- – 01/13/2023
Private blockchains are blockchain networks where all participants are known and transactions verified by a central authority. Participants undergo onboarding verification before they can join, trading the decentralization and open code composability of public chains for transactional data privacy and faster transaction speeds. Crypto advocates deride private chains as glorified databases that lack the power of open networks. Yet, firms across industries have experimented with or adopted them, viewing them as a safe way to pursue blockchain’s purported cost savings and operational efficiencies without fear of exposing confidential data (see Figure 1). To better understand how firms are using private blockchains, let’s look at three interesting use cases:
DTCC processes 100,000 to 160,000 bilateral equity transactions daily using R3’s Corda.1 Equities take two days to settle (T+2). Project Ion, DTCC’s alternative private blockchain equities settlement platform, facilitates a netted T+0 (near-instant) settlement cycle for certain bilateral transactions. Developed with 15 leading financial services firms, Ion went into live parallel production in August 2022. It’s viewed as an important advancement in modernizing financial market infrastructures, giving firms an opportunity to explore the operational efficiencies and resiliency capabilities of blockchain technology. Ion may reduce counterparty and credit default risk and free up capital in the long run. And it’s not DTCC’s only private blockchain endeavor. Project Lithium launched in April 2022 to explore how a central bank digital currency (CBDC) might operate using blockchains and the current U.S. clearing and settlement market infrastructure.2 These projects, along with asset tokenization efforts like its Digital Securities Management platform, show that the DTCC views blockchains as a crucial technology for 21st century financial market infrastructures.
Walmart bolstered food safety traceability and streamlined freight invoicing using Hyperledger Fabric. In 2016, Walmart first used a private blockchain to manage its mango supply chain, reducing the time required to establish a mango’s provenance from 7 days to 2.2 seconds.3 Encouraged by cost savings and real-time data monitoring capabilities, it expanded operations to trace 25 supply chains in 2018, and then worked with several leading food companies like Nestle and Unilever to establish the IBM Food Trust, a private blockchain-based platform for food producers, suppliers, manufacturers, and retailers. On top of that, in 2019 Walmart Canada partnered with DLT Labs to create DL Freight, a private blockchain used to capture 200+ end-to-end freight transportation supply chain data points and automate invoice generation. Prior to its implementation, 70% of invoices required manual reconciliation, resulting in significant payment delays to suppliers. Today, less than 1.5% of invoices are disputed. Used by all 70 Walmart Canada freight carriers since March 2021, DL Freight is also self-learning, analyzing collected data to generate new insights like optimal truck routes given vehicle type or load weight.4
Microsoft saves roughly $50 million a year by using Quorum and NFTs to manage its Azure supply chain. Developed with Accenture and eight cloud supply partners like Lenovo and Wiwynn, the Microsoft-funded private chain was named Gartner’s 2021 supply chain breakthrough of the year.5 The blockchain tracks tokenized data records of serialized hardware devices from their creation to their transport and use in Microsoft’s Azure cloud data centers. In doing so, it facilitates end-to-end asset level supply chain visibility and bolsters overall supply chain resiliency as all consortium members can view, contribute to, and monitor operations in real time.6 Suppliers can also use the chain to sell directly to each other, something that would be impossible to do with a Microsoft controlled centralized database. And it lays the foundation for tokenized payment settlements, since tokenized transfer records can make it easy to create digitized invoices and purchase orders, and Quorum integrates with Ethereum making stablecoin payments feasible.
