Panelists at Future of Fintech said production-ready blockchains are coming, and talked about the shift from private to public blockchain for incumbents.
With the market capitalization of cryptocurrencies crossing $100B and a recent boom in corporate interest, blockchain and cryptocurrencies are definitely having their moment.
Still critics of blockchain point to a dearth of production-ready blockchain solutions after years of exploration and development. But proponents maintain that change will come, if slowly, and that blockchain isn’t necessarily a cure-all. “A lot of companies are looking at blockchain as if it were some sort of miracle drug. I don’t think that’s the right response,” said Rumi Morales of CME, speaking at CB Insights’ Future of Fintech conference.
Morales was joined by Marley Gray of Microsoft and Joseph Lubin of Consensys, in conversation with Steven Norton of the Wall Street Journal discussing blockchain trends and the role of incumbents in blockchain.
While it’s still early days for blockchain, panelists did agree that companies need to start rolling out production-ready blockchains and not just proofs-of-concept. Morales noted how painful implementing blockchain solutions can be: “Blockchain was not created to be financial infrastructure for old legacy businesses.”
There is also a notable sea-change in the way companies are approaching the technology, as the focus of development continues to shift from private blockchains, to consortia, to public blockchains. In the interest of confidentiality, though, corporate players have typically gravitated toward private blockchains.
Such a paradigm shift might prove challenging, but panelists expressed confidence in the promise of public blockchains: “Interoperability lends to public spaces, not private spaces,” said Gray. “The question then becomes one of, how do we use public blockchains with existing private and consortium investments to extract the most value.” Morales also seemed encouraged by recent wins for open source software in corporate environments, and noted that the same collaborative spirit could lead to a greater comfort with decentralization.
Nonetheless, caution is warranted. “None of the public blockchains are sufficiently scalable yet,” said Lubin. “Until then, there are interesting ways to build applications on private or consortium blockchains.”
Steven: I’d like our panelists: Rumi Morales with CME Ventures, Marley Gray with Microsoft, and Joe Lubin of ConsenSys. So, blockchain, lots going on, tons of activity in the space, but generally still quite a bit of confusion about what it is and how things are actually going. So let’s start out with kind of an overview of the state of play of blockchain for business today. How is it different than it was, maybe, six months to a year ago?
Marley: I’ll probably get swag at that one. So six months ago it was, sort of just, “Help me stand up a blockchain. I wanna stand up a private blockchain.” Underneath, what they’re saying is, “I don’t wanna embarrass myself in public.” And everybody wants to do that, so there was this mad dash to set up these places where people could play with it, try to figure out, you know, what they’re gonna do. Now, fast forward six months later, one of our goals was to make it ridiculously easy to roll these out, either join a public blockchain or roll out your own private blockchain. So we made that really easy. Now, we’re at the next phase where, “Now I’ve got this blockchain, what do I do with it?” So we’re kind of stuck on that piece right now.
Joe: So, we started our company about two and a half years ago. About two years ago, we started getting inquiries from companies, mostly banks or financial space organizations, and they were very naive. They didn’t understand much. They thought blockchains came in different colors. So we did a lot of education early on, and we have found incredibly rapidly that within a wide variety of companies and sectors, the sophistication has grown enormously. So, one simple way of thinking about blockchain is as a next generation database system. So it’s a kind of database system that everybody, every actor on the system can trust because they have direct access to the data and the programs that operate on the data, at least in the case of Ethereum. And so we see that as a sea change for how businesses build systems, from building a siloed information systems on legacy database technology to this new shared technology that everybody can trust.
Steven: What do you think, Rumi, is it becoming easier to use? Are companies starting to get it?
