You are on page 1of 15

7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

Boston Consulting Group

Consortiums and Shared Ledgers: Supply


Chains as a Blockchain Use Case
Published on December 28, 2016

George Samuel Samman Follow


238 13 111
Blockchain & Cryptocurrency Consultant

This post is based on a presentation I gave in Hong Kong for Chain of Things and also
one for the Scotland Blockchain meetup. This was inspired by a recent whitepaper I co-
authored with Gilbert & Tobin. Since a blockchain/shared ledger is a network of nodes
all coming together to share information and work together on different use cases a
consortium model makes sense to deploy.

This presentation focuses on:

1) Different Trust Models that are used by the different blockchain and shared ledger
technologies.

2) Privacy and confidentiality are the key design features when architecting blockchain
solutions for financial services.

3) What is a Private Shared Ledger? How it differs from other solutions.


https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 1/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

4) Why use a consortium?

5) The different types of consortiums

6) How to Form/Structure a Consortium

7) Different examples of consortiums (public & private models) looking at supply


chains

8) How Internet of Things (IOT) fits in.

Different types of networks require different trust models. Below is a chart I put
together to highlight the differences in each model.

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 2/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

If privacy and confidentiality are the main design feature for shared ledgers, tradeoff
need to occur in order to make this work. All systems have tradeoffs and using a triangle
to understand this usually helps. In this triangle, one can only achieve two of three sides
at any time. The three most important features of blockchain/shared ledgers: 1)
Consistency 2) Full Decentralization & 3) Enterprise Scale. So for example with Bitcoin
and Ethereum, you get full decentralization and consistency (all nodes get data
replicated to them) but you can't get enterprise. With this triangle you can shift it like a
slide ruler, so you can have something between full decentralization and centralization,
but of course you will lose consistency or scale as you do. Many of the shared
ledger/private blockchain solutions have sacrificed decentralization because of the trust
model they employ. The nodes need to be known, but not trusted on these ledgers so
why bother with decentralization at all? Some of these models are no different than
centralized databases with the addition of blockchain "features". Once you sacrifice
decentralization and synchronization by not replicating to all nodes you can get
enterprise scale and privacy and confidentitality while keeping the data
consistent. Some use a node to node model some use a master node which validates and
achieves consensus.

The slide below shows the difference between open, permissionless ledgers and
shared/distributed/permissioned ledgers.

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 3/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

Shared ledgers and private blockchains have some or all of the features found in the
next slide. These are the common design features associated with blockchain solutions.

Back to LinkedIn.com

The next slide comes from the KPMG report on Consensus I co-authored and shows
how many use cases there are for financial services. There are just as many consensus
mechanisms as well and this can be really confusing particularly when trying to
implement different use cases and figure out the design features necessary for what you
want to accomplish. For all of these uses anonymity can't be used and privacy and
confidentiality are necessary. This makes most ways of doing consensus not suitable.

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 4/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

In fact there are many different solutions which are being deployed to tackle the privacy
problem. In my blog post: "The Trend Towards Blockchain Privacy: Zero Knowledge
Proofs", I go into deep detail about these systems and why they are being
implemented. This includes zkSnarks, Zero Knowledge Proofs, zCash, Hawk,
Confidential Transactions and State Channels.

Why Use Consortiums?

Consortiums make sense because the success of shared ledger and blockchain
technologies requires significant levels of market participation, collaboration and
investment. The consortium is less about a technology solution or a particular business
model. It's more about how companies who haven't been able to trust each other in the
past can come together and collaborate and share information. The trust is shifted to the
shared ledger/technology solution. The participants just need to have similar
requirements in terms of:

the mix of confidentiality and transaparency (as captured in the design choices and
operating rules for the shared ledger platform)

functionality and processes

the approach to governance and

a shared view of regulation and compliance

All participants need to commit to complying with the operating rules of the
consortium. Since these participants are known to each other they can deal with each
other directly, without the need for a third party and innovate in a cost effective
manner. This leads to collaboration with other consortium members where it makes
sense.