Private chains have proved effective at preserving data privacy and saving firms money by increasing operational efficiencies across complex supply chains. They also may offer an easier way to demonstrate regulatory compliance, as all participants are known and held accountable for their actions. Yet, they are costly to establish (making it challenging for small- to medium-sized firms to justify their implementation); lack the composability advantages of open source, public chains; and can fail if too many members drop out or can’t agree on rules of engagement. B3i, a private chain consortium of 20 large insurance firms, filed for insolvency in July after shareholders concluded there wasn’t sufficient support to continue the venture.7
Scaling Solutions and New Public Chains Usher in a New Era for Enterprise Blockchain Adoption
Before 2021, enterprise blockchain adoption was almost exclusively focused on private blockchains. That’s changing fast. DeFi is the first large scale example to demonstrate public chains’ performance and transformative capabilities. But more importantly, layer 2 scaling solutions like sidechains and rollups (see Figure 2) and newer interoperable chains like Avalanche and Cosmos are maturing public chain ecosystems, giving them the privacy, security, and speed needed to meet enterprise requirements. A host of companies are already leveraging scaling solutions and public chains to build new products and businesses:
Ernst & Young (EY) believes strong privacy tools on public chains will drive mass enterprise blockchain adoption.8 In September 2021, EY integrated its flagship blockchain products (EY Blockchain Analyzer and EY OpsChain) with Ethereum layer 2 Polygon, using Polygon’s optimistic rollup and sidechain scaling solutions to offer enterprise clients more predictable costs and settlement times, higher transaction volumes, and Ethereum interoperability.9 It also announced it would collaborate with Polygon to co-develop privacy focused Ethereum scaling solutions for enterprise clients.10 In May 2022, they launched a mainnet beta of Polygon Nightfall, a hybrid optimistic-zero knowledge rollup designed to help firms transfer tokens privately across public chains. EY used Nightfall to build EY OpsChain Supply Manager, a supply chain traceability and inventory management application for public chains. It also launched EY OpsChain API services for enterprise scaling, which allows firms to transact on a blockchain without the need to host a node.11 Italian newswire ANSA is an early API user, and other EY blockchain clients/collaborators include Microsoft, ConsenSys, beer brand Birra Peroni, and marine insurer Guardtime.Figure 2: Layer 2 Scaling Solutions: Sidechains and Rollups
A separate chain that runs independent of the mainnet or parent chain, but is linked to it and works off of it via a two-way bridge.
Designed to make transaction processing more efficient, sidechains often have their own consensus algorithm and block parameters which allows for improved privacy and security. With sidechains, tokens can be transferred between blockchains allowing projects to expand their ecosystems in a decentralized manner.
|Rollup||Smart contracts designed specifically to increase Ethereum’s transaction throughput speed and security, by moving data computation and storage off-chain. There are two main types of rollups:
Source: FCAT Research, Ethereum.org, CB Insights, CoinDesk
VMware expanded its enterprise blockchain offering to support Ethereum and Ethereum Virtual Machine (EVM) compatible chains with the August release of a beta of VM Blockchain for Ethereum and an accompanying developer kit. This update is particularly noteworthy because of VMware’s recognition that remaining competitive requires public chain integration.12 After all, its older enterprise VM Blockchain had traction, with clients like financial technology provider Broadridge and the Australian Stock Exchange. But the new version allows developers to connect to popular Web3 wallets like MetaMask and use common tools like Hardhat or Truffle. It also uses a unique zero-knowledge proof / multi-party computation privacy technology called UTT (Untraceable Transactions13) to reduce regulatory compliance risk and improve efficiency. Early adopters of VM Blockchain for Ethereum include the Central Bank of Israel that’s testing the UTT privacy functionality in its CBDC experiments, and Infosys which used it to build a blockchain-based record management system that helps governments verify and manage personal records like birth certificates.14
Ava Labs, which is backed by A16z and Polychain Capital, is the development team behind public chain Avalanche, the fastest chain as measured by time to finality and fifth largest by market capitalization.15 Like Cosmos and Polkadot, Avalanche is better thought of as a network of chains that communicate with each other rather than a single, linear chain. It follows a modular (subnet17) architecture and comprises three built-in blockchains that each complete a different core function, allowing firms to launch applications and chains that fit their specific needs (i.e., KYC compliance, low gas fees).18 In November of 2021, Deloitte partnered with Ava Labs to develop Close As You Go, a blockchain-based platform to help state and local governments prove their eligibility for federal emergency funding.19 In March of 2022, Ava began working with GoldenTree Asset Management and crypto firms Aave, Jump Crypto, Valkyrie, Securitize, and Wintermute to create the first institutional DeFi specific blockchain.20 The chain will build-in KYC functionality in order to eliminate compliance uncertainties.
