The Big Interview: Ernst & Young: The Future of Supply Chain is Blockchain

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Blockchain technology has the potential to improve supply chain security and immediacy at all levels — transparent, tamper-proof records of transactions in inventory management is no mean feat.

There are more than 70 Layer 2 networks either running or announced on the Ethereum blockchain, and consulting firm Ernst & Young is focusing in on enterprise use cases and privacy.

The company has developed a privacy ecosystem tool, Nightfall, and an enterprise software application that uses private and public blockchains for companies to manage and purchase renewable energy.

Techopedia spoke with Jeff Wong, the firm’s Global Chief Innovation Officer, and Paul Brody, Global Blockchain Leader, about how the combination of blockchain and artificial intelligence offers value for applications that need efficiency, transparency, and security while maintaining privacy.

Key Takeaways

  • There is a place for private enterprise blockchain networks in testing, but there is a limit to their adoption as companies do not want to use their competitors’ chains.
  • Without privacy features, large companies will not use public blockchains to avoid disclosing commercially sensitive information.
  • Zero-knowledge proofs have important implications for enterprise blockchain adoption as they preserve decentralization and privacy.
  • By pairing the intelligence with the verification engine, AI and blockchain can facilitate smart agent monitoring agents that optimize supply chain management and help companies maximize profit margins.

Public vs Private Blockchains

Q: There is some debate about whether companies should use public or private blockchains. Do you have a preference for public, or is there a place for private networks in certain applications?

Paul Brody: Everybody wants to be on a private network, but the main reason that they want to be on a private network is that, ultimately, if they control the network, they can set up some model where they can monetize the network itself.

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And the problem with that is that nobody else wants to use it — Bank A does not want to contribute to the profit pool of Bank B by funding their transaction processing cost.

 

So, everybody wants to start their own blockchain, and nobody wants to join anybody else’s. Private blockchains have a real difficulty taking off.

Private blockchains are occasionally useful for testing. But it’s cheaper, simpler, and much more appealing to deploy on a public blockchain.

The analogy I often give to clients is that we don’t build private networks anymore. All the stuff that we use today is just VPNs that we’re running over the public Internet.

So, do you want to build your own blockchain, or do you want to use the one that’s out there and way cheaper? I think slowly but surely, that’s resonating.

What almost always happens is [companies] try a private chain, and they come away saying it worked technically, but we couldn’t scale it because of the partnership issues.

Jeff Wong: If you want the business outcomes and you say, “I’m going to take a private blockchain approach to this,” 99% of the time, there’s a cheaper and easier way to do it.

If you can get the outcomes in a cheaper, easier way, but you want to be private with the limitations of what private can do, then you should probably pick a different pathway.

And that’s what we noticed early on in all the very early pilots—and this is many years ago—is that they all went down this path and said, “Wait, there’s an easier, cheaper way. We don’t need to use the fanciness of a private blockchain,” but they weren’t getting the benefits of the public.

We’ve seen the learning of those early experiments has now tilted as a whole toward public blockchains.

Early on, they just played off the word “private” and they’re thinking “privacy”, but that hadn’t been solved yet on the public blockchains. Our contribution really helped leap forward the ability to do that and once that happens, everything becomes clear.

Privacy Technologies Essential to Enterprise Blockchain Adoption

Q: How important is privacy for enterprise blockchain use?

Paul Brody: To make blockchain useful for large enterprises, the big problem that has to be tackled is that while blockchains are very cool in terms of their ability to make tokens and do smart contracts, they don’t, by default, have privacy. Without privacy, large companies would not want to use them because it would involve disclosing very sensitive information.

Over the last six or seven years, we have invested heavily in developing privacy technology. In the last six months, we have reached the point where we can conduct complex multi-party business transactions with privacy, at scale and efficiency, on a public blockchain, including payments and asset transfers.

This is starting to really open up the aperture of the kinds of things that we can do with clients.

Q: How do privacy-enhancing technologies fit into this?

