Brussels Hyperledger Meetup - IBM Blockchain Explained

1Page© 2016 IBM Corporation© 2016 IBM Corporation
Making Blockchain Real for Business
Explained
David Smits
IT Architect

Contents
is Blockchain?
is it relevant
for our business?
can IBM help
us apply Blockchain?
2Page© 2016 IBM Corporation

Business networks,
wealth & markets
– Business Networks benefit from connectivity
• Participants are customers, suppliers,
banks, partners
• Cross geography & regulatory boundary
– Wealth is generated by the flow of
goods & services across business
network in transactions and contracts
– Markets are central to this process:
• Public (fruit market, car auction), or
• Private (supply chain financing, bonds)

Transferring assets, building value
Two fundamental
types of asset
Intangible assets
subdivide
Cash is also
an asset
– Tangible, e.g. a house
– Intangible, e.g. a mortgage
– Financial, e.g. bond
– Intellectual, e.g. patents
– Digital, e.g. music
– Has property of anonymity
Anything that is capable of being owned or controlled to produce value, is an asset

Ledgers are key …
Ledger is THE system of record for a business.
Business will have multiple ledgers for multiple
business networks in which they participate.
– Transaction – an asset transfer onto or
off the ledger
• John gives a car to Anthony (simple)
– Contract – conditions for transaction to occur
• If Anthony pays John money, then car passes
from John to Anthony (simple)
• If car won't start, funds do not pass to John (as
decided by third party arbitrator) (more complex)

Introducing Blockchain
A shared ledger technology allowing any participant in the business network
to see THE system of record (ledger)

Problem …
… Inefficient, expensive, vulnerable
Bank
records
Party A’s
records
Party C’s
records
Auditor
records
Party B’s
records
Party D’s
records

Solution …
… Consensus, provenance, immutability, finality
Party C’s
records
Auditor
records
Party B’s
records
Party D’s
records
Bank
records
Party A’s
records
Shared, replicated, permissioned

– Unregulated, censorship-
resistant shadow currency
– First Blockchain application
• Pioneer of Blockchain
technology
Blockchain underpins Bitcoin …
… Digital currencies different from cryptocurrency
BUT
is not bitcoin

Blockchain for business …
Append-only
distributed system of
record shared across
business network
Business terms
embedded in
transaction database
& executed with
transactions
All parties agree
to network verified
transaction
Ensuring appropriate
visibility; transactions are
secure, authenticated
& verifiable Privacy
Shared
ledger
… Broader participation, lower cost, increased efficiency
Smart
contract
Consensus

• Shared between participants
• Participants have own copy through replication
• Permissioned, so participants see only appropriate transactions
• THE shared system of record
Records all transactions across business network
Shared ledger

Smart contract
• Verifiable, signed
• Encoded in programming language
• Example:
– Defines contractual conditions under which corporate Bond transfer occurs
Business rules implied by the contract … embedded in the Blockchain
and executed with the transaction

Privacy
• Participants need:
– Transactions to be private
– Identity not linked to a transaction
• Transactions need to be authenticated
• Cryptography central to these processes
Ledger is shared, but participants require privacy

Consensus
• Anonymous participants
– Bitcoin cryptographic mining provides
randomized selection among anonymous
participants
– Significant compute cost (proof of work)
• Known & trusted participants
– Commitment possible at low cost
– Byzantine fault tolerance (BFT)
… the process by which transactions are verified
• Multiple alternatives
– Proof of stake, where influence is determined by
risk of validators
– Multi-signatures, validation needs consent from 3
out of 5 validators
• Industrial Blockchain needs “pluggable”
consensus

Car Lease Video

16
Regulator
How do participants typically work today ?
Ownership
Transfer
“In house”
(ledger)
Synchronisation:
× Slow
× Error prone
× Multiple ledgers
× Who owns what,
when, could get
confused ?
1.
Manufacturer
“In house”
(ledger)
2. Dealer
“In house”
(ledger)
3. Leasing
Company
“In house”
(ledger)
“In house”
(ledger)
4.
Lessee
5. Scrap
Merchant
“In house”
(ledger)

17
1. 製造業者
•車を製造します
•販売特約店に所有権を移転します
Participants
Regulator
•Creates “Vehicle Template”
1. Manufacturer
• Manufactures cars
• Transfers ownership to Dealers
2. Dealer
• Sells cars
• Transfers ownership to Leasing
Companies
3. Leasing Company
• Provides lease cars
• Transfers ownership to Lessee
4. Lessee
• Leases Cars
• Transfer of ownership to Scrap
Merchant
5. Scrap Merchant
• Disposes of Cars