Rumi: Depends on the company, obviously, right? But I think this is a very interesting year. Last year we saw a number of companies announcing things, that they would be building things, or that they had a POC, or their some type of use case. This is the year where they need to prove that, right? Are they gonna go into production with it? Is this gonna generate cost savings? Is this gonna be a new business opportunity? But if it’s not, I think you’re gonna have then, maybe like the anti-blockchain crowd start to have more of a voice in companies and say, “Hey, I thought this was supposed to be a miracle drug. This hasn’t generated what I thought it was gonna do. We need to slow down our spending now.” And I don’t think that is the right response. This is gonna be a long iteration. It’s gonna have a long life. But I think this gonna be a very interesting year to see whether the proof is in the pudding, as it were.
Joe: So last year, POCs were the focus. This year, we’ve put systems into production with a large energy company, and banks are putting some systems into production.
Steven: And what does that process look like, going from cool idea, experimenting in the sandbox, to actual production? And what’s the biggest hurdle to making that happen inside a company?
Rumi: Well, I would say if, like, for many people I know, they’ve moved on to pulling out their eyelashes because they’re done pulling out their hair, right? It can be very painful. Especially if we think about some of the more of the open source blockchains that people are learning. This is not created to be, or was not originally created to be financial infrastructure for these old legacy institutions that are a hundred plus years old, right? So, there’s an inherent tension, and even if it’s a private blockchain, people are still trying to figure out how is this gonna fit in this old institution? So it’s definitely something that’s taking time. You know, from the CMEs example…so for those not familiar with the CME, you may know a lot of our products a lot better, whether it’s gold or oil, soybeans, interest rates, equity stocks, you know. The Chicago Mercantile Exchange, the Chicago Board of Trade and IMEX, that’s all under the CME group. And I have the privilege of leading the venture capital arm for the CME group. And early on, we recognized that this underlying technology would be very important for us, especially with the clearing and settlement, so that’s been a focus. But you can also think of our contracts, our natural product is gonna…almost begs itself to be digitized, right? The same forces that went from pit trading to electronic trading are leading electronic trading to digital trading. But how painful was that shift to electronic trading? It was pretty painful, right? And that pain is hopefully gonna be worth the gain but it has been a difficult challenge made from the investments that we’re making to commercial production in the organization.
Joe: So, the stress level depends on your industry, on your use case, and your approach. There are situations…basically the CME is a trillion dollar financial mission and critical organization, so they have to be incredibly prudent. We rolled out a system for a large energy and mineral exploration company, BHP Billiton, and we set it up so that it would run in parallel with the existing infrastructure. And it’s essentially phased in more and more functionality over time, so much less stressful approach.
Steven: Yeah. Is there still this question circling around, do I get a private blockchain? Do I use the public blockchain? Do I have 10 blockchains in my company? Do I use just one? Where is that conversation move now, Marley?
Marley: It’s all over the map. So, yeah, most of the enterprises, they’ll start off with a private blockchain first, then they’ll start looking at consortiums. So, we’re all familiar with, sort of, and working to try to build, like, Enterprise Ethereum Alliances, target to trying to help customers get into where they can build these multi-party consortium networks. And they’ll be duplicative ones that are very siloed in vertical industries, but the true problem is, and Joe and I talk about this a lot, is ultimately, you know, trying to get a place where we can have business contracts, essentially, that weave together across verticals. So we can have financial instruments weaved in with supply chain to have better terms of credit or to issue insurance claims automatically based on actions that happen. So I think, that, sort of, interconnectivity begs to move things to the public blockchain, as well as things like identity, self sovereign identity, something that really needs to be in a public space. So I think what we will see is…see enterprises really focus on figure the stuff out internally, so that they can go out and then start working with either the fierce competitors or, you know, building in their supply chains. And then, ultimately figuring out, “Okay, how do we use the public blockchain with our existing investments so that we can really get the true value of what this technology can deliver?