Paul Brody: If you think about a business agreement, there’s two parts — it’s always: “I have money and I’m exchanging my money for your stuff under the terms of an agreement”.

In the end, what we ended up having to do to make it work was build two kinds of privacy technology based on the same fundamental mathematics: zero-knowledge proofs.

It has huge, profound implications for all kinds of things, but it’s particularly necessary for blockchain because it’s the only way to preserve decentralization and privacy.

We created two things. The first is called Nightfall, which is a Layer 2 on top of Ethereum that allows you to put tokens into the system and move them around.

So, if I am Company X and I want to buy a bunch of digital switches from Company Y, then Company Y could create tokens that represent digital switches, and Company X has tokens to represent money — I put them both into this privacy space, and we have an exchange.

This works in the blockchain ecosystem because many companies share this privacy space. For example, you can know that Company X is transacting with somebody, and you can know that Company Y is transacting with somebody.

But because there are so many other people in this ecosystem, you cannot reverse engineer to say this company specifically paid this much money for these switches.

Corporations are very sensitive to this — they don’t want you to know what they’re buying, how much they’re paying, and where it’s going.

You can do this in a very simplistic way with a mixer on a blockchain. But the problem is that mixers only work for completely fungible things like money. They don’t work for non-fungible things, and you can’t hide them in a mixer; you can only hide them in a zero-knowledge space.

That takes care of the money for stuff. But you also want the terms of the business agreement.

We built a separate tool called Starlight, which lets you take advantage of a regularly programmable smart contract, such as a 5% discount after you spend more than $1 million.

I can turn it into a zero-knowledge circuit, which is a logic execution layer under zero knowledge, and then I can make these two work together so that the end state goal is that I can execute any business-to-business agreement under privacy.

Both of those came out of our study of how businesses interact — what do they want to do with each other? Basically, they buy stuff from each other and have to figure out how to do that at a low cost and in a way that is robust in terms of privacy.

Privacy — not anonymity. Our goal isn’t to enable anonymous payments.

If you’re a regulator, you can go to a company, if you have probable cause, and say: “Show us proof of with whom you are transacting”.

With zero-knowledge blockchain systems, I can show you the details of who I’m transacting with and what I’m buying without compromising anybody else’s privacy.

Because I have mathematical proof, I can prove to you that the information I’m giving you is truthful.

Jeff Wong: For an enterprise, they don’t have to worry about all the complexity of the mathematics and that it’s a blockchain system; it just gives them the outcome.

I can exchange on a public network with nobody knowing what I’m doing, and I can have a smart contract so I can automatically pay, or I can automatically get my discount — everything is verified immediately because it’s all the jointly agreed ledger.

They get all the characteristics they need with Paul’s team doing all the complex math implementation behind it.

Q: Is that message getting through to clients about how blockchain and privacy technologies can work together for compliance systems?

Paul Brody: It’s working in compliance systems, but the ROI that companies are often interested in usually has more to do with how they execute business agreements efficiently.

Companies are way better at negotiating deals than they are at implementing them. What they see as valuable is this automation at scale.

It’s interesting because it’s really hard to sell companies compliance tools. They don’t really believe that they’re non-compliant, and they don’t want to believe they’re going to get caught or fined.

But you can prove to them that they are wasting money on administration, and so, strangely, compliance is often sold as a secondary benefit to operational efficiency.

Jeff Wong: A lot of this is managed by spreadsheets and lawyers arguing with each other and that is not an efficient way to get your discounting, make sure you’re tracking things, etc.

Blockchain is basically the only solution that provides an efficient, visible way, verified amongst multiple parties simultaneously, and that’s what companies want.

The next generation of supply chain is not just about what you do within your own company but how do you think about it as an entire chain with multiple parties.

The pairing we have is what blockchain can do, matched with what AI can do, which is forecasting, planning, and communication.

When you pair those two together, you really provide yourself with a glimpse into the future of what a supply chain interaction between companies should be. This is what companies want.

The technology has historically been unable to do that, and we’re at the beginning phases of achieving it.

