In-Depth

Microsoft Aims To Eliminate the Middleman with Blockchain

Microsoft is aggressively building out blockchain services in Azure with help from financial, traditional and ISV partners.

• By Jeffrey Schwartz
• July 31, 2017

If Microsoft's efforts to start adding blockchain services to Azure appeared speculative two years ago, no one sees it that way these days. Microsoft engineers and executives say they can't keep up with the inquiries about blockchain, the emerging technology that enables bitcoin and similar cryptocurrency payments that make use of digital tokens and wallets.

A growing number of experts believe the rise of new systems and business processes that use blockchain will disrupt the way financial payments and high-volume database transactions are conducted as early as next year. "Demand is at fever pitch," says Yorke Rhodes, Microsoft's global strategist for blockchain. Customers want to test it and partners are lining up to work with Microsoft, even though the company just started building blockchain capabilities into Azure in late 2015.

The Azure Blockchain as a Service and blockchain apps that started to appear in the Azure Marketplace helped fuel pilots from some of the leading banks, including Bank of America, J.P.Morgan, Banco Santander, Bank of New York Mellon and UBS. Microsoft notched a key win when the R3 consortium of 40 of the world's largest banks said they would run their blockchain proof-of-concept settlement exchange on the Azure-based service. R3 had also run pilots on IBM Bluemix and on Amazon Web Services (AWS).

Microsoft's rapid rise in the race to accelerate its blockchain portfolio and ecosystem followed its decision in 2015 to support the Ethereum multimode consortium network protocol in Azure. At that time, Microsoft also partnered with ConsenSys, a startup whose Solidity programming language was designed to write distributed ledgers built with programmatic smart contracts on blockchain networks that target the open source Ethereum-based virtual machine. In addition to Solidity, ConsenSys provides Ethereum-based consulting services, has inked key partnerships and has helped incubate a number of blockchain startups.

In describing Microsoft's decision to build its first Azure blockchain service on Ethereum, Marley Gray, Microsoft's director of blockchain engineering, at the time explained that it "is open, flexible and can be customized to meet our customers' needs, allowing them to innovate and provide new services and distributed applications, or Dapps. Ethereum enables Smart Contracts and Dapps to be built, potentially cutting out the middleman in many industry scenarios."

Potential for Disintermediation
One example of a new venture using Microsoft's blockchain services in Azure that aims to cut out the middleman is Decentralized Corp., which calls itself DCorp. The startup has developed a decentralized version of the Chicago Mercantile Exchange (CME), where futures and options are traded. CME generated $3.6 billion in revenues in 2016 and $1.5 billion in profit. "You decentralize that and issue a protocol token, which is exactly what DCorp is doing, and you get better scale, better security, better liquidity and lower cost," says Jeremy Epstein, CEO of Never Stop Marketing. Epstein says he is so confident that blockchain is going to disrupt a number of industries in the coming years that he has focused the majority of his time working with startups and ventures working with the technology.

Sandra Roe, who leads the CME Group's digitization efforts and spoke on a panel in late February during the launch of the Enterprise Ethereum Alliance, said the company doesn't disclose publicly what it's doing, though she acknowledged it has engaged in some proofs of concept. "We are looking to help with the Enterprise Ethereum Alliance and make sure we can come up with a collaborative way of building the next generation of hopefully enterprise-level applications and products," she said.

Epstein believes existing financial institutions will have a hard time keeping up with some of the startups using blockchain technology, even if they use it themselves. "For a large company or a large existing institution, to totally flip its business model is really, really difficult," Epstein says. "They are going to take blockchain and use it to streamline their back-end operations and they are going to get greater efficiencies, as they should. But it's not going to change the fact that they still have a defensive perimeter that they need to protect, that their governance systems are going to be hierarchical and lack some degree of transparency. It doesn't change the fact that they're going to have the cost of maintaining their buildings and servers."

Building Partnerships
Microsoft has released a steady stream of updates to its blockchain tooling and application portfolio and updated technical roadmaps, which included the planned release of middleware called the Cryptlet Fabric later this year. In addition to a broad technical footprint, Microsoft has inked a steady stream of new partnerships, ranging from the fastest-growing startups to the most established systems integrators, among them KPMG and Accenture.

For its part, Microsoft has a longstanding partnership with Accenture, one of the largest systems integration and consulting firms. In addition to their own joint efforts, both companies also are partners in Avanade Inc., focused on consulting services and deployment of Microsoft-focused technology.

Accenture has engaged with Microsoft more closely this year on pilots and proofs of concept that use the Azure blockchain service. Since Microsoft started rolling it out, there are now 16 certified blockchain apps in the Azure Marketplace and 45 code bases as of last month, according to Microsoft's Rhodes. David Treat, Accenture's global blockchain lead, says that's an impressive buildout in a short amount of time.

"Microsoft is enormously well-placed to be able to play a central role in how blockchain technology will be developed and rolled out into production through the Azure platform," Treat says. "It's enormously congruent with the Azure cloud strategy capabilities." Treat also says Microsoft has inked partnerships with some of the leading developers of blockchain capabilities, including Blockstack Labs, BlockApps Inc., Ethcore, Chain Inc., Truffle and R3, among others.