18
Business Process (1/2)
Regulator
1. Creates “Vehicle
Template(V5C)”
1. Manufacturer
3. Add Vehicle
data to V5C
2. Dealer
2. Transfers ownership to Manufacturers
4. Transfers ownership to Dealers

19
Business Process (2/2)
2. Dealer
3. Leasing
Company
4. Lessee 5. Scrap
Merchant
5. Transfers ownership to Leasing
Companies
6. Transfers ownership to Lessee
7. Transfer ownership to Scrap
Merchant
8. Disposes car

20
How could participants work with blockchain ?
node
1. Manufacturer
2. Dealer
3. Leasing
Company
4. Lessee
5. Scrap
Merchant
Regulato
r
Shared
Ledger
Smart
Contracts
node
nodenode
node node
Conditions for
asset transfer
Records of
asset transfer

22
Smart
Contract
Smart
Contract
CryptographyCryptography
Shared
Ledger
Shared
Ledger
ConsensusConsensus
Ensuring secure,
authenticated &
verifiable transactions
Business terms
embedded in
transaction database &
executed with
transactions
All parties agree to
network verified
transaction
Append-only distributed
ledger shared across
business network
Blockchain Recap

23
V5C
Data
Owner: Regulator
VIN:
Maker:
Model:
Methods
Create
V5C
Data
Owner: Manufacturer
VIN:
Maker:
Model:
Methods
Update
Smart Contract (1/2)
Regulato
rCreate V5C template Transfer V5C template to
Manufacturer.
Smart
Contract
Smart
Contract
Crypto
graphy
Crypto
graphy
Shared
Ledger
Shared
Ledger
Conse
nsus
Conse
nsus
Update V5C with car
information
1. ManufacturerRegulato
r
Blank
Rule of Creation
Only Regulator can create
V5C template.
Rule of Update
Only Manufacturer can
update V5C.
V5C
Data
Owner: Manufacturer
VIN:
Maker:
Model:
Methods
Transfer
Blank
123
Alfa Romeo
Mito

24
Smart Contract (2/2)
V5C
Data
Owner: Dealer
VIN: 123
Maker: Alfa Romeo
Model: MiTO
Methods
Transfer
Transfer V5C to Dealer.
2. Dealer
● ● ●
Disposes car.
5. Scrap Merchant
V5C
Data
Owner: Leasing company
VIN: 123
Maker: Alfa Romeo
Model: MiTO
Methods
Transfer
V5C
Data
Owner: Scrap merchant
VIN: 123
Maker: Alfa Romeo
Model: MiTO
Methods
Dispose
Rule of Dispose
Only scrap merchant can
dispose car.
1. Manufacturer
Transfer V5C to Leasing
Company.
Smart
Contract
Smart
Contract
Crypto
graphy
Crypto
graphy
Shared
Ledger
Shared
Ledger
Conse
nsus
Conse
nsus

25
Shared Ledger
Shared Ledger
Block 1020
Previous Hash
Transactions
Create V5C template
Hash of TX
Nonce
Timestamp
● ●
●
● ● ●
Block 1021
Previous Hash
Transactions
Transfer V5C
Regulator to Manufacturer
Hash of TX
Nonce
Timestamp
Block 1022
Previous Hash
Transactions
Hash of TX
Nonce
Timestamp
Block 1023
Previous Hash
Transactions
Hash of TX
Nonce
Timestamp
Update V5C Transfer V5C
Manufacturer to Dealer
Block 1024
Previous Hash
Transactions
Transfer V5C
Dealer to Leasing Company
Hash of TX
Nonce
Timestamp
Block 1025
Previous Hash
Transactions
Leasing Company to Lessee
Transfer V5C
Leasing Company to Lessee
Hash of TX
Nonce
Timestamp
Block 1026
Previous Hash
Transactions
Hash of TX
Nonce
Timestamp
Block 1027
Previous Hash
Transactions
Hash of TX
Nonce
Timestamp
Transfer V5C
Lessee to Scrap
Dispose V5C
Smart
Contract
Smart
Contract
Crypto
graphy
Crypto
graphy
Shared
Ledger
Shared
Ledger
Conse
nsus
Conse
nsus