Blockchain and AI in Real World Enterprise Use

Q: Given the many potential benefits of combining blockchain and AI, how can they work together in the real world?

Paul Brody: There are a couple of different ways to look at it. We have a real-world integration where we use Co-pilot for Github, for example for software development.

AI is fantastic at software development; blockchain is a software business. We are also seeing AI take hold in any kind of crypto and crypto asset trading.

These are good examples of where AI works really well now, because what we see from a lot of AI tools is that when you train them properly, they’re mostly right most of the time.

For example, in asset trading, triggers don’t need to be right every single time. To make money, you have to be right more than you are wrong.

Software development is another good example. You don’t just take the code and pop it into production. You take the code, test it, debug it, and then put it in production.

In these kinds of use cases, we can take advantage of the fact that AI is more right than it is wrong, but there are still some human filters and verification tools.

It’s been tougher for something like self-driving cars because you really don’t want a car that is mostly pretty good at driving; you want a car that is extremely good.

It’s not impossible, but it’s much harder, so practically speaking, the initial integration occurs in analytics, software development, and trading.

The beauty of blockchain is that it’s a particular type of transaction processing tool designed to be extremely reliable and tamper-proof. Bitcoin is a great example. It involves moving around money, but the entire infrastructure is designed to ensure that if I give you a Bitcoin or a part of a Bitcoin, there’s rigorous reconciliation across the entire network.

If I can attach extremely rigorous transaction execution to lots of good insight, then I can do a better job.

The supply chain is a good example. Companies do these big top-down plans, but when you get down to an individual store level, there’s not enough human brain power in the company to worry about the supply of Coke cans at a Safeway store in Oakland.

But with AI, I can have a smart agent monitoring just the supply of Coke cans to a supermarket in Oakland. And you can start to imagine that occasionally, it might be wrong in terms of forecast or planning, and suddenly, three extra pallets of Coke show up.

But if most of the time you are right, you can make a lot more money with less inventory from that kind of management.

But it would be way premature to say that we’re seeing a ton of really good examples in the real world, mainly because each of these fields individually is still quite immature. For them to work well, they have to mature independently before they start working really well together.

Jeff Wong: It’s early, but the example of AI and crypto trading where you pair up the intelligence of an AI-driven training system with the verification — because you’re in a trading system where you have to be able to verify across — and then you can start to see that’s the alpha version of what we’re describing in the supply chain, the intelligence matched with the verification engine.

The initial versions of what we think will happen in the supply chain are already there; now, we just have to take that same concept and apply it over here. But it is early because people are still exploring these concepts and developing these technologies underneath.

Q: At this point, is it about education to help companies understand how blockchain can be used in supply chains?

Paul Brody: The EU has a rule that goes into effect next year. If you’re importing agricultural commodities, for example, you have to prove that you have not engaged in deforestation in order to produce them.

A big part of the problem is that many people don’t really understand the complexity of a supply chain. Many people who trade or work in the financial markets don’t have experience with the complexity of plumbing; they don’t realize it’s deforestation certified and carbon neutral, and all of those things require tonnes of documentation.

Jeff Wong: At that point, what we’re talking about is identity or identities associated with a pallet of goods and the ability to attach a bunch of documents. This cuts across many different systems, different verifications and agencies.

Different countries have different rules. You could try to build a massive system in the sky that knows everything, but that is far more difficult than the decentralized network.

Blockchain provides the best answer when dealing with the complexity of a multinational, multi-system output, and people see that benefit, which is why it’s becoming increasingly exciting as the years progress.

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Nicole Willing
Technology Journalist
Nicole Willing
Technology Journalist

Nicole is a professional journalist with 20 years of experience in writing and editing. Her expertise spans both the tech and financial industries. She has developed expertise in covering commodity, equity, and cryptocurrency markets, as well as the latest trends across the technology sector, from semiconductors to electric vehicles. She holds a degree in Journalism from City University, London. Having embraced the digital nomad lifestyle, she can usually be found on the beach brushing sand out of her keyboard in between snorkeling trips.