Joe: So, none of the public blockchains are sufficiently scalable yet to subserve the world’s various different kinds of systems. So, similar to the early days of the World Wide Web technology and the internet, companies are going to have to build on private permissioned infrastructure. And if they build on ethereum, they’ll be able to port their applications to the public blockchain when it’s sufficiently scalable and when confidentiality is figured out. Until then, there are ways or interesting ways of building applications on private or consortium blockchains and linking them. You can either validate transactions across different blockchains, we’ve got a project that’s working on that. Or we’re just taking the state of the system and basically hashing it, creating a single number from it that roughly represents the state and putting that on the public blockchain for checkpointing.
Steven: So it seems like if you’re doing blockchain inside a company, you sort of need to be aware of the entire landscape right now, and it’s quite busy. You mentioned, Rumi, when we spoke earlier this week, that you’re kind of blanketing the universe of blockchain with your investments. How do you describe that approach, and how does that work in practice?
Rumi: I guess this is one of the advantages of being in venture capital, is you don’t have to just take one bet for the future. You’re expected to take many, right? And especially on a universe in the blockchain landscape, where we’re still not sure which roads are headed where. Why don’t we try to take them all, right? But you definitely have to have a different…I think a fundamentally differentiated view of how the chain is gonna be created. So early on, we thought about the bones of our organization, and how those could be interpreted in a digital world. Now, obviously, we couldn’t invest as a company in bitcoin blockchain, right? But our first investment in this space was in Ripple. And we’re very interested in their distributed ledger technology as an alternative to the bitcoin blockchain, and this was three years ago, so we’ve been actively immersed in this space as a corporate investor. I don’t care what Fred Wilson says about all of us being dumb money, or maybe I should care, but I think that we’ve been prudent here in our analysis of our opportunities in blockchain. We also saw another view of the world in digital asset holdings with, you know, in what Blythe Masters is doing specifically creating, you know, capital markets infrastructure with a private blockchain as another alternative path for our future. But we then quickly realized, we couldn’t do this with every single one, so we then invested in Digital Currency Group. And so for those familiar with DCG, they have equity stakes in around a hundred companies, I think, at this point, in addition to owning CoinDesk, Genesis, Grayscale. So we have that universe covered from an investment exposure and strategic access.
At the same time though, you know, we are members of the Ethereum Enterprise Alliance, or is it Enterprise Ethereum Alliance? Sorry. And Hyperledger, right, as well as the Post-Trade Distributed Ledger Group, members of the Chambers of Digital Commerce, so focusing on regulatory protection, too, and regulatory policy in driving that universe. You know, there’s still so much unknown, and right now we’re trying to take every road possible as we explore what will ultimately work for the CME. But I will conclude by saying this, when it comes down the actually developing commercial applications, we focus narrowly into, you know, exactly what our most specific pain points and/or what our customers are gonna want. So, you know, we have a bitcoin realtime index and reference rate, which we publish, but we also have announced that we’re gonna be developing a digital gold product with the Royal Mint, and it’s a very defined task that we have ahead of us there.
Steven: Right. There are so many visions for the blockchain future, and knowing exactly what it’s gonna look like, sometimes seems like a fool’s game, but one thing that comes up all the time is standards and who’s going to set the standard. We have so many groups who are working together, the Ethereum Alliance being one of those, to try to figure out what blockchain is going to look like. The World Economic Forum put out a white paper today calling for a global standards group that starts to look at how this impacts not only companies but the rest of the world. Everyone is sort of competing for influence. How do you see the standards making coming together over the next two years, three years?
Joe: Hopefully they don’t come together over the next two or three years because that will be a very immature technology. It’s really early, early days, in the exploration of blockchain. And there’s a vast solutions base that we and many other groups need to explore, so there are certain pieces that are great to standardize on. One thing that drove enormous growth in the token launch space is ERC20 token standard on Ethereum. So just because the standard specified what a token should look like, in terms of data and the methods that that piece of software responds to, then it can be used in a bunch of different programs on the blockchain, in wallets, in exchanges, and it’s really made it easy to drive growth in that space. Identity is another really important one to try to get right early because it’s foundational. Microsoft, ConsenSys, a handful of other groups, formed the Decentralized Identify Foundation to try to work out those issues. In terms of blockchain, in general, blockchains two, five, ten years from now are gonna look totally different.
