Paul Brody (Ernst & Young) - Privacy, Composability & Compliance - Business On Chain for Enterprises

Morning [Music] everybody. Let's talk about privacy. One of my favorite topics and specifically let's talk about sort of why privacy is so important for enterprise users. uh if you were here uh two talks ago and you were hearing Serge Jay, he was talking a ton in a wonderful way about the value criticality of compliance and I'm going to spend a few minutes today talking about why privacy is so important and how privacy particularly for enterprises is different than the kind of privacy that we're talking about for consumers and individual users. So let's get into it.

Basically, I want to recap by just talking about like why do we need privacy and and what is the problem that we're solving. Fundamentally, we talk a lot in the world of Ethereum about coordination and coordination remains the essential problem in the world of business. If you were to go back 50, 60, 70 years ago and say, "What is the world's greatest manufacturing facility?" somebody would have probably said to you, "Hey, it's the River Rouge plant that Ford has." And I'm only slightly exaggerating when I basically say that dirt went in on one side and cars came out the other.

They had a glass works, a steel works, uh like a tire factory, everything in there. Today, if you were to say, what's a prototypical factory that represents the modern economic era? I would say Foxcon's iPhone assembly plant in Shenzhen, right? They don't actually make anything there, but they assemble like a bazillion parts from all around the world. And so what we've seen in like the space of 75 or 80 years is this shift from uh I can do this all myself and my number one issue is how do I make my own organization do what I want to everything I do depends on a ton of other people and companies and experts to make things work and scale.

Uh and the problem with coordination the modern enterprise world is that all the really cool technology capabilities that we have built over the last 30 40 years basically fall apart the minute you try to interact with another company right you can have the world's fanciest ERP system complete with analytics and AI tools and your supplers like can you fax me that purchase order right I I I'm exaggerating where's not a lot of faxing still going on we have moved on to emailing each other PDF files right um but that's basically what happens We have all these like little silos. And if we could get rid of these silos by creating tokens and smart contracts and moving them from one end of the manufacturing process or production process to the other, we would be able to run business operations way, way faster. How much faster? So we know that converting a traditional paper contract or business contract to a smart contract cuts your administrative time by about 99%. That's like a real number from actual experience that we have.

And then secondly, we know that uh smart contracts with inventory management are so good at managing those resources and so good at accuracy because of the no double spend policy applying it across the supply chain. You can run your network with we think on average 20 to 30% less inventory. These are hundreds of billions of dollars worth of value creation for businesses if we can get them. And the only problem is that we really can't access all of that today. Like people are always asking me, Paul, you love to talk about blockchain and industrial applications.

Like why isn't there more of this in the world? And the answer is very simple. Privacy is absolutely life and death issue for large companies. Walmart and Apple and IBM are never going to make it publicly available what they're buying, where it's going, and how much they're paying. And until they have really robust privacy, they're not going to do it.

And by the way, privacy basically consists of two things, right? And and I'm now going to describe in a very simple framework every single business agreement on Earth. It all comes down to this. I have money. You have stuff.

And I would like to exchange my money for your stuff under the terms of some kind of an agreement. In the financial market, that's a swap. But in the world of enterprises, it's almost always some kind of like larger agreement with uh terms and conditions, payment terms, that kind of discounts, rebates, etc. And so those are those can all be turned into a smart contract. And we need two kinds of privacy to get there.

And this is kind of at the heart of what we've been working on on at EY over the last eight years is trying to create the tools that support this this privacy requirement. On the side of smart contracts, we have created a tool called Starlite. Starlite lets you take an EVM compatible smart contract and turn it into a zero knowledge circuit without being a math expert, which is really good because like my math skills are not great. Secondly, we created something called Nightfall. Nightfall is designed to enable it's it's a ZKZK rollup that is designed to enable high volume efficient transfers of assets under privacy.

Both of these are public domain open-source contributions to the Ethereum ecosystem. So, please make use of them. We are just about to deploy Nightfall version 4 onto the Sapoleia test net and I believe that we will be in production by the end of this year as a layer 2 uh uh rollup and we are also working with a number of L2s potentially deploy it as an L3. Now with these things along the journey we've identified a bunch of requirements for how enterprises need to use privacy and why it's a little bit different. Top of the list regulatory compliance.

