Digital Economy: Applications of Distributed Ledger Technologies Workshop

2 June 2016, London 1. Introduction to the call 2. Introduction to distributed ledger technology and functionality 3. Lego blocks exercise: representations of value 4. To DLT or not to DLT? 5. Everledger 6. Use case sessions 7. Q+A on the call From improving government services to enhancing healthcare, the transformative potential of distributed ledger technology (DLT) extends far beyond its current Bitcoin and digital currency uses. Following the recent Government Office of Science report, Distributed Ledger technology: beyond blockchain, RCUK's Digital Economy Theme has put out a call, managed by the Engineering and Physical Sciences Research Council (EPSRC), for the most creative, co-created and interdisciplinary ideas for transformative uses of DLT. Around 50 interested parties gathered in central London for a day-long workshop to hear from DLT experts, network and discuss ideas for feasibility studies around the call. 1. Introduction to the call Tracy Keys, Digital Economy portfolio manager, ESPRC, outlined the funding call. DLT is a new area of interest for RCUK and, in the first instance, it is looking for feasibility studies. RCUK can offer £3m to support five to ten projects with an 18-24 month timeframe and it expects them to be interdisciplinary, to tackle the sociotechnical challenges holistically and to be co-created with users. There is a two-stage stage process for applications. The first is an anonymous outline process, aimed at encouraging adventurous and creative projects. A simple four-page case for support will be assessed by an expert panel which will not know the identity of the applicants or their institution/s. The second stage, for those selected, is an interview with full proposal. Tracy highlighted that user engagement is crucial. There are already some groups lined up who are interested but applicants should not feel limited to these. They are:

• Defence and security agencies (contact through EPSRC). • Lloyd's Register Foundation (contact through EPSRC). • CREDIT network – will facilitate interactions and help to guide on what else

should be done in this new area (contact through principal investigator Roger Maull, Surrey).

• Digital Catapult also has a call open around seconding academics but applicants need to be quick as it closes on 19 June (contact Sam Davies, Digital Catapult).

Full details are in the call document [https://www.epsrc.ac.uk/files/funding/calls/2016/applications-of-distributed-ledger-technology/], but the crucial dates are: 2 August: deadline for outline proposals 3-7 October: sift panel 1 December: deadline for full proposals 6-10 February: interview panel February 2017: funding decision 2. Introduction to distributed ledger technology and functionality Phil Godsiff, an early career researcher and accountant who spent 35 years working in banking - "so I have the morals of an alley cat", he joked - gave a swift overview of the blockchain. There is no one consistent definition yet, but "networked, consistent sequence duplicate record of transactions" is a good starting point, where those records may be data or software. It's a bit more than a big database. Shared ledgers provide robustness and integrity. Out of those qualities we get innovation and flexibility – and that's what we're really looking at in this call. Phil drew on a presentation by Ian Stewart from Imperial College and his "nonsense watch" for the blockchain. Apparently, you can tell people do not really understand the blockchain if they say something like "we hate Bitcoin but love blockchain". However, unless you seek out the operator or miner remuneration, it is very difficult to get a blockchain that will work. As nonsensical is the claim that "the block chain is efficient". One of the things that makes the blockchain robust is that it's not very efficient. A more interesting way of looking at it is that "Bitcoin is R&D for the blockchain". Phil gave a quick run through of the types of distributed ledger. A public (anyone can use it) distributed ledger may be double permissionless, with integrity maintained through on-ledger reward (eg Bitcoin), or permissionless, with integrity maintained through off-ledger incentives. A private distributed ledger (only useable by a selected group) may be permissioned, with all group members maintaining integrity, or double permissioned, with only privileged group members maintaining integrity. Unpermissioned ledgers operate by “decentralised competition”, which leads to issues of democracy and consensus. Permissioned ledgers operate by “centralised fiat” which reduces availability and resilience. These are all considerations to think about when deciding the type of blockchain to use. You can also think of the blockchain as a "secure list", with the qualities of availability, resilience, non-repudiation and recovery. Confidentiality, authentication and anonymity are properties of data you might write to the ledger/record. The list element is particularly interesting, said Phil, as a list either consists of things that have been done or is a to do list. Smart contracts fit here. Use cases are crucial, and Phil suggested some areas to consider that might be of value:

• Inter-organisational record keeping – not asset tokens but information and data.

