

Append-only distributed system of record shared across

business network

Business terms embedded in transaction database & executed with transactions

All parties agree to network verified transaction

Ensuring appropriate visibility; transactions are

secure, authenticated & verifiable Privacy

Shared ledger

… Broader participation, lower cost, increased efficiency

Smart contract

Consensus


• Shared between participants

• Participants have own copy through replication

• Permissioned, so participants see only appropriate transactions

• THE shared system of record

Records all transactions across business network

Shared ledger


Smart contract

• Verifiable, signed

• Encoded in programming language

• Example:

– Defines contractual conditions under which corporate Bond transfer occurs

Business rules implied by the contract … embedded in the Blockchain and executed with the transaction


Privacy

• Participants need:

– Transactions to be private

– Identity not linked to a transaction

• Transactions need to be authenticated

• Cryptography central to these processes

Ledger is shared, but participants require privacy


Consensus

• Anonymous participants

– Bitcoin cryptographic mining provides randomized selection among anonymous participants

– Significant compute cost (proof of work)

• Known & trusted participants

– Commitment possible at low cost

– Byzantine fault tolerance (BFT)

… the process by which transactions are verified

• Multiple alternatives– Proof of stake, where influence is determined by

risk of validators

– Multi-signatures, validation needs consent from 3 out of 5 validators

• Industrial Blockchain needs “pluggable” consensus


Car Lease Video

16

Regulator

How do participants typically work today ? Ownership Transfer

“In house”(ledger)

Synchronisation: × Slow× Error prone

× Multiple ledgers

× Who owns what, when, could get confused ?

1. Manufacturer


2. Dealer


3. Leasing Company



4. Lessee

5. Scrap Merchant



17

1. 製造業者•車を製造します

•販売特約店に所有権を移転します

Participants

Regulator•Creates “Vehicle Template”

1. Manufacturer• Manufactures cars• Transfers ownership to Dealers

2. Dealer• Sells cars• Transfers ownership to Leasing

Companies

3. Leasing Company• Provides lease cars• Transfers ownership to Lessee

4. Lessee• Leases Cars

• Transfer of ownership to Scrap Merchant

5. Scrap Merchant

• Disposes of Cars


18

Business Process (1/2)

Regulator

1. Creates “Vehicle Template(V5C)”

1. Manufacturer

3. Add Vehicledata to V5C

2. Dealer

2. Transfers ownership to Manufacturers

4. Transfers ownership to Dealers


19

Business Process (2/2)

2. Dealer3. Leasing Company

4. Lessee 5. Scrap Merchant

5. Transfers ownership to Leasing Companies

6. Transfers ownership to Lessee

7. Transfer ownership to Scrap Merchant

8. Disposes car


20

How could participants work with blockchain ?

node

1. Manufacturer

2. Dealer

3. Leasing Company

4. Lessee

5. Scrap Merchant

Regulator

Shared Ledger

SmartContracts

node

nodenode

node node

Conditions for asset transfer

Records of asset transfer


22

Smart Contract

Smart Contract

CryptographyCryptographyShared LedgerShared Ledger

ConsensusConsensus

Ensuring secure, authenticated & verifiable transactions

Business terms embedded in transaction database & executed with transactions

All parties agree to network verified

transaction

Append-only distributed ledger shared across

business network

Blockchain Recap


23

V5C

Data

Owner: Regulator

VIN:

Maker:

Model:

Methods

Create

V5C

Data

Owner: Manufacturer

VIN:

Maker:

Model:

Methods

Update

Smart Contract (1/2)

Regulato

rCreate V5C template Transfer V5C template to Manufacturer.

Smart

Contract

Smart

Contract

Crypto

graphy

Crypto

graphy

Shared

Ledger

Shared

Ledger

Conse

nsus

Conse

nsus

Update V5C with car information

1. ManufacturerRegulato

r

Blank

Rule of Creation

Only Regulator can create

V5C template.

Rule of Update

Only Manufacturer can

update V5C.

