Perhaps even more interesting than the blockchain project unveiled this week is how it came to be — and who is behind it.
Here's a quick recap for anyone still recovering from the Federal Reserve fest (you know, back in the analog world of monetary policy): a consortium of more than a dozen banking and technology companies — ranging from old schoolers like IBM and JPMorgan Chase to new schoolers like Digital Assets Holdings — unveiled plans to develop open-source software that can serve as the basis for new applications.
If the so-called Open Ledger Project works, it could offer banks interested in blockchain technology a user-friendly starting point to work from. A blockchain is a type of shared, trusted ledger, originally created to track bitcoin digital currency transactions, and it allows parties to transactions to maintain records in a decentralized way.
What distinguishes this effort is its broad range of participants, which hail from different corners of the business world.
"There's a critical mass of organizations that have the resources to fuel this, and it's a diverse set of organizations, so they're all going to keep each other honest," said Jim Zemlin, executive director of the Linux Foundation. "This is a breakthrough technology a lot of people want to get to market faster."
Its challenge is clear: making sure that the coalition functions more like a laser-focused championship football team and less like the office holiday party where everyone overpays, makes lots of menu demands that are never satisfied, and leaves hungry.
Ari Juels, a professor at Cornell Tech in New York City and a member of the Initiative for CryptoCurrencies and Contracts (IC3), also sees the mélange of stakeholders as an advantage, especially the fact that academics and startups are among them.
"The rigor and expertise in cutting-edge cryptographic and distributed-systems tools that academic scientists can bring to such a project are important," he said. "Standards … are important, but so too is ensuring use of the best technologies in a rigorous way and avoiding the pitfalls of an ad hoc approach in cryptosystem and distributed-system design."
The Open Ledger Project begins with several key gifts, though ultimately business interests are at its heart.
Digital Asset Holdings (led by Blythe Masters) plans to donate code that came from a distributed-ledger company called HyperLedger that it bought last year.
In January, IBM will contribute cryptography and smart contract code it has been developing for two years. Smart contracts are computer programs that can automatically execute the terms of a contract.
And the financial technology firm R3 is contributing a new financial transaction architectural framework designed to specifically meet the requirements of its global bank members and other financial institutions.
The project is backed by a pack of technology and financial services players that includes IBM, JPMorgan Chase, Wells Fargo, State Street, ANZ Bank, Swift, R3, Credits, Cisco, Digital Asset Holdings, Accenture, Intel, London Stock Exchange Group, Mitsubishi UFJ Financial Group, IC3, the Linux Foundation and VMware.
"Many firms are evaluating blockchain technology for the transactional, transparency, and settlement innovations it may hold," said Steve Ellis, head of Wells Fargo's Innovation Group. "The open-ledger project enables institutions across industries to collectively explore how to create value, reduce cost and improve accessibility to financial systems and services for customers."
Indeed, in a separate announcement, R3 announced Thursday that it has added new bank partners to its own blockchain consortium; it is now up to 42. New members include U.S. Bancorp, Northern Trust and Westpac. R3, which launched in September, has focused on building a network of bank supporters.
All are trying to help banks and other companies use some of the qualities of the blockchain to build efficient applications in areas like trade finance, securities settlement and cross-border payments.
The Open Ledger Project's underlying goal is to weave a "fabric" for blockchain applications — a common code layer meant to help get diverse parties working with the same cloth.
It seeks to provide a standards-based layer upon which other blockchain applications can be built, with features like permissioning and security built in. The point is to remove complexity from blockchain application development and allow different companies to quickly create compatible blockchain software. Such programs could be used to log transactions between banks or international businesses, or even let banks and businesses share the same system of record.
"Our hypothesis is that the blockchain will be transformative in the financial services industry," said James Wallis, vice president of global payments at IBM. "By its very definition, it's where you have different parties conducting business with each other, transferring assets across borders, between enterprises, and therefore interoperability is critical."
IBM and the Linux Foundation agreed that to achieve such interoperability, what was needed was a fabric layer that could be used to create compatible applications, and an open-source community to build it.