• Lightweight financial systems. • Multiparty aggregation to make sharing easier. • Provenance tracking – digital tokens and virtual certificate of authenticity and

distributed trust. He also suggested some questions that might be useful to consider:

• Do you trust everybody in the chain? (Would it be good to have a structured single version?)

• What value do the intermediaries add? (Would peer to peer be better?) • Do you need a shared set of rules about what "good" looks like, enforced by a

group rather than a single owner? (And how can you trust them?) • What is the nature of the assets being moved around? (And the link to the

real world?) Finally, is the blockchain a fad? Is it just cloud computing again? Phil quoted Bill Gates: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction." 3. Lego blocks exercise: representations of value Chris Speed, of the Block Exchange workshop at the University of Edinburgh got the room energised, talking, bartering and, ultimately, revealing their souls with a fast-moving exercise involving Lego. The goal was to find out what can happen if you free up your mind about what value really means. Read more about Chris's ideation workshops on value in his blogpost.

4. To DLT or not to DLT? Catherine Mulligan, associate director of Imperial College Centre for Cryptocurrency Research and Engineering, ran through a couple of her centre's proof of concept projects and then shared a very useful flow chart aimed at helping participants decide whether DLT is an appropriate solution or not. The first example was the centre's work on protecting critical infrastructure, flagging up when changes are made on a sensor network (sensors are embedded into the urban environment in smart cities). They ran a crackathon in 2013 by setting up a number of sensor networks and inviting in hackers to try to hack them. Admins were asked to let them know when they noticed they had been hacked. None of them noticed. It's possible to use DLT to flag up warnings that something has changed on the network that should be investigated – every step of the supply chain can be stored on the blockchain. In this use case it is important to understand what kind of integrity breach stored or captured on the DLT that you want to be alerted to – and what the privacy implications might be. Cathy's second example involved smart contracts for government: a solution for a smart contract and web interface, creating a more streamlined process for local authorities by transparently recording transactions around waste collections and management. Residents take photos and upload them, contractors view their contracts and see how everything is functioning, if something is wrong e.g. if garbage is not collected, they can go and do it, local councils collect the data on contract performance and, using Ethereum, can deduct money from the contract if standards have not been met. It is a service-level agreement enacted in Ethereum. An inanimate object – the smart bin with sensors that detects when it has been collected – becomes part of the supply chain and has a role in the contract. At the heart of Cathy's presentation was the recognition that there are places where using DLT is ideal and there are places where it would be better just to use a database. How do you decide? The flowchart below offers a pathway to a solution. To DLT or not to DLT: the flowchart

Q&A: Q: If my initial outline application goes through the flow chart and it comes out as a no – then will my application get thrown out? A: No, this is just a thought piece! Q: Why is "permissionless private" missing? A: The whole point of permissonless is that it's open so it can't be private. Comment: What if it were encrypted? You can't just dismiss it. Q: From a lawyer - for certain transactions every part of the system has to be FSA compliant so, if it's a public network, every part has to have FSA approval. Does this have to be considered? A: I focus on applications outside of fintech but yes there are some issues there. That's where you go permissioned/private. That's where the banking consortia are going so they can do that FSA approval. Q: I'm interested in the capabilities for extension of DLT. My idea involves transactions in milliseconds but it does comply with all the other properties – in that particular case, is there a capability for developing that case? A: Yes, I think so. 5. Everledger Leanne Kemp, founder and CEO of Everledger, introduced her blockchain startup and outlined the big issue for the blockchain more generally – scalability. Everledger is premised on provenance. Traditionally, provenance of luxury goods – diamonds, watches, art, jewellery – is locked in paper. Paper that gets put in a drawer and then lost. Crime pays when provenance is broken – think theft, fraud and cyber – and it affects us all as it costs insurers £50bn annually. Everledger tracks and protects items of value, and operates in the blockchain (both Bitcoin and its own private stack). It works with the major diamond certification houses to create digital thumbprints of diamonds – it now has 980,000 of them certified and in the blockchain – and works with insurers and Interpol to track diamonds. It creates smart contracts enabling a system of warranties for the provenance, ownership and custody of goods. The diamond pipeline is a value chain that runs from diamond dealers to cutters and polishers to jewellery manufacturers to retail stores and finally to consumers. The value added along the way is impressive, as $15 billion in rough diamonds becomes $24 billion in polished diamonds, which in turn goes into diamond jewellery with a retail value of $72 billion. It also faces challenges: fraud, synthetics, conflict stones (diamonds taken out of war zones) and double financing of the pipeline. Tech can help. Where lasers are used to remove serial numbers from stones, the digital thumbprint remains. Where diamonds are graded and priced then regraded, or cut and repolished, tech offers the ability to have portions of those stones mapped with their DNA to find out which stones came from where. New, applied tech is