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 5/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

These new technology instances are most powerful when you using a consortia
model. Below is a diagram showing at the bottom platform consortia. Moving left to
right you get public (things like Ethereum and distributed autonomous communities
(DACs) to hybrids like Hyperledger which is modular to private like R3, AMIS, and
Clearmatics Utility Settlement Coin. Many of these private models rely heavily on
industry input and engagement. In the public model you don'y pay to be a member in
Hyperledger you pay a small fee and companies of all shapes and sizes can join plus
you have a fee to join the Linux Foundation. In the private models it is much more
expensive and exclusive. Incidentally companies like R3 are also part of and main
contributors to Hyperledger through one of the main projects Fabric. Other major
projects include Sawtooth Lake (Intel) and Iroha. All of these models are trending
toward open sourcing their code to allow developers to build on top of their platforms
and form communities around the technology. The DACs are truly a new business
model as they are building decentralized companies in which the network participants
are part owners of the company. Centralized companies will go away and the projects
are creating their own economic ecosystems. Many of these projects are raising money
through Initial Coin Offerings (ICOs) and those who invest get "appcoins" and owners
and users of the network. These are essentially decentralized software protocols and are
"disrupting the disruptors".

At the top right are business consortia these can be public or private depending on use
cases and business needs of the companies and business units involved. Shared ledgers
allow companies and business units to work together in a way they couldn't in the
past. They provide end to end business processing and record keeping for corporations
(particularly intra-company). This, in turn, allows companies to derive new efficiencies
by sharing information, reducing costs and producing revenue generating
opportunities. Many blockchain technology providers are building their own shared
ledger platforms which allow companies to use it and work together on use cases and
improving inefficiencies.

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 6/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

Next is the critical choices that need to be made. This comes directly from the report I
co-authored with Gilbert & Tobin.

1) Setting the Consortium Strategy

Setting a consortium strategy at the outset is critical to the long-term success of


the business consortium:

++ Identifying new revenue opportunities, which may not have been viable
outside of the shared ledger environment;

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 7/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

++ Identifying possibilities for working with new organisations which may not
have been practical in the past and which could deliver new opportunities for
collaboration, innovation and efficiencies;

++ Identifying the target consortium members as well as those who may not
be permitted to join;

++ Strategically consider who should control the consortium?

++ What are the competitive threats and long-term strategies for the
sustainability of the consortium?

2) Choosing the Ledger Platform

Selection of a shared ledger platform is not like any other technology project
status quo processes wont work. Before

evaluating potential options and selecting a fit for purpose platform, critical
preparatory steps need to be taken to establish the basis for evaluation:

++ identifying all of the business processes and operational requirements


(including regulation) that will need to be performed on an end-to-end basis;
and

++ identifying how those business processes will be reconstructed on the shared


ledger platform.

Private shared ledger platforms are by no means standard or uniform. Each


platform provides different options for:

++ how confidentiality is achieved and how the permissions are designed: who
can see, who can write, who reads, who validates;

++ how scalability is achieved;

++ how consensus is done (although some platform developers are questioning if


consensus is even necessary);

++ how encryption and security are implemented and managed;

++ how smart contracts are linked with real world contracts (including
hashing options), and how validation is carried out to ensure consistency
between them;

++ capabilities for interfacing with information feeds (or oracles); and

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 8/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

++ capabilities for interoperability with other shared ledger platforms and


legacy systems.

It is critical to choose a fit for purpose shared ledger platform from the outset.
If the platform design doesnt readily lend itself to delivering the consortiums
strategy, there is no assurance that workarounds will achieve the required
result. Even if workarounds are possible, they may prove to be just too complex
in practice. Failure to choose a fit for purpose platform from the outset may
leave the consortium with little choice but to start all over again.

3) Choosing the Solution Design

Once the shared ledger platform is chosen, that is not the end of the matter. A
technical solution design is still required, determining how the consortiums
specific strategy and operational requirements will be delivered on the shared
ledger platform. This requires decision-making around:

++ the overall architecture of the solution including how security and


safeguards will be built into the technology and the

processes, and how real-world governance and decision-making will be


integrated with the technical solution;

++ the design of the rules engine and the smart contracts system for
automated processing on the consortium (including automation of the
consortiums operating rules where practicable);

++ how to create trust and security on the shared ledger? How will the public /
private encryption keys be managed? Who will hold those keys? Where will the
keys be held?

++ the specific protocols to be adopted in relation to permissions on the shared


ledger: who can see, who can write, who reads, who validates and how
consensus will be performed, if required;

++ how the technical design will prevent (as far as possible) any breach of the
consortiums operating rules whether by the technical operator or by
participants on the shared ledger?

++ the required information feeds or oracles to be incorporated into the


design; and

++ how to achieve compliance with applicable regulatory requirements and in


financial services, this may include considerations around redundancy and other

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;OC 9/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

technology matters which could impact on the stability of the relevant financial
markets.

