IBM, Microsoft Are Building Our Blockchain Futureand They're Not Afraid to Butt Heads

By Features PCmag

IBM and Microsoft are the two tech giants taking the most concerted, diversified leap into owning our blockchain-tinted future. In our series on IBM, Microsoft, and the future of blockchain, Part One explained the concept of Blockchain-as-a-service (BaaS) and broke down the biggest players in the fledgling enterprise market—Microsoft BaaS versus IBM blockchain—but that's only part of the story.

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Each company's BaaS platform is also closely linked with open-source. IBM is a founding member of the Hyperledger Project, an initiative managed by The Linux Foundation to create an open, standardized, and enterprise-grade distributed ledger framework and code base. Hyperledger counts several other tech companies as members (Cisco, Intel, and VMware, among others) but Microsoft is not among them. In fact, this past June Microsoft launched its own open-source blockchain effort, Project Bletchley, to develop its own modular blockchain standard for smart contracts and financial transactions.

Big Blue and Redmond are far from the only players in the blockchain space—the banking and finance industry, academic and research institutions, a rapidly growing pool of startups, other tech companies, and a potpourri of consortiums, alliances, and open-source initiatives (and that just covers private or "permissioned" blockchains) collectively make up a wide-ranging ecosystem. But IBM and Microsoft have invested substantial funding and resources into building out and upon the game-changing distributed database technology. These strategies are coming to blows on multiple fronts, and how the battles play out will have a real impact on what the open-source blockchain space and the enterprise BaaS markets will look like a few years down the road.

We spoke to Marley Gray, blockchain Chief and Director of BizDev and Strategy for Cloud & Enterprise at Microsoft, and Arvind Krishna, Senior Vice President and Director at IBM Research, about their goals for the open-source projects. We also discussed how the open and enterprise technologies feed into one another and the different ways in which each company sees blockchain changing how the world works. Both companies aim to create an open "fabric" upon which the future of blockchain can be built.

Project Bletchley's "Cryptlets" and Next-Gen Blockchain Security
Project Bletchley is Microsoft's open-source blockchain middleware that's designed to create a "fabric for blockchain." Built on Microsoft Azure, the modular blockchain fabric will be open to many different blockchain protocols, from what are called Unspent Transaction Output-based protocols (UTXO) such as the Hyperledger Project to smart contract-based protocols such as Ethereum (see the "E" section in our Blockchain A-Z story). Gray said the goal was to keep Bletchley open, even to Hyperledger, but Microsoft stopped short of joining that fabric in favor of its own.

"We wanted to make sure [Bletchley] remained an open platform," said Gray. "Bitcoin, Ethereum, UTXO, Hyperledger—we want Bletchley to remain open and work with all of those, and whatever we provide from an infrastructure perspective needs to be reusable. If it applies broadly to consortiums and enterprises, we need to include that in our middleware stack."

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Gray explained a couple of Microsoft's guiding principles with Bletchley and blockchain. The open-source project is designed as blockchain middleware—software acting as a connecting bridge between underlying blockchain data structure and blockchain-based apps—and introduces a new technology called "cryptlets."

Cryptlets are security and interoperability components, each of which has a unique signature, added to a UXTO or smart contract-based blockchain to encrypt and authentication transactions. Gray explained how Bletchley is trying to fill the current gaps in blockchain technology, particularly around security and interoperability.

"The common pain point we were hearing around blockchain was with identity management and key management [and] how you get your hands around that," said Gray. "Privacy is the second one. The third is interoperability with existing systems and then with other blockchains. One blockchain isn't going to do everything; we're going to have many blockchains."

Gray said cryptlets can act as a delegate or a full surrogate for a blockchain transaction. That means a cryptlet can assume the identity of a person, an asset, or a smart contract, and can be used either as a utility to process a transaction or as a contract cryptlet using the blockchain as a data store. He also explained a subtechnology called CryptoDelegates which act as adapters using secure communications such as HTTPS and SSL to add security layers such as key verification, signature recording, and added encryption to smart contracts and transactions.

"Without cryptlets, you don't have that standard security envelope. We purposely designed Bletchley to act like traditional middleware," said Gray. "In your back end you could use SQL, change the database, and not change your application logic because it works with any back end. People want to start building systems now.

"This is the new agile world where, if you wait to build it until you get all the technical and business issues figured out, when you come to market you're too late. You have to start building now," Gray added. "When everything does settle down, you can quickly shift what you've built. Bletchley includes the infrastructure work, cryptlets, and CryptoDelegates in the middleware stack, but also tooling."

