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More and more companies are coordinating business between them by forming groups with mutually agreed business process. Blockchain-based technologies using smart contracts for business process management have emerged as an effective tool to enable such business groups. Two categories of such groups are emerging in the market that we term ‘Blockchain Consortia’ and ‘Digital Cooperatives.’
Blockchain consortia are groups that use exclusively private blockchain techniques and infrastructure for their inter-business workflows. Such consortia emerged early in the enterprise blockchain landscape because they are easier for business leaders to understand and be comfortable with since they imply that their data is kept separate from the world outside the consortium. Blockchain consortia are also characterized by proprietary mechanisms for governing the consortium using both manual and automated techniques as well as proprietary applications. However, blockchain consortia have significant disadvantages as explained in this blog and have struggled to remain relevant as exemplified by the folding of consortia such as Marco Polo, TradeLens, and B3i to name just a few.
Digital cooperatives have been in existence in the public blockchain space for a number of years where they are called DAOs (Decentralized Autonomous Organizations). Well-known examples are MakerDAO, Aragorn, and Uniswap. Such DAOs are not really suitable for enterprises since they operate on public blockchains without any privacy. Recently, however, digital cooperatives for the Enterprise have emerged that use a blockchain-based technology called ‘zero-knowledge (ZK) rollup’ to provide scalable, and private, blockchain use. In digital cooperatives, groups of companies use public blockchains in concert with private, secure, and trusted execution environments utilizing zero-knowledge technology. This division of computational and storage effort between private and public infrastructure enables much higher performance at a much lower cost without compromising the benefits of blockchain use. Digital cooperatives also tend to rely on automated governance mechanisms using smart contract systems that are open source and transparent. An example of this is MEF member DCConnect’s Televerse DAO highlighted in the MEF Edge VIEW blog Decentralizing Telecom Services Using Blockchains and DAOs. The MEF SLA Reporting service previewed at the recent GNE 2023 in Dallas similarly will evolve into such a digital cooperative as SLA agreements evolve from bilateral agreements to multi-lateral agreements. As in the case of the Televerse DAO, multiple service providers come together to jointly, rather than individually, offer high-value end-to-end products with control and visibility throughout the entire digital supply chain.
Digital Cooperatives and Blockchain Consortia Compared
Intellectual property (IP)
Blockchain consortia founders often put in significant development effort, and so retain the resulting intellectual property, and then expect newcomers to pay, or to accept an inferior status in the consortium.
In comparison, digital cooperatives are formed from an underlying open-source code base of zk-rollups and basic digital cooperative templates. Therefore, little up-front investment is required by the founders of the digital cooperative making it easier to maintain fair and equal status for newcomers.
Because responsibility is shared in a blockchain consortium, but not clearly and transparently defined and applied, a blockchain consortium can lose momentum with development increasingly hard to initiate and continue—or the consortium can become increasingly dependent on a dominant player or minority in the consortium.
A digital cooperative, however, is using transparent and automatically enforceable governance processes using smart contracts that all participants agree upon upfront, with the required zk-rollup execution infrastructure centrally operated by a trusted third-party service provider with established, transparent and enforceable contractual obligations. The design and maintenance of the governance of a digital cooperative can, therefore, be focused on addressing the multi-party business process problem rather than dealing with the evolution and management of the infrastructure.
In a blockchain consortium, there is limited, or most often, no interoperability with other blockchains and, therefore, little scope for moving financial assets accumulated in the consortium to the wider financial system. Privacy strategies such as digital assets in private channels in a consortium compound this issue and make it (technically) extremely difficult to prove to other entities ownership of these assets and that all transactions were compliant with regulations. This makes the usage of digital assets between private channels even in the same consortium virtually impossible.
In comparison, since there is no need for encapsulated channels in a digital cooperative, and every member of the digital cooperative operates in the same space but with visibility and access restrictions as in traditional database systems, assets can be moved easily out of or into a digital cooperative and those assets’ regulatory history is easily verifiable.
Members of blockchain consortia are inherently vulnerable to ‘blind mutualization of risk’. In established risk mutualization in the finance and insurance sectors, the financial risk and the parties involved are well known. In contrast, in blockchain consortia, a consortium member running its node could be unwittingly supporting illegal activity in the consortium because data obfuscation in a private channel renders the node operator ‘blind’ to that activity. For the same reason, aggregate risk in the consortium is unknown to its members.
However, in a digital cooperative, there is no hidden liability because any liability sits transparently both at
(1) the infrastructure level with the third party digital cooperative operator as with traditional SaaS systems, and
(2) the application layer with the participants in the multi-party business process.
In the context of a blockchain consortium, there are two extreme positions and no satisfactory trade-off. At one extreme, everyone in the consortium sees the other’s data, but actions can be proven easily. At the other extreme, private channels are created (in a large consortium, the number of these channels explodes exponentially) and transactions are private, but it is extremely difficult to prove that those transactions occurred (financial siloing).
In digital cooperatives, the data on the public blockchain is obfuscated as zero-knowledge proofs that do not leak sensitive information. This enables transactions to be provable and, therefore, auditable when required without exposing the underlying transactions.
Blockchain consortia relying exclusively on private blockchain technology have to manage and secure ever-growing private blockchain infrastructure which in aggregate is more expensive than public blockchain infrastructure.
Digital cooperatives using ZK-rollup techniques enable large private data transactions to be rolled up into extremely small amounts of highly trustable data that is stored and verifiable on a public blockchain—making digital cooperatives far more scalable and cost-effective than blockchain consortia.
The Transition to Digital Cooperatives
As the value of using blockchain-based technologies to streamline business interactions becomes more obvious to ever more companies, the importance of understanding the advantages of a new digital cooperative approach over the current industry ‘norm’ of blockchain consortia will be essential for service providers that want to participate in digital supply chains with large numbers of partners and suppliers.
Digital cooperatives are the future of scalable and dynamic business collaboration that will underpin complex on-demand service offerings. The time to start understanding their potential is now.Tags: Zero Knowledge