V5C

Data

Owner: Manufacturer

VIN:

Maker:

Model:

Methods

Transfer

Blank

123

Alfa Romeo

Mito


24

Smart Contract (2/2)

V5C

Data

Owner: Dealer

VIN: 123

Maker: Alfa Romeo

Model: MiTO

Methods

Transfer

Transfer V5C to Dealer.

2. Dealer

● ● ●

Disposes car.

5. Scrap Merchant

V5C

Data

Owner: Leasing company

VIN: 123

Maker: Alfa Romeo

Model: MiTO

Methods

Transfer

V5C

Data

Owner: Scrap merchant

VIN: 123

Maker: Alfa Romeo

Model: MiTO

Methods

Dispose

Rule of Dispose

Only scrap merchant can

dispose car.

1. Manufacturer

Transfer V5C to Leasing Company.

Smart

Contract

Smart

Contract

Crypto

graphy

Crypto

graphy

Shared

Ledger

Shared

Ledger

Conse

nsus

Conse

nsus


25

Shared Ledger

Shared Ledger

Block 1020

Previous Hash

Transactions

Create V5C template

Hash of TX

Nonce

Timestamp

● ●

●

● ● ●

Block 1021

Previous Hash

Transactions

Transfer V5CRegulator to Manufacturer

Hash of TX

Nonce

Timestamp

Block 1022

Previous Hash

Transactions

Hash of TX

Nonce

Timestamp

Block 1023

Previous Hash

Transactions

Hash of TX

Nonce

Timestamp

Update V5C Transfer V5CManufacturer to Dealer

Block 1024

Previous Hash

Transactions

Transfer V5CDealer to Leasing Company

Hash of TX

Nonce

Timestamp

Block 1025

Previous Hash

Transactions

Leasing Company to Lessee

Transfer V5CLeasing Company to Lessee

Hash of TX

Nonce

Timestamp

Block 1026

Previous Hash

Transactions

Hash of TX

Nonce

Timestamp

Block 1027

Previous Hash

Transactions

Hash of TX

Nonce

Timestamp

Transfer V5CLessee to Scrap

Dispose V5C

Smart

Contract

Smart

Contract

Crypto

graphy

Crypto

graphy

Shared

Ledger

Shared

Ledger

Conse

nsus

Conse

nsus


26

Distributed to all nodes by Peer2Peer

Smart ContractsShared Ledger

Block

Hash

Node

Node

NodeNode

Consensus

Regulator1. Manufacturer

2. Dealer

3. Lease Company

4. Lessee

5. Scrap Merchant

Node

Hash of TX

nonce

Timestamp

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Create V5C(Send transaction)

Create V5C(Send transaction)Proof of WorkProof of WorkDiscover nonce!Discover nonce!

OK

OK

OKOK

V5C

Data

Owner:

Regulator

VIN:

Make:

Model:

Method Create

Transaction

Create V5C

Create BlockCreate BlockConsensusConsensusCreate V5C(Execute transaction)

Create V5C(Execute transaction)

635840321837635840321837

000000012345000000012345

OK

Block

Hash

Transfer V5C(Send transaction)

Transfer V5C(Send transaction)

Transaction

Transfer V5C

Node

Hash of TX

nonce

OK

Proof of WorkProof of Work

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Timestamp

759710275638759710275638

000000067890000000067890

Discover nonce!Discover nonce!Create BlockCreate BlockConsensusConsensus

OK

OK

OKOK

OK

OK

Transfer V5C(Execute transaction)

Transfer V5C(Execute transaction)

Block

Hash

Manufacturer

Transfer

Update V5C(Send transaction)

Update V5C(Send transaction)

Transaction

Update V5C

Proof of WorkProof of Work

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Hash of TX

nonce

Discover nonce!Discover nonce!Create BlockCreate Block

Hash of TX

nonce

Timestamp

387291845274387291845274

000000037648000000037648

OK

OK

OKOK

OK

OK

ConsensusConsensus

Update

123Alfa Romeo

MiTO

Update V5C(Execute transaction)

Update V5C(Execute transaction)

SharedLedger

SmartContract

Smart

Contract

Smart

Contract

Crypto

graphy

Crypto

graphy

Shared

Ledger

Shared

Ledger

Conse

nsus

Conse

nsus


27

Summary

Shared trusted processes

Trusted recordkeepingImprove discoverability

• Reduces complexity of system interfaces and reconciliations between car lease participants.