26
Distributed to all nodes by Peer2Peer
Smart ContractsShared Ledger
Block
Hash
Node
Node
NodeNode
Consensus
Regulator
1. Manufacturer
2. Dealer
3. Lease
Company
4. Lessee
5. Scrap
Merchant
Node
Hash of TX
nonce
Timestamp
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Create V5C
(Send transaction)
Create V5C
(Send transaction)
Proof of WorkProof of WorkDiscover nonce!Discover nonce!
OK
OK
OKOK
V5C
Data
Owner:
Regulator
VIN:
Make:
Model:
Method Create
Transaction
Create V5C
Create BlockCreate BlockConsensusConsensusCreate V5C
(Execute transaction)
Create V5C
635840321837635840321837
000000012345000000012345
OK
Block
Hash
Transfer V5C
(Send transaction)
Transfer V5C
(Send transaction)
Transaction
Transfer V5C
Node
Hash of TX
nonce
OK
Proof of WorkProof of Work
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Timestamp
759710275638759710275638
000000067890000000067890
Discover nonce!Discover nonce!Create BlockCreate BlockConsensusConsensus
OK
OK
OKOK
OK
OK
Transfer V5C
Transfer V5C
Block
Hash
Manufacturer
Transfer
Update V5C
(Send transaction)
Update V5C
(Send transaction)
Transaction
Update V5C
Proof of WorkProof of Work
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Hash of TX
nonce
Discover nonce!Discover nonce!Create BlockCreate Block
Hash of TX
nonce
Timestamp
387291845274387291845274
000000037648000000037648
OK
OK
OKOK
OK
OK
ConsensusConsensus
Update
123
Alfa Romeo
MiTO
Update V5C
Update V5C
Shared
Ledger
Smart
Contract
Smart
Contract
Smart
Contract
Crypto
graphy
Crypto
graphy
Shared
Ledger
Shared
Ledger
Conse
nsus
Conse
nsus

27
Summary
Shared trusted processes
Trusted recordkeepingImprove discoverability
• Reduces complexity
of system interfaces
and reconciliations
between car lease
participants.
• Improves
discoverability and
transparency as ALL
transaction related to
a specific car is
stored on a single
shared ledger.
• Regulation compliance
are checked for each
transactions.
(e.g. VIN can not be
changed after
manufacture)
• All transactions can
not be modified
without the consensus
of other participants.
(As opposed to a single
participant assuring
data integrity)
Reduce costs and complexity

Contents
is Blockchain?
is it relevant
for our business?
can IBM help

Blockchain benefits
Saves
time
Removes
cost
Reduces
risk
Increases
trust
Transaction time
from days to near
instantaneous
Overheads and
cost intermediaries
Tampering, fraud
& cyber crime
Through shared
processes and
recordkeeping

Benefits
1. Consolidated, consistent
dataset reduces errors
2. Near-real-time of
reference data
3. Naturally supports code
editing and routing code
transfers between participants
What • Competitors/collaborators in a business network need
to share reference data, e.g. bank routing codes
• Each member maintains their own codes,
and forwards changes to a central authority for
collection and distribution
• An information subset can be owned by organizations
How • Each participant maintains their own codes within a
Blockchain network
• Blockchain creates single view of entire dataset
Consensus use case –
Shared routing codes

Benefits
1. Trust increased, no authority
"owns” provenance
2. Improvement in
system utilization
3. Recalls "specific"
rather than cross fleet
What • Provenance of each component part in complex
system hard to track
• Manufacturer, production date, batch and even
the manufacturing machine program
How • Blockchain holds complete provenance details
of each component part
• Accessible by each manufacturer in the production
process, the aircraft owners, maintainers and
government regulators
Provenance use case –
Vehicle maintenance

Benefits
1. Lowers cost of audit and
regulatory compliance
2. Provides “seek and find”
access to auditors and
regulators
3. Changes nature of
compliance from
passive to active
What • Financial data in a large organization dispersed
throughout many divisions and geographies
• Audit and Compliance needs indelible record of all
key transactions over reporting period
How • Blockchain collects transaction records from diverse
set of financial systems
• Append-only and tamperproof qualities create high
confidence financial audit trail
• Privacy features to ensure authorized user access
Immutability use case –
Financial ledger

Benefits
1. Increase speed of execution
(less than 1 day)
2. Vastly reduced cost
3. Reduced risk,
e.g. currency fluctuations
4. Value added services,
e.g. incremental payment
What • Bank handling letters of credit (LOC) wants to offer
them to a wider range of clients including startups
• Currently constrained by costs & the time to execute
How • Blockchain provides common ledger for letters of credit
• Allows all counter-parties to have the same validated
record of transaction and fulfillment
Finality use case –
Letter of credit
Letter of credit
Republic of A
Buyer’s bank issues
LC and sends to
seller’s bank
A Plus
Bank
Bank B
Seller’s bank authenticates
LC and credits Company B
Sales contract
Company B:
Seller/beneficiary
Company A:
Buyer/
applicant
B-land
Buyer applies
for LC