Marley: It’s way too early for standards. We’re still…it’s one thing to standardize on a protocol and say, “Oh, we’re going to agree on this message format,” but this technology is actually changing the DNA of…potentially changing the DNA of how everyone here does business, both at a corporate and a personal level. Because it’s not just distributed data, we were talking about distributed everything, distributed cost, distributed risk, distributed…So that changes, not only the business models, we’re still having to figure out how is the technology map in business model. Probably how does the business model adjust to what the technology capabilities are? And we haven’t figured that out yet. If you try to standardize something, it’s like casting your die before you know what it is you’re making. So…
Steven: Have there been business models that you’ve seen, or certain applications that you’ve seen, that seem the most promising, in terms of actually making that leap over?
Marley: There are some killer apps that we see across industries. So every industry can…and really if anybody has a specialty in any industry, everyone thinks, “Here’s the killer app.” It’s a major pain point, but those are usually, either, we call it the fear bucket or the greed bucket. And then there’s the middle bucket, which we don’t know what it’s gonna be. It’s like trying to predict Facebook back in 1995, you know, who would have known? But, yeah, some of the use cases we see are…the early ones are around asset issuance provenance and trading, but I think the more sophisticated ones will be those across industries, where you have banks working with supply chain organizations, working with the insurance companies, and to really come up with an automated, sort of, very efficient ecosystem. And really, it’s all about, at its core, is supply chain. Every organization has a supply chain. It’s not just industrial supply chain. You have trading partners. You buy goods from people. You sell goods to other organizations, you know, and that…if you do that, which everybody does, it’s going to change the way your business works.
Joe: Yes. We have, on the product side of our company, we have about 30 different projects, two projects that I think this group might be able to resonate with. One is in the advertising technology space. On the internet, the amount of fraud in ad placement is shocking. It’s probably 70%, could be higher, in terms of the number of impressions that are paid out to fraudulent entities. So we’re building a system that is designed to squeeze fraud out of that space. On the energy front, we’re working with one of the largest energy companies in the world to build a transactional business logic layer on top of the decentralizing electricity industry. So, photovoltaics storage are getting cheap and decentralizing physically worldwide. There’s recognition that centralized generation long-distance transmission is brittle and vulnerable and inefficient. And so, we have built a network of smart batteries that are attached to photovoltaics. The batteries are connected on the blockchain that essentially represents a market. So the batteries themselves can put bits out for the electricity. Or if they’re tapped up, they can offer electricity into that market. And this kind of application enables time shifting of energy use. So the sun is up at a certain time of day and you collect energy. And we can shift usage, say factory usage, to other points in time using this technology. It prevents the need to spin up, say, billion dollar peaker plants to handle peak load in, say, hot days in the summer.
Steven: So it sounds like blockchain is starting to, kind of, converge on a lot of other technologies that many of you are probably are thinking about, if not actively working with, internet of things, AI, things like that. How does this convergence start to happen? Rumi, do you have any thoughts on that?
Rumi: Sure. I neglected to mention one company, as well, that we’ve invested in this space, as I think about it more as an IOT company, but it’s filament. And, you know, filament really wants to be, you know, kind of the future communications platform/payments platform for the interest of things, right? And you can use blockchain as a rail for that payment for devices that are gonna be talking with each other. And I think where blockchain is very relevant with filament is, you know, this is naturally something where decentralization is very important. And to your earlier question about standards and why it’s too early, I think, we really have to be very, very specific about the definition of blockchain if we’re going to be talking about standards. If for so many companies and governments that are saying, “Oh, yes, let’s use a blockchain,” many times they’re just looking for an encrypted database. Like, they really don’t want any of the charm of decentralization at all, right? So for us, as we think about applications for the future and those technologies that are gonna interact with blockchain, I think decentralization has to be a very key component of that, that something like IOT makes a lot of sense. But in CME Ventures, generally, you know, blockchain is just one part of our investment portfolio. It is otherwise filled with a lot of specific verticals under the artificial intelligence umbrella, as well as geo-spacial data, IOT, and so on and forth. And we see a lot of convergence amongst these. And ideally, there won’t be buzzwords like, blockchain and AI machine learning. You want to see some type of combination before that next buzzword exists of the way that these technologies are interacting with each other.