• Improves discoverability and transparency as ALL transaction related to a specific car is stored on a single shared ledger.

• Regulation compliance are checked for each transactions.(e.g. VIN can not be changed after manufacture)

• All transactions can not be modified without the consensusof other participants.(As opposed to a single participant assuring data integrity)

Reduce costs and complexity



Contents

is Blockchain?


can IBM help




Blockchain benefits

Savestime

Removescost

Reducesrisk

Increasestrust

Transaction time

from days to near

instantaneous

Overheads and

cost intermediaries

Tampering, fraud

& cyber crime

Through shared

processes and

recordkeeping


Benefits

1. Consolidated, consistent

dataset reduces errors

2. Near-real-time of

reference data

3. Naturally supports code

editing and routing code

transfers between participants

What • Competitors/collaborators in a business network need to share reference data, e.g. bank routing codes

• Each member maintains their own codes, and forwards changes to a central authority for collection and distribution

• An information subset can be owned by organizations

How • Each participant maintains their own codes within a Blockchain network

• Blockchain creates single view of entire dataset

Consensus use case –Shared routing codes


Benefits

1. Trust increased, no authority

"owns” provenance

2. Improvement in

system utilization

3. Recalls "specific"

rather than cross fleet

What • Provenance of each component part in complex system hard to track

• Manufacturer, production date, batch and even the manufacturing machine program

How • Blockchain holds complete provenance details of each component part

• Accessible by each manufacturer in the production process, the aircraft owners, maintainers and government regulators

Provenance use case –

Vehicle maintenance


Benefits

1. Lowers cost of audit and

regulatory compliance

2. Provides “seek and find”

access to auditors and

regulators

3. Changes nature of

compliance from

passive to active

What • Financial data in a large organization dispersed throughout many divisions and geographies

• Audit and Compliance needs indelible record of all key transactions over reporting period

How • Blockchain collects transaction records from diverse set of financial systems

• Append-only and tamperproof qualities create high confidence financial audit trail

• Privacy features to ensure authorized user access

Immutability use case –

Financial ledger


Benefits

1. Increase speed of execution

(less than 1 day)

2. Vastly reduced cost

3. Reduced risk,

e.g. currency fluctuations

4. Value added services,

e.g. incremental payment

What • Bank handling letters of credit (LOC) wants to offer them to a wider range of clients including startups

• Currently constrained by costs & the time to execute

How • Blockchain provides common ledger for letters of credit

• Allows all counter-parties to have the same validated record of transaction and fulfillment

Finality use case –

Letter of credit

Letter of credit

Republic of A

Buyer’s bank issues

LC and sends to

seller’s bankA Plus Bank

Bank B

Seller’s bank authenticates

LC and credits Company B

Sales contract

Company B:Seller/beneficiary

Company A:Buyer/

applicant

B-land

Buyer applies

for LC


– Securities• Post-trade settlement

• Derivative contracts

– Trade Finance• Bill of Lading

• Cross-currency payment

– Syndicated Loans

– Supply Chain

– Retail Banking• Cross border remittances

• Mortgage verification & contracts

– Public Records• Real estate records

• Vehicle registrations

• Citizen Identity

– Digital Property Management

Other potential

use cases


Patterns for customer adoption

COMPLIANCE LEDGER

CONSORTIUM SHARED LEDGER

ASSET EXCHANGE

HIGH VALUE MARKET

• Created by a small set of participants• Share key reference data• Consolidated, consistent real-time view

• Sharing of assets (voting, dividend notification)• Assets are information, not financial• Provenance & finality are key

