ETA Expert Insights: Distributed Ledger Technology and its Applications to Payments

From the ETA Technology Committee. Contributing Authors: Alicia Roisman Ismach, Amaryllis Payment Solutions; ETA Technology Committee. Ari Juels, Co-Director, Initiative for CryptoCurrencies and Contracts (IC3) and Professor of Computer Science at the Jacobs Institute, Cornell Tech

Distributed ledgers, or blockchains, are creating immense value and opportunity in finance and financial technology. Below, Alicia Roisman Ismach of the ETA Technology Committee talks to Professor Ari Juels of the Initiative for CryptoCurrencies and Contracts (IC3) about the Initiative’s active projects, its ambitions for the future, and what we can realistically expect distributed ledgers to accomplish.

What is IC3? What do you want to accomplish?

IC3 (www.initc3.org) is the world’s largest academic research initiative studying and devising technological and financial innovations across the full blockchain stack. It comprises sixteen faculty across eight campuses in four countries. Its mission is to take advantage of the unusually powerful role academic research is playing as a catalyst for innovation and talent generation the blockchain industry. Specifically, it was created to create a bridge between academics and practitioners, and to meet pressing industry needs with cutting-edge academic research.

What are the IC3’s Grand Challenges?

The Grand Challenges for the most part reflect a consensus among our faculty on the major technical obstacles the community will need to overcome for blockchains to see wide and fruitful deployment. We are about to overhaul and slightly condense our list of challenges to reflect some evolution in our collective thinking.

Do you consider one or more of them more critical/urgent to solve than the others?

No, but one is worth calling out. Our sixth and newest challenge – “Sound Migration” – represents a problem that one of our industry colleagues (Amber Baldet, then of JP Morgan Chase) sensitized us to. It may well be the most important, because without accommodating legacy systems, blockchains are going to be very slow to emerge. This is something we failed to appreciate but definitely do now. It’s insights like these that reflect the value IC3’s industry partners bring to our research agenda and IC3 more generally.

Which (if any) are the most “solvable” in your opinion?

Scaling is the one into which I’d say is attracting the most attention. Additionally, it’s relatively easy to achieve if you’re willing to weaken the strong trust model embodied in fully permissionless systems, i.e., move the dial a bit in the direction of centralization, which I think is appropriate in many settings.

What do you want businesses, and specifically payments companies, to know about distributed ledgers (DLs)? What should they consider before adopting them?

DLs are not magic pixie dust. They solve some problems but they are being hyped as solutions to challenges they cannot resolve on their own. It’s important for those contemplating adoption to obtain objective insight into the technology landscape and the promises of cutting-edge research. Much of blockchains’ value may be as a catalyst for the rediscovery of extremely powerful but underappreciated technologies and disciplines, like applied cryptography, fault tolerant systems, high-assurance software engineering, and so forth.

Aside from payments, where might there be some applications for blockchain within the financial space?

Smart contracts enable the creation of a whole range of financial instruments, from automated versions of existing instruments to wholly new ones. Token mania has already demonstrated the sea change that this technology can precipitate. Venture capital in the technology industry and digital cats will probably never again be the same.’

What are some permissioned blockchain projects that you are working on or that are gaining steam?

Many of our projects are agnostic to the form the underlying blockchain takes – meaning it doesn’t matter whether the blockchain is permissioned or not.. But when it comes to enterprise-oriented research, f our pioneering work combining trusted hardware with blockchains will, in my view, be the key to solving the confidentiality vs. transparency challenges of blockchains.

We’ve had an oracle called Town Crier running in Ethereum for over a year. An oracle is a system for relaying off-chain data onto blockchains in a trustworthy way. It is the first public-facing to use Intel’s new SGX technology in production and is being licensed to a company that will be applying it in enterprise settings.

Our Ekiden project, which supports confidentiality-preserving smart contracts, is playing an instrumental role in a new venture, Oasis Labs, co-founded by an IC3 Director, Prof. Dawn Song.

But additionally, IC3 faculty have been thinking about the role of blockchain systems in the government-supervised portions of the financial system, and this will have a long-term influence on financial enterprises. One example is Prof. Sarah Meiklejohn’s work on “centrally banked cryptocurrencies.”

