As we announced in April at our global blockchain summit, EY is today releasing the Nightfall software into the public domain. You can find a copy of this software on Github at https://github.com/EYblockchain and we hope you will find this a useful contribution to the global blockchain community.

This software release is an important milestone for EY because it gets us closer to our vision and our aspiration to change how the world does business. Very simply, we hope and believe that, a decade from now, the standard way in which multiple companies contract and work with each other will be through digital smart contracts managing the exchange of goods and services tokens for payment tokens. All executed securely, privately, and legally on public blockchains.

This is not an arbitrary vision. It is built on a lot of thinking about what Enterprise Resource Planning (ERP) did within the enterprise and how enterprises themselves have changed dramatically over the last fifty years. If we are successful, we will not just create an enormous blockchain market, we will have a hand in driving a global gain in productivity.

On the occasion of this release, therefore, I would like to circle back and explain the thinking behind EY’s plan and how the work we are doing fits into a vision that is bigger than just growing the blockchain market. (You can also take a look at the video of the keynote talk from our most recent global blockchain summit, now available on YouTube, which covers some similar points.)

Specialization, Transaction Costs, Economies of Scale

The value of specialization and trade, so elegantly explained by Adam Smith, is constrained by the cost and complexity of doing business with other people. The easier it is to work and coordinate activity with others, the larger a firm can become. Economic transaction costs are typically much lower within an enterprise than they are for working with external parties, though the larger a firm gets, the harder it can be to coordinate between parts of the organization.

Information technology has always had a role in cutting transaction costs. Telegraphs, phones, and finally computers made it possible for firms to operate at regional, national, and eventually global levels with a remarkable degree of coordination. The advent and wide usage of ERP systems took that to a whole new level.

ERP turned disparate and distributed organizations into global giants. Starting in the 1970s, companies implemented ERP systems to unify their organizations from end to end at a level far more detailed than ever before, with two very specific goals: first, get all parties in the business on the same page with regard to the facts. How many employees do we have? What is our current inventory and sales? These things are obvious to small companies but were remarkably difficult to determine in large companies prior to rise of ERP because information systems were not unified. Different warehouses had different data systems and even different definitions of things like inventory. Is something that is sold but not shipped inventory or not?

Not only did ERP unify information across the enterprise, it unified process as well. From procurement to hiring to shipping, the implementation of ERP brought with it the promise of global standardization. Before ERP, companies could try to negotiate volume purchase deals, but they were hard to enforce. After ERP, if your company had an exclusive shipping agreement with a single supplier, enforcement was often (though not always) simpler. In some cases, attempts to print a shipping label with a non-preferred shipping carrier simply wouldn’t work.

Reliably enforcing business deals, in turn, led to bigger discounts and growing economies of scale. Scalable digital inventory and procurement systems in the retail sector alone are thought to have contributed about a quarter of US productivity growth in the 1990s, much of that from a single company. (Link)

The result is that companies today are much larger than they were in the past because organizations and processes can be scaled up globally consistently much faster than ever before. This has happened even though deploying ERP is itself an endless and Sisyphean task as mergers, acquisitions and spin-offs assure that organizations rarely remain static for long enough to complete the entire deployment.

The Constraints of Coordination

Even as companies have gotten bigger thanks to ERP, they have struggled with an entirely new problem: the same processes that had been unified internally with ERP are much harder to manage externally.

Take something simple like procurement. Inside a company with a single ERP system, the enterprise can control preferred buying partners. Outsource your manufacturing, however, and suddenly you have a big new complex problem: how can you know how much of a volume discount you are entitled to if you can’t keep track of how much raw material each sub-contractor is buying at any one time. Coordinating purchase orders across those suppliers is difficult because they all use different systems and they are wary of sharing information that might cause a competitor to guess how much work they were doing and for whom.

And while companies’ business models have evolved to do far more outsourcing and partnering, the way they work with each other digitally has barely changed since the 1970s. Back then, the best-in-class method of communicating digitally with suppliers was a system called Electronic Data Interchange (EDI). Basically, enterprise text messages with standardized formats. Contracts, supply requests and shipment notices could be sent back and forth between companies.

EDI works, but not very well for modern requirements. If you have multiple companies working on a single transaction, like making, shipping, insuring and paying for something and you use EDI, you end up with lots of overlapping or out-of-sync messages between companies. EDI messages also don’t contain shared business logic: there is no way to do “if-this-then-that” logic in an EDI message, even though business agreements call for things like “change the price when you hit X volume” and “calculate the insurance rate based on the shipment value.”