"The amount of innovation and creativity that are coming from the startups is just fantastic," Treat adds.

The Microsoft-KPMG partnership earlier this year involved the joint launch of Blockchain Nodes, designed to build and pilot capabilities that use blockchain technology to improve business processes. KPMG said it can use its deep industry and blockchain application knowledge with the technical capabilities of Microsoft's blockchain portfolio to build new applications of the technology.

"The Blockchain Nodes will play a critical role in identifying new applications and use cases that blockchain can address," said Eamonn Maguire, global and U.S. leader for KPMG's Digital Ledger Services, in a statement. "They will enable us to work directly with clients to discover and test ideas based on market insights, creating and implementing prototype solutions that use this innovative technology."

The effort will initially focus on applications covering financial services, though plans call for Blockchain Nodes to explore how the technology can optimize business processes and models in other industries such as health care and the public sector, among others.

Indeed, experts see blockchain technology having appeal beyond financial services. Gray said in a blog post that in the public sector, a secure, distributed ledger based on blockchain "can provide more openness and transparency, and transform services and processes, including licensing, personal identification, voting records, utilities, benefits management and more." He added: "Industries such as retail and manufacturing can benefit from better supply-chain management, smart contract platforms and digital currencies, and tighter cybersecurity."

Likewise, in health care, blockchain has the potential to facilitate secure health care information exchanges linking patient records to different providers and insurers, while putting tight controls on how information is shared and parsed. Manufacturers, wholesalers, distributors and retailers also see potential for blockchain to accelerate logistics and supply-chain management. One company is Mojix Inc., best known for its RFID hardware and data analytics software. Mojix revealed that it has developed a blockchain-based smart contract that can expedite procurement, fulfillment and delivery of goods and transactions between retailers, suppliers and logistics providers.

Mojix revealed the offering in early January at the annual National Retail Federation (NRF) show in New York, and was at Microsoft's late-April customer event. During a discussion in Microsoft's booth at the NRF conference, Scot Stelter, Mojix vice president of products, explained how a grocery chain implementing a smart contract could stipulate that an order of blueberries had to be picked on a certain day, arrive within five days and be stored within a specific temperature range throughout the logistics and shipping processes.

"At each step of the way, that's a smart contract, where effectively a box gets checked, cryptographically locked and published to the blockchain," he said. "When I am at the end of the chain, I see it so I can track the provenance of those berries, so when they arrive I know if they are fresh. All parties to a contract have to agree that all the boxes are checkable. Once they are checkable, the contract gets locked and it fulfills itself."

Secure Innumerable Transactions
The fascination over blockchain comes from its potential to transform the way transactions are conducted. Instead of all parties in a transaction going through a traditional central database server or third-party clearing house, blockchain is based on a distributed peer-to-peer general ledger. Every block in the chain of a multi-party transaction is unique, based on a cryptographic hash represented as digital tokens that guarantees that the record written to a general ledger is authentic, based on the time it was recorded. Unlike traditional databases, blockchain transactions are immutable, meaning they can only be written once and never overwritten.

"The transformation that's underway is significant because when you think about it, for the past 50 or 60 years since databases were invented, we've been locked in a particular business model where I can't trust your data and you can't trust mine," Treat says. "My database administrator may have changed something. Your business process might run differently than I expect. A hacker could've broken into either of our sets of data. As such, we've been just locked in this notion of a messaging-based business model. I've got to send you my version of the world, you send me yours, and we reconcile that and agree on a single view of the world to get anything done. For the first time ever, the database technology has evolved to a state where we could actually confidently share access to data and get out of that messaging-based business model."

Like Microsoft, Accenture says many of its clients are ready to move forward. "We're transitioning now, basically, past a proof-of-concept phase, where everyone has wanted to learn about the technology, and do so by getting hands on with it," Treat says. "Now they've gone past a learning curve to where we're actually starting to really focus on the business transformations that are going to result, and actually starting to do production coding, coding of systems that are destined for production."

While the Cryptlet Fabric will provide the key middleware services to develop these production-ready services, Microsoft is looking to bring more developers into the fold. Microsoft released a new proof-of-concept framework, consisting of code and the necessary scaffolding to roll out blockchain PCs driven by Azure Resource Manager templates. Microsoft said it provides all of the resources to build out a blockchain network in Azure, including a gateway API, responsive Web application, integration with Azure Active Directory (Azure AD) and Azure Key Vault, and a SQL database configured to collect on-chain data. It uses Azure Event Hubs, which supports the exchange of raw data to Azure Data Lake Analytics or provides transaction data to Azure Search. Microsoft said it allows for the building of Web apps without writing any code.

"This will save customers a whole lot of time," says Craig Hajduk, Microsoft's principal program manager for blockchain engineering. "Rather than spend a whole bunch of time getting that one version of the app built, they can actually accelerate it very quickly and then have much richer discussions about the value it brings to them and get to see it in much higher fidelity."