coming in – high definition photography, nanotech, molecular science – that makes the ability to detect rogue diamonds affordable. The issue for Everledger and the blockchain is scale. A million diamonds might sound impressive but it's actually trivial when 16m stones are authenticated annually by GIA - and that's just one certification house. The New York Stock Exchange has 11,500 transactions a second. The Bitcoin blockchain has only been pumping two transactions a second. Leanne explained that everyone is aware of the problem of scalability and is trying to resolve it. The blockchain roadblocks to enterprise adoption include:

• Throughput: two transactions per second isn’t enough • Latency: 10 minutes is too slow • Capacity: 50GB is laughable for a database • Scalability: Performance decreases as nodes are added • Query: Database is not queryable

To run across all 80 countries and sit across all major exchanges, Everledger needed a scalable blockchain database with high throughput (>1,000,000 writes/s), low latency, high capacity (petabytes with each node adding 48TB), powerful query capabilities and rich permissioning to enable enterprise blockchains. So Leanne started working with BigchainDB to achieve some of those throughputs and then worked with Google, which resulted in the possibility of blockchaining a distributed database – a decentralised blockchain stack that is private stack and open source. Finally, Leanne was keen to emphasise that this tech is not just about diamonds – by changing the way we think and trade it can be used to solve some of the problems global trade causes and, instead, encourage ethical trade. It could reduce conflict trade and blood diamonds and, as an enabling tech across the platform, it could tackle other issues, such as the ivory trade. Diamonds are just the start. This tech should be applied to real world problems, Leanne urged. Q&A: Q: Is one of the challenges around the picture/biometrics of the diamond? A: We are starting to solve that by using facial recognition technology. More challenging is art - as it ages, the paints and oils change. We're not experts in art, we're experts in tech and so we have had to partner with art experts to learn about pigments etc. We're an emerging tech company, not a Bitcoin company, so we use the blockchain, AI and smart contracts to solve problems. Q: Will you stop using blockchain? A: I've had 25 years in emerging tech. Blockchain is still so immature yet society is putting so much pressure on it. There's a lot of work going on and, if you're a start up, you may not be able to make a decision in the short term. However, the essence of this tech is footprints, its distributed nature. That's unlikely to change through the evolution of its growth. We need to peg ourselves to that. Q: What about the last mile problem – is there a solution to corrupt officials in mines passing conflict diamonds off as ok? A: The problem isn't with the miners but with the banks and insurance companies. They should bind the financial certification with the ethical certification. If they did that

a lot of this problem would be solved. These companies have to be financed so it's those companies that are at fault. 6. Use case sessions In seven groups - health, arts 1 & 2, government (things), government (people), supply chain, smart contracts – participants explored possible use cases for DLT. They outlined the challenge or premise, suggesting use cases and any possible issues. The discussions were informed by some of the points made in Cathy and Leanne's presentations – that DLT shows great promise but is still in its infancy, and that it may be included in a list of possible solutions to problems, even if it isn’t the solution. Research areas to look at were based on: what can this technology do (potential applications); the technical engineering side of it (latency, security, legacy infrastructure); understanding of how people will respond to this technology and ideas of trust – the interface of where science meets values, and the need to carry people and their values with you. Supply chains

• Premise: what's the value added from DLT? Looking at the basic economics, where could DLT maintain or grow the market?

• Use case: food and the food supply chain. Using DLT to trace food as it goes through the food supply chain would have significant value for the consumer due to the need to know provenance for reasons of safety, religion, allergy, ethics etc.

• It's possible to look at the supply chain of food and develop a pilot to look at potential value.

Arts 1

• Challenge: distributed creation where it may be distributed across many people through time (e.g. music first composed then recorded and then produced) and across space. There needs to be a lightweight way of recording provenance. Also moral rights – do I want my art to be used to popularise something or not – are smart contracts needed?