There is a scalable way to do this and there has been for about twenty years: centralized, web-based industry portals. For consumers, they exist for shopping, ride sharing, and vacation rentals, to name a few very prominent examples. Why haven’t companies adopted the same solutions? Because centralized systems tend to turn their network operators into market dominators. To be at the center of such a complex multi-industry web of communications is to become exceptionally powerful. Ask any taxi company or small business selling products online though some very well known digital markets. Those marketplace operators know more about the market than any of the individual participants, and they use that information as leverage.

The result: while many industry web portals emerged in the late 1990s and got huge amounts of funding, most of them disappointed largely because enterprise buyers never fully trusted them with mission-critical transactions.

So, Why Blockchains?

So now we get to blockchains, specifically public ones. Blockchains have one trick that is more magical and revolutionary than anything else they do: they can execute transactions and business logic across a network without requiring a central authority to validate and complete that work. Same symphony, same music, no conductor.

Everything that companies cannot do with EDI, and all the things they want to do with web portals are possible with blockchain, without the danger of handing over strategic business information to a potential competitor.

Using a public blockchain, enterprises can create products, trace their history and enter into business agreements with other parties, all with shared rules. When an item is delivered from one point to another, everyone in the agreement can find out, and business rules can be applied consistently across a multi-enterprise agreement. And instead of having to do this by joining a dozen different extra-nets or networks, it can all be done in a single shared blockchain.

The results from widespread adoption of blockchains will be value creation every bit as large as the first round of enterprise IT-driven productivity gains, now spread even further across the economy. For enterprises, this will be a giant leap forward in how they work with each other.

As simple as these things sound, managing business processes across enterprise boundaries is now the single largest activity in most companies, and by far the most complex and costly. It has all the complexity of traditional enterprise work, with virtually none of the automation that has fed into other parts of the enterprise over the last forty years. And, with large size and complexity comes the opportunity for enormous improvements.

To keep things simple, I will cite just three of the biggest sources of ROI we have seen so far. The first is simply process cycle time. Working with Microsoft and applying blockchain technology to the software licensing process on the Xbox network (see press release link here), we have been able to cut the time needed to calculate payment amounts by more than 99%, from 45 days down to a few minutes and we believe, working with Microsoft, that when fully deployed, this system will be 40% less costly than the prior solution.

The second gigantic opportunity we see is around procurement and enterprise spend. Enterprises, especially those with multiple ERP systems struggle mightily to take full advantage of their volume purchase agreements and deals because they cannot track volume and manage all the terms and conditions. With blockchain based smart contracts, it is possible to make sure that every purchase is issued at the best possible price. In a pilot with a consumer products company, we estimated hundreds of millions of dollars in gains would follow from full implementation.

Finally, we think blockchains will revolutionize industry-level supply chains by managing assets and inventory across the whole value chain, and doing so with precision and discipline (See EY OpsChain announcement below). When an asset is represented as a digital token, blockchains take the management of that token very seriously. Adding that inventory token to a new location means it must come out an existing one – avoiding the risk of double counting. Few companies are able to do this internally, never-mind with external partners. Increasing accuracy in the supply visibility can lead, though planning systems, to far less idle inventory sitting around.

There are many more business cases out there, from budgeting to asset management, but just these three examples alone would transform enterprise operations. The business case for this technology is compelling and the advantages for firms that get there first will be dramatic.

Why Public Blockchains Over Private Ones, and So Why Create Nightfall

Private blockchains were created largely because transaction privacy was not possible on a truly decentralized public blockchain until recently. In order for each member of the network to approve transactions, it was necessary to know who was sending (or agreeing) to what and with whom. The result would be that if any company wanted to exchange money tokens for product tokens, everyone would be able to determine how much they bought and what they paid. Given the extremely sensitive competitive nature of enterprise pricing, that made truly decentralized public blockchains unusable.

Private blockchains allow for more privacy and control, but they are not decentralized. Private blockchains have operators and managers and are still likely to empower those operators with advantageous market positions. They are, in the end, only modestly better than a web portal when it comes to reducing the strategic risk of participation in digital business networks. While they can be useful, we believe that private blockchains will never deliver upon their full promise of this technology.

We created Nightfall in order to make transactions on public blockchains secure and private. Nightfall replaces sensitive business information with a type of cryptography called a Zero Knowledge Proof (ZKP). The idea is simple even if the math is hard: instead of showing the actual information, you simply show the mathematical proof that you did something instead. Other parties on the blockchain cannot determine from that who passed what information to whom, but they can use the proof to verify the truthfulness of the statement.

ZKPs are not new, indeed Zcash, a payments blockchain has been around for about 3 years and provides a working proof of the math’s usability in blockchains. Starting in 2017, the core functions needed to use ZKPs on the Ethereum network were added and, at that time, we began the process of making them useful for enterprises. Specifically, we wanted to allow not just the transfer of a cryptocurrency, but any form of fungible payment or non-fungible asset such as tokens representing US$, other currencies, and unique business assets.