4) Planning to Mitigate Potential Pitfalls

While there are clear efficiency benefits and cost savings that shared ledgers can
provide through collaboration and more effective information sharing, this
doesnt mean that competition / antitrust risks will disappear. There is no reason
why consortium activity on a private shared ledger would be exempt from these
laws. Under current Australian laws, consortium activity can constitute cartel
conduct if the structure fails to incorporate appropriate compliance and
enforcement measures. Upcoming changes to Australias competition laws will
see the introduction of a concerted practice prohibition which sets a lower
threshold for illegal coordinated activity than the existing cartel laws.

It is arguable that current competition laws do not take appropriate account of


developments in the digital economy at least in Australia. While this may
change in the future, efficiencies and cost savings do not currently constitute any
defence to cartel conduct - unless the consortium members pre-emptively seek
authorisation from the Australian Competition and Consumer Commission.
This is a public process that could take six months to complete. By comparison, if
the consortium can establish well-designed operating rules and governance for
the consortium, then it may be possible to rely on that framework to clearly
establish the efficiency benefits without the need to go through the public
authorisation process.

5) Establishing the Consortium Framework

This is detailed in the slide below

This slide shows how a consortium forms. Someone (consortium promoter) decides that
there is a reason for the consortium to form. Once this happens founding members and
participation members join with different benefits or tiers of benefits based on the
operating rules of the consortium agreement which are decided by a governance
board. These rules include such things as legal and structural decisions of the
consortium as well as decisions which are to be implemented on the shared ledger based
on a specific technology implemented by the consortium promoter with input from all
of its members. The smart contract system and the rules engine have ensure consistency
between real world contracts and smart contracts and as is shown below this is done in
both private and public models because "code is king" does not hold up.

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;O 10/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

R3's Corda matches real world contracts with smart contracts and hashes them to a
blockchain. This is a decision based on best practices and governance because smart
contracts fail when you need them most: when you need dispute resolution. There isn't a
way to code this in and know how a dispute will resolve. By doing this you can going
off-chain into the real world of courts to settle disputes. Corda comes to consensus on
these contracts in two ways: 1) transaction validity: which is based on state outputs and
contract code which match the actual contracts and signatures necessary. This allows for
the counter parties to agree by independently running the same smart code and
validation logic and confirm that the contract is the same. 2) Transaction
uniqueness: this essentially makes sure there is no double spend by making sure the
inputs are unique and no other transaction matches this one with certainty. A third party
is generally involved in this piece of the consensus mechanism.

CODE (Centrally Organized Distributed Entity) uses real world governance to


counterbalance smart contract "code" for the Ethereum (public) blockchain in order to
ensure another DAO does not happen. An article by Zach Lebeau describes what
exactly this entails:

"CO + DE = Decentralization Generator

CODE stands for Centrally Organized Distributed Entity.

The CO Centrally Organized component can be represented by a number of


different company structures in various jurisdictions around the world. Because
MME the Swiss legal architects of the Ethereum Foundation were integral in
the formation of the CODE structure, SingularDTVs CO resides in Zug,
Switzerland. The DE Distributed Entity is the component existing on
Ethereums blockchain. Together, the CO and the DE build a bridge between the
centralized legacy paradigm and the decentralized Ethereum paradigm.

The engine of SingularDTVs CODE is its Smart Contract System (SCS). The SCS
decentralizes legacy assets and places them on the blockchain. The SCS also
directs the flow of decentralized assets for the purpose of funding, building,
maintaining and growing real world projects. Value resulting from these real
world projects are routed through the SCS and placed back onto the blockchain
via SingularDTVs tokens, SNGLS.

When functioning at its potential, the CODE acts as a decentralization generator


that perpetually places centralized assets onto the blockchain, growing the
Ethereum ecosystem. In the coming years, when trillions of dollars of assets are
placed on the blockchain, its structures like the CODE that will have helped make
it possible."

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;O 11/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

SUPPLY CHAINS and IOT

At Devcon 2, Tyler Smith from BHP Billiton, one of the world's largest natural resource
producers, presented Project Rai Stones (which can be viewed here) which is being
done in collaboration with Consensys and Block Apps using the Ethereum public
blockchain. This project is a blockchain based tracking application for wellbore
samples. Smith explained that these samples are extremely expensive and can not be
replaced. The samples themselves pass through many custodians, mostly all BHP
vendors and they are currently manually tracked using spreadsheets and email. This
leads to human error which can cause large regulatory fines when things aren't
right. Smith also explained that there is a lack of transparency to business unit
stakeholders and a lack of efficiency in finding metadata about these samples.

There are 3 nodes in this project: BHP, Weatherford (who is providing data analysis)
and the regulators and the goal is to properly map businesses processes to a granular
level than understand how to map that to a blockchain architecture. This flow needs to
have a simplified version of process flow of the samples through the vendors and
custodians to capture the analysis of the sample itself and link it to the digital object of
the sample on a blockchain.