Steven: Sure. Marley, how about at Microsoft? I know there’s some IOT work going on. Where do IOT and blockchain start to meet one another?
Marley: So, yeah. Blockchain is sort of the dot connector between all of these different components that, sort of…and you start to compile these components together, so you go IOT devices, and AI, and machine learning, and you could use blockchain to create systems and tie these things together with cryptography to define processes of how these things will orchestrate together securely. IOT is one of the biggest things and IOT was the…how do we secure this internet of things that could, you know…my car would cut off, or, you know, how do we secure that? And, you know, cryptography is gonna be very key in doing that, but you have to sort of end-to-end. Well, not sort of you need end-to-end security, and so blockchain provides that, sort of, common truth that everyone can agree on. And, you know, I think what we’re trying to build is the cloud and IOT kind of go together to help deliver that truth and make that truth actionable to things like IOT, where it can become a trusted participant. Where things like IOT devices can report into a supply chain, you know, the temperature of this crate went up above this degree, and the shrimp in there is bad so issue an insurance policy, your insurance claim on this shrimp, and make sure you discard it when it gets to port. That kind of stuff and that enabling is the coordination of the IOT devices reporting up through the cloud into a blockchain, and decisions being made and rules being defined.
Steven: Joe, do you get the sense that companies are warming up to the idea of decentralization? Are they becoming more cooperative?
Joe: Legacy companies are not in the business of decentralization. Although, a Canadian messaging platform called Kik, is jumping into the token launch space. And so they’re embracing it to some degree, at least. But companies are using blockchain for efficiency, and because it enables new kinds of use cases that they weren’t previously able to consider. Shared sources of truth for reference data would be one simple example. While all of that excellent activity is going on, there are many new companies and projects around the world that are envisioning new ways of doing things that are more decentralized.
Steven: What do you think, Rumi, more cooperation? Is decentralization a concept that companies are warming up to?
Rumi: I think I began my first answer saying, it depends on the company. To say again, it depends on the company, for sure. But I think, in general, open source is something that they’re more up to, actually. And I think it’s not just in the blockchain space but, generally, in this notion of, you know, collaboration in technology development is generally getting more and more accepted, I think, within organizations. So I think that will lead to influence, like perhaps, greater decentralization, but it’s still gonna probably take some time, yeah.
Joe: So one aspect of decentralization could be considered sharing, and so supply chains, information infrastructure for sectors or industries, those things have now become possible because all those cooperating and competing actors can use the same shared infrastructure. So, yeah, bigger companies may evolve to being more collaborative at least.
Steven: Sure. Well, we’ve got a few minutes left. I want to talk about the other side of this: cryptocurrencies. And most recently, all that we’ve been hearing about ICOs. I was pretty surprised, in a good way, to see a front page story in the New York Times, the other weekend, on the ICO boom. How do you start to think about ICOs? Are these unlocking new opportunities? Is it too early, too dangerous? What’s the general approach to these things right now?
Joe: So, token launches, we prefer to call them token launches based on legal advice. They are thawing an enormous amount of frozen global capital. It’s hard to make an investment in a company in the Western world. I have to be in a credit investor, in most cases. Token launches enable smart college students to put a hundred bucks into something they care about. Or it enables couple of smart college students to do permission-less VC to put their pitch out on the internet and sell some tokens to fund, maybe a first phase of development of a project. It never in history have we had a platform that had its own built-in money, had its own ability to build financial instruments on that money, had its own ability to construct funding mechanisms for projects. So that sort of dynamic sets up an enormous number of positive feedback loops, and I think that will drive a network effect like we’ve never seen.