Nightfall is the second version of EY’s privacy technology based on ZKPs (First Version Announcement). We released the first in 2018 in October as a prototype and though it was ground-breaking as the very first use of ZKP transfers on the public Ethereum main-net, the early version was not very efficient. Transactions in our prototype cost about US$100 in network power (gas, as it’s called in Ethereum) to execute, far too much for most uses. Since then, we have worked hard to improve efficiency and we have reduced that cost to around US$8-10 per transaction.

At $8-10 per transaction we believe that many business applications will be cheaper to execute on public networks that private ones. Private blockchains require a company to set up and maintain the entire network, a costly proposition that makes this technology the province of large enterprises with deep pockets. Public blockchains, on the other hand, share the fixed costs of maintenance, upgrades and security across a community of thousands of individuals and enterprises.

More fundamentally, we believe than public blockchains are much more secure than private ones. Only public blockchains can promise users immutable transactions and a vigilant global security community. While news of hacks and thefts on public blockchains can be unnerving, nobody really knows if or when private networks are attacked, and consequently problems and risks may never be reported or fixed. The “security through obscurity” model has long been considered obsolete and efforts to sell private blockchains as “higher security” are misleading.

We chose to release Nightfall into the public domain because we believe that widespread adoption of this technology will benefit the growth of blockchain business transactions and we hope that the open source community will adopt and work to further improve this software. We will continue to contribute improvements to this effort as well.

The EY Strategic Roadmap for Blockchain

We believe that public blockchains will do for business ecosystems what ERP did for the single enterprise. Our mission at the blockchain business in EY is to put in place all the tools, systems and services that will be needed to help companies take advantage of this technology and drive enormous productivity gains as a result.

Two central solution platforms are the core of EY’s software and service offerings in the blockchain market. The first is our EY OpsChain platform. This software platform is an interface layer for companies to connect their business operations with a blockchain. Using EY OpsChain, companies can create, buy, sell, and manage tokens and contracts on public or private blockchains. EY OpsChain includes connectors to major ERP systems like SAP, enabling fully automated, integrated business transactions.

We believe that any business process can be modeled with a combination of digital tokens and smart contracts within and between enterprises. In EY OpsChain we have created a number of modules that address specific business processes from tracing food, wine or pharmaceuticals, to managing supply chain replenishment processes, to securitizing mortgages and managing payments. We have also worked closely with Microsoft on specific challenges in scaling this technology, such rapid deployment with a Quorum blockchain on Azure and integration to active directory.

Our second major platform is EY Blockchain Analyzer (link to updated announcement below). While EY OpsChain is about doing business on blockchains, Analyzer is about tracking, managing and understanding those transactions. EY Blockchain Analyzer is used by our audit teams to conduct financial statement audits, but it can also be used by external clients for transaction monitoring and analytics. We are also deploying within Analyzer the tools and calculations necessary to determine tax liabilities from business transactions done on blockchains.

Across both our platforms and in our core technologies, we are making particularly large investments in security for enterprise blockchain users. We will start to incorporate ZKP transactions and contracts in our next version of EY OpsChain and we are starting the early deployment now of smart contract and token testing in EY Blockchain Analyzer (Testing Announcement). The testing functionality in Analyzer will allow users to validate that tokens and contracts conform to known best practices for definition and operation.

We are also investing in solutions to help clients address and mitigate the risk of token theft. EY Blockchain Analyzer can be used for forensic purposes (and has been with some high profile cases) and we have also developed a technology called EY Dye Pack that can be added to ZKP-based transactions and tokens. EY Dye Pack uses ZKP software to identify stolen tokens, prevent their usage, and issue replacement tokens to the victims of thefts, analogous to those exploding dye packs we all see in movies about bank robberies.

Maybe Not The Revolution You Were Expecting

Public blockchains will be a productivity revolution, just not the kind you were expecting. This is not the burn-down-the-banks and end-the-tyranny-of-money kind of revolution some were hoping for. It also lacks the terrifying (if rather unlikely) possibility of AI-based super-intelligence rendering humanity obsolete too. With blockchains, all we have to lose is our administrative complexity and transaction reconciliation paperwork.

Efficiency and integration may be dull, but they are powerful limiters of our potential. Done right, our hope is that blockchain not only creates enormous benefits, but distributes them in a fair manner – instead of delivering enormous gains to centralized market operators, decentralized networks will share the benefits of digital collaboration back to all the market participants. Though recent history does keep suggesting that optimism about the broader social impact of technology is frequently misplaced, that will not deter us from trying again.