Below is a slide of the business process flow.

This allows for real time updates of the samples while getting rid of siloed functions,
making tracking of information across functions and processes that are not as efficient
as they could be for supply chains of all sorts. Billions of dollars of value travel on
supply chains each day.

Other companies, financial institutions and startups are focusing on supply chains. IBM
will use Hyperledger to build its solutions on and focus on supply chains. Below is a
slide showing other companies focusing on supply chains.

The other use case touched on was industry cooperation more than just sourcing and
origins of supply chains. The example Tyler Smith gave was around required public

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;O 12/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

regulatory data that resource companies must give to partner countries that are set up in
a contract before extraction can begin. It's not just BHP, but all companies in this
industry that need to record and report things like production and location of assets to
the partner countries who are required to make it available to the public. Their are firms
that aggregate public data for the governments and the countries into databases and
costs multi billions of dollars annually. The idea is to cut out this middle man by
forming a consortium in the natural resource industry to report all public regulatory data
that is required. Countries, regulators and natural resource companies can all be nodes
in this consortium and publish real time access of this data for all to see and share
information amongst peers. The countries themselves can save money by not needed to
house this data since the blockchain has built in redundancy. This also improves
transparency dramatically.

Since this information all needs to be open and transparent and a publicly recorded,
BHP has decided to use a public blockchain. There are cases however where using
private shared ledgers are necessary, particularly because of data leakage and sensitivity
around pricing of invoices and businesses processes as the slide below shows. There are
many different financial institutions and companies involved who would require
sensitivity and encryption around the transaction and data flows. Using a public model
in this case would not be warranted. In many instances, just the counterparties involved
in each part of the chain might need to be involved, while the entire chain itself just
knows that business logic/process flows happened with integrity.

Elements of IOT would be needed for both models in order to ensure this integrity as
value get transferred over large distances between many parties in sensitive climates and
by land, sea and air in areas where there may or may not be wi-fi. The image below
shows what is needed in order to make a robust supply chain enhanced by IOT.

Filament is an example of an IOT technology that works where there is no wi-fi by


using radio waves.

The consortium model using shared ledgers works really well for use cases such as
supply chains where business processes and information sharing between many
different counterparties is necessary from a geographic and company endpoint to
endpoint. However, any business process, no matter how automated, always has to leave
space for human judgement, nuance and contextual understanding. This is why the

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;O 13/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

consortia model needs human governance and real world legal solutions to go with
blockchain/shared ledger technology making for a robust solution.

Conclusion

Institutional trust wasn't designed for the digital age.

The emergence of shared ledger technologies empowered by consortia is a game


changer for a major trust shift, which will empower new business models and
relationships between corporations and consumers.

If shared ledger technologies realise their full potential, then the consortium model
should thrive and be sustainable in the way that hasnt been possible in the past.

Report this

George Samuel Samman


Blockchain & Cryptocurrency Consultant Follow
25 articles

13 comments Newest

Leave your thoughts here

Iain Wicking 2w
Procurement Consultant
You really describing what is known as a 'metaprise' which is an entity formed to managed information
that individual entities will not or cannot justify managing on behalf of other entities. Two issues. First
is designing and building the metaprise and secondly it highlights the need to move away the
constraint of the ERP based business model.
Like Reply

Chuck Thompson, JD, CBP 2w


CEO and co-founder, Blockchain Consulting
Very impressive piece of work.
Like Reply

There are 11 other comments.Show more.

Don't miss more articles by George Samuel Samman

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;O 14/15
7/23/2017 Consortiums and Shared Ledgers: Supply Chains as a Blockchain Use Case | George Samuel Samman | Pulse | LinkedIn

Kadena: The First Real Private Blockchain and Shared Ledgers: The The Trend Towards Blockchain Privacy:
Blockchain New Age of the Consortium Zero Knowledge Proofs
George Samuel Samman on LinkedIn George Samuel Samman on LinkedIn George Samuel Samman on LinkedIn

Looking for more of the latest headlines on LinkedIn?

Discover more stories

Help Center About Careers Advertising Talent Solutions Sales Solutions Small Business Mobile Language Upgrade Your Account
LinkedIn Corporation 2017 User Agreement Privacy Policy Ad Choices Community Guidelines Cookie Policy Copyright Policy Send Feedback

https://www.linkedin.com/pulse/consortiums-shared-ledgers-supply-chains-blockchain-use-samman?trk=v-feed&lipi=urn:li:page:d_flagship3_feed;O 15/15

You might also like