• Transfer of high value financial assets• Between many participants in a market• Regulatory timeframes

• Real-time view of compliance, audit & risk data• Provenance, immutability & finality are key• Transparent access to auditor & regulator



Key players for Blockchain adoption

Regulator Industry Group (e.g. R3) Market Maker

– An organization who enforces the rules of play

–Regulators are keen to support Blockchain based innovations

–Concern is systemic risk – new technology, distributed data, security

–Often funded by members of a business network

–Provide technical advice on industry trends

–Encourages best practice by making recommendations to members

–In financial markets, takes buy-side and sell-side to provide liquidity

–More generally, the organization who innovates- Creates a new good or service,

and business process (likely)

- Creates a new business process for an existing good or service


Contents

is Blockchain?


can IBM help




Blockchain for Business – Our Point of ViewCommunity + Code

Linux Hyperledger Project

Open Source Code: Blockchain for business;

Consensus | ProvenanceImmutability | Finality

Open Governance – 100 member cross industry board

Cloud

IBM Blockchain

Blockchain managed service on IBM Cloud and z Systems;

Identity | Consensus | System Integration | Hardware-assist for Performance & Security

IBM Blockchain on Bluemix

Clients

Blockchain SolutionsBlockchain Garage

Making Blockchain real for business

Blockchain Garage; New York | London | Singapore | Tokyo

Blockchain Services Practice


Linux Foundation’s Hyperledger Project

– Linux Foundation project announced December 17, 2015

with 17 founders, now nearly 100 members

– The Hyperledger Project is a collaborative effort to

advance Blockchain technology by identifying and

addressing important features for a cross-industry open

standard for distributed ledgers that can transform the

way business transactions are conducted globally

– Open source and open standards-based

Enable adoption of shared ledger technology at

a pace and depth not achievable by any one

company or industry

QUICK FACTS

Chairman Blythe Masters/DAH

Executive Director

Brian Behlendorf

Technical Chair Chris Ferris/IBM

Contribution44,000 lines of code in February 2016

Sprint to one codebase with unified thinking

Staged releases

www.Hyperledger.org

© 2016 IBM Corporation 41

Comparison Matrix

Hyperledger Ethereum Ripple Bitcoin

Description General purposeBlockchain

General purpose Blockchain

PaymentsBlockchain

Payments Blockchain

Governance Linux Foundation Ethereum Developers Ripple Labs Bitcoin Developers

Currency None Ether XRP BTC

Mining Reward N/A Yes No Yes

State Key-value database Account data None Transaction data

Consensus Network Pluggable : PBFT Mining Ripple Protocol Mining

Network Private or Public Public or Private Public Public

Privacy Open to Private Open Open Open

Smart Contracts Multiple programming languages

‘Solidity’ programming language

None Possible, but not obvious

41Page


Engagement model overview

1. Discuss Blockchain technology

2. Explore customer business model

3. Show Blockchain Application demo

1. Understand Blockchain concepts & elements

2. Hands on with Blockchain on Bluemix

3. Standard demo customization

1. Design Thinking workshop to define business challenge

2. Agile iterations incrementally build project functionality

3. Enterprise integration

1. Scale up pilot or Scale out to new projects

2. Business Process Re-engineering

3. Systems Integration

Remote or face to face Remote or face to face Face to face Face to face

Free of charge Free of charge For fee For fee

Let’s Talk

BlockchainHands-on

First Project

Scale


HSBC, Bank of America, IDA Trade Finance - Letter of Credit

ABN AMRO Financial Restructuring & Recovery

Crédit Mutuel Arkéa Consortium Shared Ledger

Japan Exchange Group (JPX) Post Trade

Kouvola Innovation Supply Chain Logistics

London Stock Exchange Market Innovation

Mizuho Digital Currency

IBM Global Finance Shadow Chain for Dispute Resolution

IBM and Hyperledger in Action


Summary

Blockchain …

– is a shared, replicated, permissioned ledger technology

– can open up business networks by taking out cost, improving efficiencies and increase accessibility