Enterprise discussions about blockchain infrastructure adoption used to get mired in the private versus public debate. Thanks to layer 2 scaling solutions and newer interoperable chains, features like data privacy, low fees, and speed that used to drive enterprises to opt for private chains, are now feasible on open-source, public chains. Over the next few years, expect to see:
More tools developed to encourage enterprise blockchain adoption. J.P. Morgan’s Onyx blockchain unit and startups like Tassat and Axoni facilitate financial services via private chains. And while some fully private chain use cases will likely persist, the scales are tipping towards public chains and scaling solutions. R3 spinoff Obscuro, EY-developed Starlight, Hyperledger Firefly and even China’s BSN Spartan Network are open-source tools and networks joining the ranks of Hyperledger Besu and the Baseline Protocol to help enterprises conduct commerce on public chains.21 Hedera, which is governed by 39 global organizations including Google, IBM, and Boeing, is a public chain designed for enterprise use.22 Similarly, Klaytn, developed by South Korean social media giant Kakao, is retooling its developer package and leveraging sidechains to better support the metaverse and gaming industry, while a private deployment underpins the Bank of Korea’s CBDC project.23 Finally, look for blockchain-as-a-service (BaaS) providers like Kaleido or Alchemy to help firms use cloud-based solutions to build, host, and operate their own blockchain applications and smart contracts.
Continued focus on interoperability, tokenization, and Web3 strategies. Companies are quickly realizing that to provide end-users with a seamless Web3 experience they must upgrade their middle and back-end technology to ensure public chains, private chains, and legacy systems can communicate and integrate.24 Certain financial institutions are each exploring asset tokenization and blockchain-legacy system interoperability. Google formed a Web3 team in May and has partnered with public chain NEAR, TRM Labs, and Blockdaemon among others. Further, Starbucks is integrating NFTs into its reward program, while Shopify stresses that the future of commerce is “wallet aware.” All these efforts will bring a wave of new startups and products aimed at helping firms develop and execute their Web3 strategies.
A fight for talent. The Boston Consulting Group estimates asset tokenization will grow from $310 billion today to $16 trillion by 2030.25 That means firms will be chasing developers and product managers versed in Solidity (Ethereum’s programming language), smart contract deployment, and Web3 technology architectures. And those people are in short supply. For example, Electric Capital estimates there are about 11,000 active blockchain developers today.26 Even with the rise of development platforms like Reach, that is nowhere near the number needed to code Web3 into existence.
Continued regulatory attention. The recent U.S. Treasury OFAC sanction against crypto mixer Tornado Cash highlighted the tension between the promise of open source, public chain ecosystems, enterprises’ need for data privacy, and regulators’ need for financial crime compliance.27 And amidst that tension, policymakers are constantly playing catch up. The good news is that scaling solutions and newer public chains can allow firms to demonstrate regulatory compliance more easily. For example, the Central Bank of Korea is exploring smart contracts and layer 2 scaling solutions in the second phase of its CBDC project.28 In this environment, research about blockchains’ utility across industries, comment letter responses, and the work of trade groups like the Digital FMI Consortium, think tanks like the Atlantic Council, and non-profit advocacy groups like the Digital Dollar Project are crucial for helping regulators understand how the Web3 economy is taking shape.
4 https://hbr.org/2022/01/how-walmart-canada-uses-blockchain-to-solve-supply-chain-challenges; DLTLabs Case Study – Hyperledger Foundation
6 Improve supply chain resiliency, traceability, and predictability with blockchain - Microsoft Industry Blogs
21https://obscu.ro/ https://www.ledgerinsights.com/r3-spinoff-obscuro-launches-ethereum-privacy-solution/ BSN. (n.d.). BSN Launches Global Open-Source Spartan Network To Enable Public IT Systems. PR Newswire; China has seen blockchain’s future and it doesn’t include cryptocurrencies. (2022, September 7). Forkast.news. https://docs.baseline-protocol.org/baseline-basics/the-baseline-protocol; https://www.hyperledger.org/use/besu
24 JPMorgan (JPM) to Use Blockchain for Collateral Settlements - Bloomberg; https://www.cnbc.com/2022/05/06/googles-cloud-group-forms-web3-product-and-engineering-team.html
https://cloud.google.com/web3; https://www.ledgerinsights.com/starbucks-odyssey-nfts-rewards-program/; https://www.notboring.co/p/tokengated-commerce
Web3 Growth Stymied By Scarcity Of Programmers (forbes.com)