The goal of Bletchley is to make the blockchain more secure at all levels of the stack so that we don't end up with more incidents like the smart contract logic loophole that caused the $50 million DAO hack. The process of how cryptlets and CryptoDelegates work within the Bletchley fabric is far more complicated, and Microsoft explains in it greater depth in a white paper on GitHub.

"The DAO could've used some debugging," Gray joked. "We built the core infrastructure for cryptlets and CryptoDelegates, so a developer can tag a transaction and it's like magic; it knows how to invoke the cryptlet on the web and do the encryption for you."

Hyperledger and IBM's Multi-Pronged Enterprise Push
Microsoft BaaS and Project Bletchley isn't the only combined open-source, cloud, and enterprise strategy aiming to create a blockchain fabric. IBM's enterprise blockchain products are all informed by open source and the development of Hyperledger, to which IBM has contributed more than 44,000 lines of code to date. The Hyperledger project is a "cross-industry open standard for distributed ledgers" but IBM's Krishna cut through the jargon and explained four critical benefits of blockchain around which the initiative is geared.

1. Distributed: Digital ledgers spread across multiple locations while keeping data aligned across the blockchain.
2. Consensus: Governance based on open-source committee voting.
3. Immutable: An original, irrefutable transaction record—key to the concept of "blockchain equals trust."
4. Permissioned: Identity verification and modulation of who can add and modify blockchain entries.

"There are lots of regulations I can rail off around racketeering, anti-money laundering, corruption—if I don't know who a person is or what they do, it's hard to justify using a blockchain for business," said Krishna. "Distributed, consensus, immutable, and permissioned: those are the four critical elements that determine how distributed trust is achieved, and trust takes away friction."

The open-source project (of which IBM handed over control to The Linux Foundation) has 40-plus members, including financial entitles, fintech startups, and tech companies—with organizations from J.P. Morgan Chase and Deutsche Bank to Cisco, Intel, Red Hat, and VMware contributing code. The R3 consortium is also a member, and the Linux Foundation is currently vetting applications for several hundred more members.

The big difference with Hyperledger in relation to the blockchain technology used in Bitcoin (and even Ethereum) is open governance. Ethereum is open source but it's governed by the board of the Ethereum Foundation, not an open technical committee.

As for project member R3—of which IBM and Microsoft are ­both members along with more than 50 other banks, financial institutions, and tech companies that are building a financial-grade private blockchain ledger—Krishna hopes the consortium will eventually deploy its private blockchain network on Hyperledger's fabric as opposed to Ethereum.

Hyperledger is focusing on blockchain essentials such as identity management, interoperability, and data governance but—much like Microsoft's Bletchley—Krishna said the overarching goal is to create a "robust fabric" that will aggregate common blockchain requirements across industries. Krishna has called Hyperledger "the open-source business reaction to the anonymity of Bitcoin," and hopes Hyperledger achieves a critical mass that stops open-source splintering in blockchain development, and provides more governance and trust than Bitcoin and Ethereum.

"In order for hundreds of thousands of enterprises and governments to embrace this technology, you need transparency and governance over how the code is written. In the end, the big value in a blockchain network is trust, and the code needs to be open, extensible, and with no back doors. In order to do that, you need actual open source, not just open source by name," said Krishna.

"You can call Ethereum open source but there's no governance about what is deployed in the network, and the 20 folks in charge could choose to change the code tomorrow. That's the big difference," he added. "Can I trust it or can I not? True open source means governance—a set of people who contribute code under visible rules presided over by a technical committee. History has shown that, whether it's Linux or Apache projects like Hadoop and Spark, there are powerful examples of open source as the base technology for trusted enterprise software."

The Tough Part: Weaving the Fabric into the Real World
IBM and Microsoft are both ideally positioned to eat up enterprise BaaS market share while pushing their respective open-source agendas. But the space is far more complicated than a two-horse race. Eric Piscini, Principal of Banking and Technology Consulting at Deloitte, broke down how IBM and Microsoft factor into a much larger market.

"The bottom of the stack for me is the core blockchain components coming from different players. The traditional public blockchain players like Bitcoin and Etherum, and then all the private blockchains delivered by companies," said Piscini. "That's the foundation, and the source code is running on a bunch of different cloud providers: IBM, Microsoft, HP, AWS. Pretty much everyone doing cloud is doing something around BaaS on their platform."