– Securities
• Post-trade settlement
• Derivative contracts
– Trade Finance
• Bill of Lading
• Cross-currency payment
– Syndicated Loans
– Supply Chain
– Retail Banking
• Cross border remittances
• Mortgage verification & contracts
– Public Records
• Real estate records
• Vehicle registrations
• Citizen Identity
– Digital Property Management
Other potential
use cases

Patterns for customer adoption
COMPLIANCE
LEDGER
CONSORTIUM
SHARED LEDGER
ASSET
EXCHANGE
HIGH VALUE
MARKET
• Created by a small set of participants
• Share key reference data
• Consolidated, consistent real-time view
• Sharing of assets (voting, dividend notification)
• Assets are information, not financial
• Provenance & finality are key
• Transfer of high value financial assets
• Between many participants in a market
• Regulatory timeframes
• Real-time view of compliance, audit & risk data
• Provenance, immutability & finality are key
• Transparent access to auditor & regulator

Key players for Blockchain adoption
Regulator Industry Group (e.g. R3) Market Maker
– An organization who enforces
the rules of play
–Regulators are keen to support
Blockchain based innovations
–Concern is systemic risk – new
technology, distributed data,
security
–Often funded by members of a
business network
–Provide technical advice on
industry trends
–Encourages best practice by
making recommendations to
members
–In financial markets, takes buy-
side and sell-side to provide
liquidity
–More generally, the organization
who innovates
- Creates a new good or service,
and business process (likely)
- Creates a new business process
for an existing good or service

Contents
is Blockchain?
is it relevant
for our business?
can IBM help

Blockchain for Business – Our Point of View
Community + Code
Linux Hyperledger Project
Open Source Code: Blockchain for business;
Consensus | Provenance
Immutability | Finality
Open Governance – 100 member cross industry board
Cloud
IBM Blockchain
Blockchain managed service on IBM Cloud and z Systems;
Identity | Consensus | System Integration |
Hardware-assist for Performance & Security
IBM Blockchain on Bluemix
Clients
Blockchain Solutions
Blockchain Garage
Making Blockchain real for business
Blockchain Garage;
New York | London | Singapore | Tokyo
Blockchain Services Practice

Linux Foundation’s Hyperledger Project
– Linux Foundation project announced December 17, 2015
with 17 founders, now nearly 100 members
– The Hyperledger Project is a collaborative effort to
advance Blockchain technology by identifying and
addressing important features for a cross-industry open
standard for distributed ledgers that can transform the
way business transactions are conducted globally
– Open source and open standards-based
Enable adoption of shared ledger technology at
a pace and depth not achievable by any one
company or industry
QUICK FACTS
Chairman Blythe Masters/DAH
Executive
Director
Brian Behlendorf
Technical Chair Chris Ferris/IBM
Contribution
44,000 lines of code
in February 2016
Sprint to one
codebase with
unified thinking
Staged releases
www.Hyperledger.org

© 2016 IBM Corporation 41
Comparison Matrix
Hyperledger Ethereum Ripple Bitcoin
Description General purpose
Blockchain
General purpose
Blockchain
Payments
Blockchain
Payments
Blockchain
Governance Linux Foundation Ethereum Developers Ripple Labs Bitcoin Developers
Currency None Ether XRP BTC
Mining Reward N/A Yes No Yes
State Key-value database Account data None Transaction data
Consensus Network Pluggable : PBFT Mining Ripple Protocol Mining
Network Private or Public Public or Private Public Public
Privacy Open to Private Open Open Open
Smart Contracts Multiple programming
languages
‘Solidity’ programming
language
None Possible, but not
obvious
41Page

Engagement model overview
1. Discuss Blockchain
technology
2. Explore customer
business model
3. Show Blockchain
Application demo
1. Understand Blockchain
concepts & elements
2. Hands on with
Blockchain on Bluemix
3. Standard demo
customization
1. Design Thinking
workshop to define
business challenge
2. Agile iterations
incrementally build
project functionality
3. Enterprise integration
1. Scale up pilot or Scale
out to new projects
2. Business Process
Re-engineering
3. Systems Integration
Remote or face to face Remote or face to face Face to face Face to face
Free of charge Free of charge For fee For fee
Let’s
Talk
Blockchain
Hands-on
First
Project
Scale