– addresses an exciting and topical set of business challenges, which cross every industry

IBM …

– supports the Linux Foundation Hyperledger open standard, open source, open governance Blockchain

– has an easy to access, proven and incremental engagement model giving customers the confidence to get started NOW


Further Information – Use case LinksHSBC, Bank of America, IDA:

http://www.coindesk.com/hsbc-bank-america-blockchain-supply-chain/

ABN AMRO:

https://www.abnamro.com/en/newsroom/blogs/arjan-van-os/2016/walking-the-walk-exploring-the-power-of-blockchain.html

Crédit Mutuel Arkéa:

http://www.coindesk.com/ibm-completes-blockchain-trial-french-bank-credit-mutuel/

JPX:

http://www.ibm.com/press/us/en/pressrelease/49088.wss

Kouvola Innovation:

http://www.ibm.com/press/us/en/pressrelease/49029.wss

London Stock Exchange:

http://www.ibtimes.co.uk/linux-foundation-blockchain-consortium-digital-asset-ibm-credits-london-stock-exchange-board-1533798

Mizuho:

http://www.coindesk.com/mizuho-digital-currency-powered-blockchain-settlement/

IBM Global Finance:

http://www.coindesk.com/ibm-building-blockchain-dispute-resolution-system/


Bitcoin

• In a nutshell: The original Blockchain application, spawning an industry

• Use case: Cryptocurrency transfer between anonymous participants

• Network: Single public network

• Accounts: BTC currency, rewards for mining, transaction fees

• User Data: Small transaction data area

• Consensus Network: Transactions validated using ‘Proof of Work’ cryptographic mining

• Privacy: Transaction ledger completely open

• Smart Contracts: In original design and code, but not obvious

• Open: Open source. Changes governed by Bitcoin developers.

• Recent Innovations: None – relatively established

• Backing: Bitcoin applications are backed many VCs. Network not backed.

• More information: https://bitcoin.org


Ethereum

• In a nutshell: Popularized smart contracts

• Use case: Smart contracts encapsulate business rules. Ether currency as ‘fuel’

• Network: Single public network. Private network providers available, e.g. Eris

• Accounts: Ether currency, rewards for mining, transaction fees

• User Data: Accounts can hold binary user data

• Consensus Network: POW transaction validation

• Privacy: Fully open ledger

• Smart Contracts: Fully externalized via ‘Solidity’ programming language

• Open: Open source. Changes governed by Ethereum developers

• Recent Innovations: Discussing ‘Proof of Stake’ option – May 2016

• Backing: Ethereum applications are backed by VCs. Network by donations

• More information: https://www.ethereum.org


Ripple

• In a nutshell: International Payments Platform for banks and businesses

• Use case: Cryptocurrency (XRP) transfer between anonymous participants

• Network: Single public network

• Accounts: Hold XRP currency balance

• User Data: No user data

• Consensus Network: Transactions validated using novel, ‘white-list’ network protocol

• Privacy: Fully open ledger

• Smart Contracts: None.

• Open: Open source. Changes governed by Ripple Labs

• Recent Innovations: Focus on international banking settlements

• Backing: Andreesen Horowitz, Google Ventures

• More information: https://ripple.com


Hyperledger

• In a nutshell: Distributed ledger backed by the Linux Foundation

• Use case: General purpose distributed ledger satisfying broad requirements

• Network: Private networks focus. Available as managed service. Public later

• Accounts: Not currency based. (UTXO API available using smart contracts)

• User Data: Flexible key-value database

• Consensus Network: Transactions validated using PBFT as default. Pluggable design

• Privacy: From fully open to private ledgers

• Smart Contracts: Broad choice of programming languages. Extensible via Docker containers

• Open: Open source. Changes via standard Linux Foundation processes

• Recent Innovations: Merging contributions from IBM, DAH, Intel prior to expect GA July 2016

• Backing: 30 Founders: IT companies, Banks & Financial organizations

• More information: https://www.hyperledger.org