Piscini also leads the Deloitte Global Cryptocurrency Center that serves financial institutions and retailers. Deloitte has a BaaS platform of its own as well called Rubix. Deloitte sees blockchain adoption coming not just from banking and finance but from industries such as manufacturing, automotive, oil and gas, and more. These industries are trying to figure out not only what to do with blockchain but how to do it while managing compliance, risk, and security. Piscini said the relationship between open development and enterprise adoption is key, but that initiatives such as Hyperledger and Project Bletchley should be focusing on individual business use cases rather than on a blanket fabric.

"Open source is a great construct for blockchain. It doesn't mean public or private blockchain; it means all that code is available for everyone to use and play with. And a lot of the private blockchain implementations are using open-source code. The public versus private or permissioned versus permissionless debate will continue for a long time—until we have some kind of technique or standard. But it's more than that; it's standards around specific business use cases," said Piscini.

"I use the example sometimes of Visa or MasterCard," he added. "Those entities were created because banks needed standards to communicate on the transactions they performed together. On the blockchain, we don't have that yet. At some point, Hyperledger and others will have to work toward techniques and standards at a use case level (payments, settlements, asset transfer, etc.) in order to get higher adoption. That's what the R3 consortium is doing: focusing on financial use cases. It's a great way to move the needle. Business adoption will not rise significantly until we build trust across industries at the use case level."

The fact that IBM and Microsoft are both R3 consortium members is telling in that respect. The two blockchain giants also both joined the newly formed Smart Contracts Alliance, an industry initiative organized by the Chamber of Digital Commerce to advance education, policy making, and adoption around another crucial blockchain use case: smart contracts.

In a fractured, overlapping landscape of open-source blockchain projects and standardization efforts, the Smart Contracts Alliance launched with a founding membership comprised of tech giants, enterprise IT companies, law firms, universities, blockchain startups, and consulting firms. Perianne Boring, founder and President of the Chamber of Digital Commerce, told us why the initiative saw this kind of universal buy-in from the start and how the crowded blockchain ecosystem is working together.

"Big companies like IBM and Microsoft, financial institutions, startups—we know what their business models are and we know what they're working on. Companies are starting to invest a lot of time, energy, and resources into smart contracts," said Boring. "A lot of our members are also members of Hyperledger, R3, but we all have different missions. The Chamber is focused on policy, legal, and regulatory issues; Hyperledger is more technology; R3 is a for-profit company for banks. The huge phase of the alliance for the next 6-12 months is education and bringing the industry together to start defining smart contracts from a legal sense. It's still very early days; this technology will take quite a bit of time for adoption. But we're looking at the big picture."

Microsoft's Gray said the next step as the blockchain matures is the emergence of blockchain data structures or smart contracts woven into the DNA of the Internet of Things (IoT), where devices have their own identity and can act as autonomous agents on their own. He said that's a little further out, but acknowledged it's an area in which IBM has invested a lot through initiatives such as the Autonomous Decentralized Peer-to-Peer Telemetry (ADEPT), or blockchain technology to build a decentralized, secure IoT infrastructure.

"Blockchain can give devices an identity, secure transactions, [and] then create a whole new economy," said Gray. "I use the vending machine analogy all the time. Think about vending machines acting as autonomous agents that do sophisticated logic on how to dispense items and accept payments wirelessly from your device using the blockchain."

IBM's Krishna expanded on that idea of blockchain for the physical economy. He talked about using blockchain for titles and transfer of real estate, services such as auto registration and insurance, and even blockchain's potential to revolutionize international commerce and trading of goods—all tied into the underlying blockchain fabric and keeping a running transaction history for centuries to come.

"If you look at how the global economy moves forward, globalization and global trade have been big catalysts. Now, if we look at the movement of goods, there's still a lot of friction around very old processes likes customs, detentions, bills of landing. I believe blockchain could be a great technology to take away a lot of that friction and really move global trade forward," said Krishna.

Be it Microsoft BaaS or IBM Blockchain, or Hyperledger or Bletchley, IBM's Krishna didn't shy away from the competition. Both in BaaS and open source, the complex layers of the blockchain ecosystem have only just begun to take shape.

"Everyone wants to put the blockchain in the cloud in a permissioned way, with an underlying fabric that's open to everybody and really enables developers. While Microsoft has watched Hyperledger, they don't seem interested in contributing to the open fabric," said Krishna. "I think there are a lot of things on Bletchley that will compete on engineering and quality—tools for analytics and monitoring, data protection, regulation—and IBM is going to compete with Microsoft in many, many industries [on blockchain]. I believe this applies to retail, finance, healthcare, and many aspects of the physical economy."

This article originally appeared on PCMag.com.