I'm going to come to that. Secondly, complex business logic, right? You basically have to have rules, terms, and conditions. It's most enterprise transactions are not a swap. Thirdly, high volume repeat transactions.

Basically, almost all long-term business relationships are some form of a repeat game. It's extremely rare for large companies to sue each other because, you know, big companies and their suppliers have often been doing business for 20, 30, 40, 50 years. They always find a way to work it out, but they transact with each other a lot. And if you do a lot of these transactions, even if you use some of the offiscation tools that are available for stable coins today, eventually it's going to be easy for us to discern what you're with whom you are transacting and how much you are paying them. This is a key one, nonfgeible and semifable assets.

Almost all the privacy conversation and a lot of the payments conversation that we've been having over the last year or two is focused on fungeible assets which are much easier to obiscate and conceal on chain. But almost everything that you buy today is a nonfgeable asset, right? Real estate, car, your iPhone, if you slap a serial number on it, even if it looks identical to everything else, it's now a nonfgeible asset, right? And then lastly, you need composability. Multi-step business networks, right?

almost nobody makes. It's not a oneanddone thing, right? Most companies that are making anything or doing anything are buying from a ton of other partners. Now, let me zero in specifically on regular regulatory compliance. And in particular, there's something I think in the enterprise space we need to be very careful about, which is privacy versus anonymity, right?

So, uh if you think about this like 2 by two spectrum, right? Ethereum is both public and really it's pseudonymous, right? You you don't not identified when you use Ethereum, but you can identify yourself. I am proud. And you can see the fabulous and exciting collection of NFTts I have in my wallet if you go identify yourself.

There are tools for private and anonymous money transfer. That is not something that regulators like, right? And Sergey hammered on this very nicely in his talk about an hour ago, right? uh moving money privately and anonymously is a non-starter in the regulated world especially for enterprises. So what we did was we basically for nightfall we are trying to stake out a path where you are your transactions are confidential but you cannot use the system anonymously and this is extremely important.

We currently support enterprise x.509 certificates and we are able to support uh any other kind of like widely accepted ID system. Beyond regulatory compliance, I think there are sort of four things that are really worth sort of making sure that we understand in how privacy needs to work for enterprise users. The first is scalability, right? We need a certain level of scalability right now.

the volume of transactions that robust privacy systems can handle is fairly limited, right? Uh compared to what we can do on chain without privacy, it's still pretty decent. Um and then secondly, we really have to have programmability. So I need to be able to apply rules to these transactions. Thirdly, composability.

And then lastly, and this is an interesting, and this is another interesting one that people don't talk a lot about, it's really permanent. So, a lot of people are used to thinking about privacy as like sort of rail gun or privacy pool type of solutions where you put money in and somebody else can take it out and it's hard to tie the two together, but money goes in and then it comes out. That's not really how enterprises want to think about their privacy ecosystem. What they basically want to do is put it into the privacy environment and leave it there. They want to keep their whole supply chain, payments, everything inside of this privacy environment.

is a permanent transactional environment. And so really, you start you start by minting your tokens and your assets outside of privacy because that's how you make sure that they are subject to all the double spend and and accountability rules that exist in the Ethereum ecosystem. But then you bridge them into a privacy environment and you do your transactions there and you keep them there until in some cases somebody at the end of the supply chain wants to take them out or put them put some cash back into the the banking system and move it somewhere else. But for the most part the concept is you put stuff into the privacy environment and you leave it there. Uh and and it's you're going to transact inside of that capability.

When it comes to picking a core technology, we have spent a lot of time, we've been going on this road at EY around core technology and privacy for about eight years. Uh I like to joke not with the people inside of EY who fund us that we are only eight years into what I thought for sure was going to be like a two-year project. Um but during that time we have seen kind of immense improvements and in particular we looked at four different kind of core technologies. We settled on zero knowledge proofs. So our systems both Nightfall and Starlight are based on zero knowledge.

There's uh homamorphic encryption, right? Uh there's multi-party computation and there are trusted execution environments. All of these have pluses and minuses. All of these have constraints. Um the only one I'll truly say that I I I really don't love is trusted execution environments because the whole thing about trusted execution environments is it calls upon you to trust some other party, right?

Right. So for example in our approach everything that we do is open- source public domain. It does not depend on any proprietary hardware. You do not have to trust anybody to use our privacy technology. We did also look at this question of can we combine some of these and uh one of our research team members she made this fantastic slide like you know how do we can we mix all of these things to address some of the constraints that exist in one type of privacy versus another.