HSBC, Bank of America, IDA Trade Finance - Letter of Credit
ABN AMRO Financial Restructuring & Recovery
Crédit Mutuel Arkéa Consortium Shared Ledger
Japan Exchange Group (JPX) Post Trade
Kouvola Innovation Supply Chain Logistics
London Stock Exchange Market Innovation
Mizuho Digital Currency
IBM Global Finance Shadow Chain for Dispute Resolution
IBM and Hyperledger in Action

Summary
Blockchain …
– is a shared, replicated, permissioned
ledger technology
– can open up business networks by
taking out cost, improving efficiencies
and increase accessibility
– addresses an exciting and topical set
of business challenges, which cross
every industry
IBM …
– supports the Linux Foundation
Hyperledger open standard, open
source, open governance Blockchain
– has an easy to access, proven and
incremental engagement model giving
customers the confidence to get
started NOW

Further Information – Use case Links
HSBC, Bank of America, IDA:
http://www.coindesk.com/hsbc-bank-america-blockchain-supply-chain/
ABN AMRO:
https://www.abnamro.com/en/newsroom/blogs/arjan-van-os/2016/walking-the-walk-exploring-the-power-of-
blockchain.html
Crédit Mutuel Arkéa:
http://www.coindesk.com/ibm-completes-blockchain-trial-french-bank-credit-mutuel/
JPX:
http://www.ibm.com/press/us/en/pressrelease/49088.wss
Kouvola Innovation:
http://www.ibm.com/press/us/en/pressrelease/49029.wss
London Stock Exchange:
http://www.ibtimes.co.uk/linux-foundation-blockchain-consortium-digital-asset-ibm-credits-london-stock-
exchange-board-1533798
Mizuho:
http://www.coindesk.com/mizuho-digital-currency-powered-blockchain-settlement/
IBM Global Finance:
http://www.coindesk.com/ibm-building-blockchain-dispute-resolution-system/

Bitcoin
• In a nutshell: The original Blockchain application, spawning an industry
• Use case: Cryptocurrency transfer between anonymous participants
• Network: Single public network
• Accounts: BTC currency, rewards for mining, transaction fees
• User Data: Small transaction data area
• Consensus Network: Transactions validated using ‘Proof of Work’ cryptographic mining
• Privacy: Transaction ledger completely open
• Smart Contracts: In original design and code, but not obvious
• Open: Open source. Changes governed by Bitcoin developers.
• Recent Innovations: None – relatively established
• Backing: Bitcoin applications are backed many VCs. Network not backed.
• More information: https://bitcoin.org

Ethereum
• In a nutshell: Popularized smart contracts
• Use case: Smart contracts encapsulate business rules. Ether currency as ‘fuel’
• Network: Single public network. Private network providers available, e.g. Eris
• Accounts: Ether currency, rewards for mining, transaction fees
• User Data: Accounts can hold binary user data
• Consensus Network: POW transaction validation
• Privacy: Fully open ledger
• Smart Contracts: Fully externalized via ‘Solidity’ programming language
• Open: Open source. Changes governed by Ethereum developers
• Recent Innovations: Discussing ‘Proof of Stake’ option – May 2016
• Backing: Ethereum applications are backed by VCs. Network by donations
• More information: https://www.ethereum.org

Ripple
• In a nutshell: International Payments Platform for banks and businesses
• Use case: Cryptocurrency (XRP) transfer between anonymous participants
• Network: Single public network
• Accounts: Hold XRP currency balance
• User Data: No user data
• Consensus Network: Transactions validated using novel, ‘white-list’ network protocol
• Privacy: Fully open ledger
• Smart Contracts: None.
• Open: Open source. Changes governed by Ripple Labs
• Recent Innovations: Focus on international banking settlements
• Backing: Andreesen Horowitz, Google Ventures
• More information: https://ripple.com

Hyperledger
• In a nutshell: Distributed ledger backed by the Linux Foundation
• Use case: General purpose distributed ledger satisfying broad requirements
• Network: Private networks focus. Available as managed service. Public later
• Accounts: Not currency based. (UTXO API available using smart contracts)
• User Data: Flexible key-value database
• Consensus Network: Transactions validated using PBFT as default. Pluggable design
• Privacy: From fully open to private ledgers
• Smart Contracts: Broad choice of programming languages. Extensible via Docker containers
• Open: Open source. Changes via standard Linux Foundation processes
• Recent Innovations: Merging contributions from IBM, DAH, Intel prior to expect GA July 2016
• Backing: 30 Founders: IT companies, Banks & Financial organizations
• More information: https://www.hyperledger.org

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