Solving real problems in infrastructure, finance and e-commerce
It’s exactly two years since we published “Avoiding the pointless blockchain project“, a checklist of questions to ask when assessing permissioned blockchain use cases. The post obviously struck a nerve and continues to attract thousands of monthly readers on our site and others. People are still hungry for content that goes beyond the blockchain hype to assess this technology objectively.
The good news is that, judging by our incoming inquiries, the market’s understanding of blockchains has greatly improved over the last two years. I would estimate that 60% of the blockchain use cases we now hear are commercially and technically sound. Nonetheless there is still plenty of confusion – companies determined to use a blockchain when a regular database would fit better, startups using “blockchains” in their branding but nowhere else, and widely reported but pointless blockchain projects which use a single node or a group of nodes under a single party’s control.
To recap what I’ve written before, the core value of a blockchain is to enable a database or ledger to be directly shared across boundaries of trust, without putting any single party in charge. A blockchain lets a group of actors achieve real-time reconciliation of validated, authenticated and timestamped transactions, without the cost, hassle and risk of relying on a trusted intermediary. The chain provides meaningful value when it’s maintained by consensus between multiple nodes, each of which is controlled by a party with different interests. This protects against individual participants (or small groups thereof) from corrupting or deleting past transactions.
MultiChain 1.0 was released a few months ago, and we’re delighted to now share the details of some of the early MultiChain-powered blockchains in production. Each application described below was independently built by a third party using the regular MultiChain software and APIs. All are running in a network of four nodes or more, with multiple active validators. Most importantly, in each case the blockchain is addressing a real business problem that could not be solved by a regular database.
Workflow management for infrastructure projects
Construtivo is a Brazilian software company which builds solutions for the design and construction phase of large infrastructure projects. For the past 15 years, Construtivo’s general approach has been to deliver software-as-a-service (SaaS), in which the company acts as the central trusted intermediary for managing project data. This is the traditional approach to ensuring that all stakeholders maintain a consistent view of a project’s status and progress.
To satisfy their customers’ desire for greater transparency and auditability, Construtivo have now integrated MultiChain into their solution, providing the option of storing crucial project data on a blockchain alongside Construtivo’s database. Several infrastructure projects in South America are already making use of this option. Each project has its own chain, with nodes run by both Construtivo and stakeholders such as contractors and engineering companies. Depending on the project’s requirements, the chain can record plans, contracts, and other workflow-related information, and can be browsed through a web-based interface.
The typical MultiChain network for an infrastructure project has 4 nodes, with an average transaction size of 15K. All nodes in each chain participate in the validation process, with control over user permissions remaining in Construtivo’s hands. As with most of our users, Construtivo researched a number of blockchain platforms to find a suitable fit. When asked why they settled on MultiChain, Rodrigo Trindade, systems analyst at Construtivo, cited its speed, simplicity and ease of integration with their application.
Shared ledger for a catastrophe bond
Solidum Partners is an investment advisory company which specializes in creating catastrophe bonds. These are financial instruments which pay investors a high rate of yield compared to regular commercial bonds, but have a risk of partial or no repayment if a particular event occurs. In essence, purchasers of catastrophe bonds are acting like insurance companies, providing the capital to cover unlikely losses and making a tidy profit so long as those losses don’t materialize.
In order to be easy to trade, non-physical securities like catastrophe bonds are traditionally held by a trusted intermediary on their owners’ behalf. Trades in the security are “settled” virtually via an update of the intermediary’s records. For Solidum, the intermediary of choice had been Euroclear, which holds over $30 trillion in financial assets on behalf of investors, or more than 10% of the world’s total. Naturally, with around 4,000 employees at 15 offices around the world, Euroclear doesn’t provide this service for free.
Due to recent changes at a banking partner, Solidum lost access to Euroclear and had to seek another way. So they issued a new $15 million catastrophe bond directly onto a MultiChain blockchain, along with dollar denominated tokens that could be used for transacting. If you like, they performed two private placement Initial Coin Offerings (ICOs), but with real underlying assets instead of a white paper and the hope of future value.
The blockchain enables safe “delivery-vs-payment” transactions, in which two users exchange dollars and bond units in a single step – a feat which traditionally requires help from a trusted intermediary. Aside from avoiding this middleman’s fees, using a permissioned blockchain gave Solidum easy and direct control over who can participate in the system, without triggering the same heavy regulation as Euroclear and its peers.
Each participant in the network has their own MultiChain node, giving them direct control over their on-chain assets. While a trustee knows the real-world identity behind each address on the blockchain, participants do not know each other’s. (Unlike many financial use cases, the level of activity is not high enough for this veil of confidentiality to be broken.) After completing AML and KYC checks, users are given access to the chain by Solidum and can then transact with each other directly. The network currently has around 10 nodes, 4 of which are permanently online and participate in the consensus process.
When asked why they chose MultiChain, Cedric Edmonds, partner at Solidum, cited its simple built-in support for delivery-vs-payment exchange transactions, as well as its general stability and ease of use.
Transaction notarization for e-commerce
Cryptologic, a blockchain consultancy based in Rosario, Argentina, have built and deployed a system for notarizing e-commerce transactions, in order to help resolve disputes between buyers and sellers. Their first customer is MercadoLibre, Latin America’s most popular e-commerce site, which has almost $1 billion in annual revenues.
Under usual circumstances, when a customer makes a purchase from an online merchant, they have to trust that merchant to record the transaction securely and permanently. But in practice, nothing stops employees of the merchant from deleting or modifying transaction records, and this can serve as a back door for delayed delivery or goods to end up in the wrong hands. By contrast, if each transaction is recorded on a blockchain whose contents are publicly visible, and whose control is spread among a number of different parties, then this record becomes far more difficult to retroactively change.
To preserve confidentiality, transaction data is hashed before being embedded in the chain. The hashes provide a mechanism for timestamping and notarization, and are sufficient to settle later disputes if either party reveals the unhashed transaction. The network currently contains 7 permanent nodes, spread between Cryptologic, various government offices, and a partner abroad. Since transactions contain hashes only, they are fairly small, and the network has seen a peak rate of 50 transactions per second (still well below MultiChain’s maximum throughput).
When asked why they chose MultiChain, Maximiliano Cañellas, CTO at Cryptologic, said they found it really easy to use, with great features like streams, and that the product is very stable, having run for 10 months without interruption.
General lessons learned
These are some early examples of permissioned blockchains in production. The networks are still small, with modest transaction volumes that are far from the limits of products like MultiChain. So it’s important not to extrapolate too much.
Nonetheless, it’s interesting to note what these applications have in common. First and most importantly, they all derive from a genuine desire for decentralization, rather than using a blockchain for a blockchain’s sake. In all three cases, there were clear reasons to choose a blockchain architecture over messaging or a centralized database.
Second, none of the chains have yet transitioned to a decentralized model for governance. All still rely on a single administrator, who onboards new users and grants them permission to transact. It remains to be seen how often decentralized governance (as supported by MultiChain’s admin consensus model) is viable or necessary in practice. Perhaps it is sufficient for the blockchain to provide a transparent view of all administrator activity, while leaving control of this activity with a single party.
Finally, the nature of these applications confirms our view that blockchains are a general purpose technology for shared databases, and not restricted to particular industries or verticals. The lion’s share of media coverage might be received by specific use cases, such as interbank settlement, supply chain finance and shared identity. But in reality, blockchains can be applied whenever we seek to avoid centralized control over a digital system of record. It’s time to think more broadly about the types of problems that this technology can solve.
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