On December 19th 2019, the audit and consulting giant Ernst & Young announced the release of their “third-generation zero-knowledge proof blockchain technology” to the public domain as part of the firm’s effort to make public networks ready for enterprise adoption.
Ernst & Young’s advocacy of public blockchain network infrastructure, as opposed to permissioned and private networks (referred to as private networks going forward, for brevity), is notable given that the firm’s industry peers have either remained neutral on the public vs. private network debate or have voiced skepticism on the viability of public networks.
Whereas Ernst & Young, it seems, is in a league of its own by going all out on public blockchain technology.
Certainly, the firm’s peers have a point; public networks suffer from a number of challenges that make them problematic for enterprises today. Many are notoriously unscalable, open to hacking, potentially expensive to use and lack privacy and confidentiality. They tend to suffer from concentration of the interests that control the orderly state of the network, potentially placing it at the mercy of adversarial nations or parties.
However, Ernst & Young believes that these problems are imminently solvable, and when solutions are rolled out to address them, enterprises around the world will start to participate in the benefits of the technology.
Dropping The Cost Of Confidentiality.
December’s release of the firm’s Ethereum-based Nightfall tool suite presents a leap forward in the firm’s quest to solve the drawbacks of public networks. A previous release earlier in October 2019 demonstrated that a public blockchain could be secured by running a secure “level 2” protocol on top of the Ethereum blockchain providing confidentiality to transactions while also allowing full auditing by a designated third party.
This confidentiality is possible through a cryptographic technique known as “Zero Knowledge Proofs”. It’s not without its limitations, however. One drawback is that the mathematics involved in the cryptography are complex and therefore computational expensive. In the world of public networks, where participants pay to carry out transactions, that means cost; $8-$10 per transaction, in fact. That’s an acceptable amount if the transaction involves something of large notional value, such as a house, but not if you are paying for a pint of milk.
This latest release of Nightfall seeks to address this by providing the ability to combine up to 20 transactions together, thereby reducing the overall cost, to about 24c or 400x less than the initial cost when E&Y first released the suite of tools. That opens up a whole new field of business transactions that will now become economical to support on a public blockchain.
Using Common Public Infrastructure.
Paul Brody, Ernst & Young’s blockchain lead makes a persuasive argument as to why the firm has pursued an approach of attempting to fix the shortcomings in public networks as opposed to getting behind private networks as his peers such as IBM and Accenture have done.
Brody points to the challenge of adoption and on-boarding associated with private networks. Put simply, it’s hard to get organizations to join them.
Brody believes that private blockchains have had their day, and points to recent research conducted by Ernst & Young in collaboration with Forrester Research which identifies that on average, private blockchains, excluding their founders have only 0.5 participants. That means that most blockchains are failing to attract the adoption of the network that makes them useful.
One of the potential reasons for this lack of adoption is that private networks tend to favor their early founders at the expense of later joiners. This may have why the Tradelens blockchain that was backed by IBM and Maersk initially struggled to get traction.
The argument therefore follows that if the whole point of blockchain is to decentralize and avoid power-broking middleman, private networks may actually be defeating that purpose by creating new ones.
Following Brody’s logic to its inevitable conclusion; with so many private blockchains with so few adopters, the market will become hopelessly fragmented and organizations will end up running multiple technology stacks to support a population of different networks. That will quickly become unwieldy and cost-prohibitive. If you can achieve the same result with a shared public infrastructure, and at a fraction of the cost, there’s no need to be contending with the complexity and the cost of maintaining these technology stacks.
To back up the firm’s assertion that public networks that use Nightfall will be actually cheaper to operate in the long run, Ernst & Young recently published a report entitled “Total cost of ownership for blockchain solutions” where they empirically dissect the costs for the respective public and private networks.
No Corporate Data On The Network.
However, even with cast iron assurances, companies are always going to be nervous about exposing their sensitive data on a public network even with strong encryption techniques. The recent hack of Capital One’s banking servers hosted by Amazon Web Services has reminded companies, particularly in the financial services space, of the dangers of entrusting their data to third parties.
Brody appears to have the answer to this, which is to avoid storing corporate data on the blockchain in the first place. While this may seem something of a contradiction given that blockchain has been touted as a single source of truth in data, in reality, blockchains make terrible databases. What blockchains are good at is serving as transaction registries – confirming that a transaction has occurred, and providing a validation mechanism for companies to check that the data that lives behind their firewall is the same what their counterparties have. Zero Based Knowledge Proof technology comes into its own here, allowing adopters to store far more data in “off-chain” storage than would have originally been possible.
Time Will Tell.
Ernst & Young is taking an audacious approach to blockchain and it is not without risk.
For one, the firm will need to be able to convince corporates to put aside their concerns around public networks despite the technology’s historic role in supporting nefarious activity such as theft. It’s a nuanced, complex and technical argument that some firms who may not be used to going into such detail as to how their enterprise software works may not be equipped to have. Moreover, attempting to bring clients to public networks is a well-trodden road, that others have struggled to make much headway in, in the past.
But Brody, tells me that he’s been pleasantly surprised by just how sophisticated large organizations have been in his discussions with them about the technology.
“Even before this announcement,”, says Brody, ”we’ve seen a huge shift in interest by Fortune 500 companies towards public blockchains. I’ve been particularly astonished by how many of our clients tell us they already know about Zero Knowledge Proofs when we start talking about how we can make public blockchains safe from a privacy and security perspective.”
Getting Out Of Your Own Way.
But maybe the firm’s biggest struggle won’t be around persuading clients to adopt the technology but about ensuring that it is able to put aside challenges with its own internal corporate organizational dynamics.
Ernst & Young clearly has ambitions to be a product company as evidenced by the solutions that it has put out into the market to date, such as; Nightfall, the firm’s blockchain data analyzer toolkit, the Tesseract mobile blockchain platform, its wallet security tool Dye Pack, and enterprise blockchain platform Ops Chain.
However, running a software development shop within a professional services firm is no mean feat given how different the business model and culture of a professional services company is to a software development firm. It’s a problem that companies such as Xerox and FIS have struggled with and only solved by splitting off into new companies. Whereas IBM is a rare exception of an organization that has successful run a hybrid organization, but they have had a long time to perfect the model.
Ernst & Young also faces the challenge that is common with the big-4 entities, that they may be restricted as to what clients they can do business given their auditing relationships, and usually it’s the auditing side of the businesses in these firms that call the shots.
Watch This Space.
One thing is clear, we’ll know relatively soon as to whether the fruits of Ernst & Young’s labor have been rewarded.
As Brody stated on a recent interview – “It takes 6-9 months to go from tools and components….into production [but] you’ll see things from us sooner as we’ve know what was coming for some time.”