The mission is: "let's try to get to a standard for the world — all the interesting and creative application use cases can be built on that base layer as one standard with people like IBM and other folks contributing code to the Linux Foundation."
The fabric layer will include code that handles permissioning — the setting up of rules around roles, business policies and such. It will provide some basic security and confidentiality features for protecting members and transactions.
The fabric will be available to banks (and other companies) as a free, open-source product that they can use as a foundation for building their own applications.
"They may need other assistance," Wallis said. "Some banks are more self-sufficient than others. The idea is a bank can focus on its business application, and not worry about the deep level plumbing of how the blockchain will operate on top of the Internet. This can help them get off to a fast start on app development. They don't need to get down to this level of code writing. It's an accelerator."
Zemlin at the Linux Foundation said the fabric layer is needed because creating breakthrough technologies that enable more efficient transactions "requires more source code than any one company can run by itself."
"You need a core fabric in terms of a base distributed-ledger code," Zemlin said. "Then you have people taking that core structure and adding value on top of it."
Zemlin compares it to the Linux kernel that was used to build the Android phone, the servers running the New York Stock Exchange, Facebook servers, and some televisions, among other things.
"In order to enable these technologies, you need to have a set of code that's nondifferentiated," he said. "That's what we're seeing with these bitcoin technologies."
Asked what the Linux Foundation's role will be in this project, Zemlin joked, "We're the roadies.
"What's important here is to consolidate a development community around a shared code base that can get out to the world faster to get all these wonderful things to be built on top of this," he said. "That's what open source does extremely well. We're a facilitator of that joint software development."
One time, the Linux kernel received an improvement from a consumer electronics company that reduced power consumption, and that saved the Linux-based data center behind the NYSE hundreds of millions in power and cooling costs, Zemlin noted.
"That kind of cross-pollination of ideas is exactly what will happen here," he said.
The many potential uses for blockchain technology in banking have been well described in this publication and others. They range from the use of smart contracts in trade finance to the settlement of securities to the tracking of loans to cross-border payments.
Any transaction that calls for virtual contracts, such as supply chain management, would be well-suited to blockchain technology, Zemlin said.
"Where we see the biggest benefit is where you've got a process that today has some degree of manual work, multiple parties and is basically inefficient," Wallis said.
Trade finance is an oft-cited example. "It's an old process, it's very wasteful, it takes a lot of time for exporters to get their money," Wallis noted.
The blockchain won't work for every type of application. It's not designed for high-speed transactions, for instance. "It's not going to be a replacement for the really high-volume payment schemes like the card networks," Wallis said.
"I think some of the best uses of blockchains are somewhat mundane on the surface: transparency and durability of transaction records," Juels said. "Using advances in cryptography, it is possible to achieve a delicate balance between general transaction confidentiality and selective disclosure to entities such as auditors and regulators, which ideally will result in more streamlined market oversight."
Blockchain initiatives are being announced with astonishing speed and frequency. There appears to be a race underway for hearts, minds and big-name partners.
"We're witnessing the early stages of a typical technology cycle with disruptive components," said Zemlin. "The blockchain pioneered by bitcoin cryptocurrency has received a lot of attention based on a well-documented argument for how transformational and powerful the blockchain can be. A lot of extremely smart people and smart investors are investing in this technology, and there are opportunities in the financial sector to leverage this technology for a variety of different things, including improving the efficiency of financial system."
Some people are comparing blockchain technology to the advent of the Internet itself — that the technology will become so pervasive and powerful, it will be the technology backbone to much of what businesses do in the future.
This is a little hard to believe. It is easy to see how blockchain technology could reduce or eliminate some work that is done by the middlemen recordkeepers in the industry — say the DTCC for securities settlement or MERS for mortgage records.
And it could eliminate many cumbersome steps, say in international payments. But the consensus and cooperation needed to get many financial services companies working off the same page technology-wise and policy-wise will take years to execute, and by then some of the blockchain frenzy will surely have died down.
Editor at Large Penny Crosman welcomes feedback on her column at firstname.lastname@example.org.