That said, we do have faculty, such as Profs. Lorenzo Alvisi and Robbert van Renesse, who focus specifically on and have deep expertise in permissioned consensus. HoneyBadger BFT is a new asynchronous BFT system that we’re actively transitioning into a production-quality tool to be included in Hyperledger. And Prof. Bryan Ford’s group has been exploring the extensive power of “Cothorities,” which essentially operate in the permissioned model.

What key milestones would have to happen in order for digital currency to replace traditional currency/payments?

In a sense, it already has. Most currency has been dematerialized. If you mean blockchain-based currency, I think that the active embrace of governments will be necessary, and that will be a quagmire. While conceived by libertarians, cryptocurrency can alternatively be a powerful tool of repression in the hands of governments. Without careful and intentional safeguards for user privacy, it can enable pervasive and automatic surveillance of monetary transactions.

Is there a tradeoff between transparency and confidentiality in distributed ledgers? How do you strike a balance? And how do you protect user privacy?

There’s a strong tension between the two. Striking a balance isn’t easy. There are some settings in which cryptography, and zero-knowledge proofs and/or secure multiparty computation are helpful. zCash is a famous example (co-founded by IC3 member Ian Miers). Our Hawk and Solidus projects use zero-knowledge proofs to enable confidentiality-preserving smart contracts and transactions in permissioned settings. But zk-proofs and MPC are only practical in niche settings. This is why, as mentioned above, I’m more bullish on trusted hardware, for all its failings, which are not inconsiderable.

What will it take to make distributed ledgers a viable, widespread option for financial bookkeeping (whether at the financial institution level, government level, or in the private sector)?

This is where I think our seemingly banal sixth Grand Challenge – Sound Migration – comes into play. We can’t simply jettison existing systems and start from scratch. Legacy-system integration is hard but necessary.

Where do you think we will see blockchain in mainstream application first?

It depends on what “mainstream” means. Bitcoin Exchange-Traded Funds (ETFs) would be a kind of mainstream adoption, for example, albeit not a very interesting or productive one in my view. If you mean an application such that users interact directly with blockchains, because of the usability challenges, I don’t see any on the immediate horizon. If you mean adoption by financial institutions, it’s hard for me to opine, but cross-border transfers are already happening in limited contexts. A particularly promising area of application, in my view, is land registries, and the Swedish government is piloting a system for this purpose.

“Smart contracts” are only as good as the information they have. How can we set up data pipelines to verify the information that goes into smart contracts?

As mentioned before, we’ve developed a system called Town Crier, an oracle that uses trusted hardware to this end. The tamperproof nature of the hardware allows data to be transmitted faithfully from websites to blockchains and can also provide confidentiality for queries. Oracles themselves can also be decentralized along several dimensions, which can enhance trust.

What needs to happen to reduce the volatility of Bitcoin (BTC) and other currencies?

I don’t know about BTC. It has several forms of built-in instability. Its abhorrent and unsustainable guzzling of electricity is one. Fractious governance is another. Poor scaling is yet another, and I’m not optimistic about payment channels and other scaling solutions. So it’s hard for me to see volatility subside much. But who knows?

The token market needs a shakeout or maturation so that genuine technical value surfaces, considered regulation comes into play, and speculation becomes more of a sideshow.

When do you think the general population will own cryptocurrencies?

I prefer to keep hoping it won’t.

Well-vetted, institutionally custodied tokens and cryptocurrencies might find a place in investment portfolios, and it wouldn’t surprise me to see that happen in the next five years. But then the cryptocurrency dream of true decentralization will essentially be toothless.

* * *

There is no doubt that distributed ledgers hold a lot of promise. They enable smart contracts that can interpret and execute their own terms; they create secure pipelines for transmitting data; and they allow for the creation of new financial instruments that we might never have envisioned otherwise. Will they overhaul the entire financial system? Probably not – after all, to quote an expert, they are not magic pixie dust. But with a set of guiding principles and collaboration between industry and academia, distributed ledgers can offer creative solutions to some of our thorniest financial and technological challenges.