• Use case: DLT as a lightweight means to record rights and attributions. Make it easy for honest merchants and consumers but also remove the "it's too difficult" argument from the recalcitrant consumer. This is important for the artist who is being short-changed by people saying "we can't pay you directly".

• Potential problems: worried about the transaction rate, though low requirements for latency etc - various problems for economists and policymakers. Would HMRC accept blockchain as evidence of VAT payments?

Arts 2

• Challenge: how to intrinsically record ownership and provenance at source in music and video.

• Use case: the music or image is captured, all the provenance data is recorded and wrapped up in the metatdata or put in the art itself and then recorded on DLT. Another case looks at how these assets change over time e.g. when music is remixed or images processed. How can smart contracts track those changes and see what has been done and at what time? Perhaps have a hook in the file and ping off requests as and when needed.

Government (people)

• Challenge: agency interactions with citizens. Emphasising the obligations of both agency to citizen and vice versa. Proof of activity and proof of identity. Could DLT record proof of activity and proof of identity?

• Use case: a citizen going to a hospital and being told that they have rapid degradation of their eyesight and the obligation to report that to DVLA for driving licence. Or, obligation of hospital to report to social services if there is suspicion of some kind of abuse.

Health

• Challenge: health is extremely complicated. There are restrictions around sharing health data so the first research project needs to be between regulators and tech people to allow health databases and DLT to interact and satisfy citizen concerns over privacy.

• If we can solve the data problems and imagine a blue sky future starting from scratch, the goals would be to track the citizen's journey through health and wellbeing and nutrition.

• Use case: non-reporting of drug trials. An area that could benefit from the transparency of DLT. Could even encode details of the trial into the system and the background information then follow the whole chain of events through many years of a trial, ensuring provenance and quality.

Smart contracts

• Use case 1: Opted for tax and looked at automated VAT returns to prevent carousel fraud. Then looked at automatic capital gains tax - if someone can work out how to monitor how house prices rise (or fall) then that could be could automated.

• Use case 2: Manufacturers of cars and emissions controls – if hooked up sensors and tracked all the cars coming in to a city, could tax them if they fall below standards. Could collect the CO2 emissions and use an algorithm to see if they are falling below threshold levels and that triggers a payment, made automatically. It could all be done through blockchain.

Finance

• Challenge: finance has a problem with access, it's an industry where there are large financial incumbents and there is a barrier to entry and to competition.

• Use case: DLT could democratise finance. Could separate the individual and institution completing the transaction with the transaction itself and impose regulation on that transaction rather than on the institution, reducing the burden on smaller institutions, broadening access to markets and allowing more people to participate. It would result in distributed stability by broadening the pool of actors and less consolidated risk.

• Problem: The use case relies on well-operated smart contracts. Would it be possible within current legal framework?

Government (things)

• Challenge: robust, auditable state records where any changes to records are more visible and more auditable.

• Use case: any government record where there might be an incentive to corrupt an official to change the record and where access to the record is a public good. Example of Public Record Archives and using smart contracts

about when to release them, electoral information to prevent electoral fraud and budget infringements.

7. Q&A on the call Q: If it's anonymous, how to fill in the Je-S form? A: Fill in the names etc for EPSRC use – it will be redacted before it goes to the panel. Q: How precise does the request for funding need to be at the early stage? A: Plus or minus 10% of what will be in the full proposal Q: Is 300-600k the EPSRC contribution? A: Yes. Q: Are there people here with an interest in public sector applications? Is it limited to partnerships with security, Lloyds, the credit network etc or is it open beyond that? A: Those are the partners who have approached us already but they are not the only areas we are expecting to see. It's really very open. Q: This tech has great transformative disruptive potential so when we are seeking partners we need to co-design these projects so should we going away from large institutions to small start-ups? A: Yes, we would endorse whatever is appropriate. Q: Who is eligible? A: All UK HEIs that receive grant funding from one of the UK funding bodies. Research institutes connected to RCUK. Other independent research organisations. That's the group of people who can receive funding. (http://www.rcuk.ac.uk/funding/eligibilityforrcs/) But we really are looking for partnerships – the user partner is a co-creator and they will be contributing – we want to see a truly co-created proposal. Ideally, we'll fund projects that come with that fusion and with the user contributing resources of either management time or money (cash is not as important as the nature of the collaboration). We need to see genuine co-creation and collaboration. Sub-contracting is another option. The call FAQs will soon be available on the call website; this will be further clarified. -ends-