Marley: Well, it seems that we’re talking about cryptoderivatives. I mean, this network lets you build just about anything. I think, you know, it’s early days. Everybody’s been making it sound like that. When do we gonna stop saying that? But for token launches you, you know, we’re gonna learn a lot about how they work. I imagine there’s gonna be a couple turns of that crank before we get it really right. And I’m sure the regulatory bodies will have something to say about what point does it become a security versus a…there’s a bridge that we’re gonna have to cross at some point. But I think right now, it’s still so…we’re not really sure what it’s gonna do, but it’s tremendously interesting. And I think, you know, anyone that…even organizations looking at this can…and even if you’re not trying to raise funds, just like interesting concept that you can apply to the other things, like loyalty, and things like that, other types of programs.
Steven: Rumi, could you see CME doing an ICO for an in-house project?
Rumi: I will say this about token launches. This is where I become very old-fashioned, suddenly. But I won’t say we’ll shut it down or stop it. I don’t think anyone should, because then you’re saying shut down innovation or stop innovation. And I think it will be important to see iterations of this. And I’ve been actually, been fascinated by the hybrid model of companies that have raised money traditionally and are now also doing some token launches, like Brave being one of them. It’s like, “Well, doesn’t that make sense then?” Don’t you wanna incentivize people to actually use, and get paid for using, your product, right? It should be a…I kind of like that mutual back-and-forth idea, but I think, until we see more proven companies start to have token launches, not token launches and then try to go prove a company. I’m still, like these gentlemen as well, I’m just watching with wide eyes.
Steven: Right. I’m curious to the extent that you think, you know, do large corporations that are experimenting with blockchain, what level of influence do they have in the overall development of the technology? Are there…can a corporate come in and really change the direction of how this is being built up, or is it another group that really has the most influence?
Joe: So, public blockchain in particular, Ethereum leads the way, in terms of defining that technology. The different independent but cooperative groups around the world that are building clients for the Ethereum protocol, they really set their own direction. The problems that you solve when you’re dealing with the most malicious situation, the public, permission-less case, are much more rigorous than what you face in an enterprise context. And so, the hard problems need to be solved there. So they have to lead. And then once they’ve led, once they’ve solved those hard problems, created a very powerful system in a Byzantine context, the most challenging context, where up to half of the actors on the system could be malicious, then you can take that technology and move it into a consortium or a corporate context. You have strong governance in those situations. You can relax assumptions. You can make optimizations, increase security with weaker kinds of consensus algorithms, and make it run really fast and more easily.
Marley: I think we’ll have to see it. We’ll see it in there as well. But the Enterprise Ethereum Alliance, we’re looking at privacy and how do you make sure that private data between two counter-parties is only visible to those two counter-parties in a regulatory oversight? So, in performance, we’ll have different. But I think, one of the things we do, kind of, in the two spaces is we don’t want to do those in isolation. So, have the public, sort of, trust-less network, sort of, define that and fix those hard to solve problems in that Byzantine environment, where the enterprise can really focus on the ill-at-ease, the operations, manageability, scalability, and all that stuff. And, you know, make sure that those can work together as we start to see the vision of the public and the private blockchains working together to create this new economy.
Rumi: Yeah. You may not see corporations lead with brains, right, as thought leaders, but they probably will lead with brawn, you know. And you see this in the consortiums, and once they all decide to adopt something en masse, I think it will be very powerful.
Steven: Great. Well…
Joe: It’s an open source technology, there’s no way to buy it. The cat’s out of the bag already and there’s really no way to influence a globally decentralized set of hackers who believe strongly in decentralization.
Steven: Good point. Thank you so much for taking the time, guys. I appreciate it. We’ll see if we’re having another blockchain panel next year, or if we’ll be mainstream. Thanks.