Um, and the answer is you can get really cute cat pictures, but practically speaking, it's really difficult. So, I don't think that this rules out in the future mixing some of these things together, right? Uh, we're going to have a conversation with the folks at Zama and some of the other firms about where, you know, where we might be able to work together, but the reality is each one of these areas, especially ZKP, FHE, and MPC, they are really difficult by themselves. Getting them to work well by themselves is hard. Getting them to work with each other or combining the different bits and pieces I think would be another order of magnitude of difficulty.

And if you ask me kind of where I am on my thinking, right, I my priority is not to be able to combine and make the perfect system. My priority is to get to good enough, cheap enough for enterprise users. Right? So, so if I think about this sort of journey that we're on, we are past the prototype stage. Um, if some of you, there might be one or two people in this audience who were at DevCon in Prague when we showed the prototype of Nightfall in 2018.

We needed a $100 in gas to complete a single transaction. And that was when ETH was $250, right? So, we have improved like a,000fold or 10,000fold since then. We're on now on version 4. We can do mainet transactions under privacy we think for about like 25 cents and layer 2 transactions for about a penny, right?

We can do complex enterprise procurement uh like uh uh you know I have a discount I purchase so much amount of assets and we could do financial transfers like enterprise payments. Those are scalable solutions at current prices and volumes to get to what I would call general purpose deployment where we can just kind of do any businessto business application. We're so close. We're We're almost at the point where we have all the different pieces of this capability set. We've got the high volume transfers and payments.

We've got the business logic composability. Uh everything else what's missing, I think, is probably one or two more orders of operational efficiency in terms of cost and uh speed. And let me give you just a little bit of sizing to help you understand this. One of our clients, a supply chain company, came to us and said, you know, they're a manufacturer. They make medicine.

They're like, we would like to conceivably manage our supply chain on public Ethereum under privacy. And they have a medical product. Uh it goes four stops from manufacturing through distribution out to the end customer. They make half a million SKUs a day. Half a million of a particular SKU day.

So that's half a million NFT transfers. Each one's a serialized one. Four times to get through the supply chain. That means you need to be able to do two million transactions a day under privacy without going bankrupt from the gas cost. We are not there yet.

That's why I say we need one to two more uh step changes in operational efficiency and cost to get to a point where pretty much any use case can be done anywhere under privacy. But we're on that path, right? Uh, and it's sooner than you think. If you go back to where we started in 2018 or 2017 and and showed the prototype in 2018, we are more than a thousand times more efficient than that we were back in 2018. It's not inconceivable to believe that another two or three orders of magnitude is achievable over the next five to six years, right?

That is a perfectly reasonable expectation for massive onchain scalability of privacy with composability and complex logic. Before I wrap up here, I will just make a shameless advertisement for Ernston Young EY, the firm that I work at. They have graciously, the partners of the firm have graciously funded eight years of blockchain R&D, which I'm super excited about. We are an ETH Maxi firm. Look at my t-shirt.

I don't have one diff one of these different t-shirts for every different conference I go to. This is it. This is my EY blockchain t-shirt. It's Ethereum we are Ethereum maxis. I literally wrote the book.

It's called Ethereum for business. Not blockchain for business or DTS for business. It's called Ethereum for business. And I am also the chairman of the enterprise Ethereum Alliance. And I even got Vitalic to shill my book for me.

So, uh I I care a lot about this ecosystem. We are committed to it. Uh I have kind of bet my career on it. So please help us out. Um lastly, if uh you enjoyed this talk or even if you didn't, uh you can have an NFT from EY.

Uh it's called a I jokingly called it a proof of Paul. It's our little homage to proof of attendance protocol and we mint them of course on Ethereum and we'll send them to your wallet. Uh and if you want other stuff or know know about us, we're at blockchain.y.com.

And with that, I'm going to say thank you. I believe that I have exactly two minutes left for questions, comments, complaints, gratuitous flattery, whatever people would like to say about EY, Ethereum, privacy, other questions. I also have like 200 pictures of my last holiday if you want to see those. I saw somebody laugh. I know you're awake.

In that case, if there are no questions or complaints, I'm going to say thank you and wish you a wonderful day in can ciao. [Music]