We love the blockchain, not the bitcoin the currency
Bitcoin was the first decentralized peer-to-peer payment network. A pandora’s box was opened and now the Bitcoin Blockchain, has inspired similar innovation in this space.
Multinational banks have expressed avid interest in blockchain technology, evident from press releases, start ups, incubators and accelerators funded by them. What they want is
“a cryptographically verifiable settlement and clearing systems that are globally distributed for resiliencey and compliant with various reporting requirements. And the governance of both network and software is clear and explicit.”
What Banks and Fintech mainstream media are really talking about are ledgers. Ledgers that can be grouped depending on their characteristics – distributed, decentralized, centralized, shared, permissioned, permissionless, public, private.
“cryptographic signatures and public keys can be chain-linked to form an unforgeable record of transactions for, say, digital cash (or any ledger record for that matter). Crypto proof replaces the notary.”
Permissionless ledgers are all about open source and access for all. Like the internet, no consent is required from any central authority or group to on board. This feature is inbuilt as a fundamental concept in their design and is arguably their value proposition. At the heart of Bitcoin is the blockchain, a public record of every transaction that has occurred since the beginning.
The public ledger, is replicated across multiple nodes (just over 6,000) in a peer- to- peer fashion across a network spanning the globe. Because it is decentralized and no single entity controls it, the integrity of of this ledger is maintained by a computationally – heavy process termed ‘proof of work’. This energy consuming process, serves a security purpose and updating the shared ledger.
The key design goal behind bitcoin is censorship resistant digital cash; cryptocurrency ledgers prioritize “mitigation of omission (censorship resistance) over deletion (irreversibility)”. The validators/nodes, who maintain the shared ledger are unknown by default, can be anyone from anywhere in the world. Users hold their cryptographic keys detached from their real world identities.
Bitcoin is architecturally and politically decentralized. It is out of the reach of governments and regulators, an incredibly valuable feature. Not so much however, if you are a government regulated financial institution seeking compliance. For some regulated financial institutions this presents a problem, and they have expressed concern about having unknown validators verify their transactions. Still, they admit Bitcoin is a genius work of architecture. What they desire, it seems, is the utility of the blockchain as tool, not as an ideology.
“It’s not about bitcoin, it’s about the underlying technology,”
According to Tim Swanson, Director of Market research at R3CEV on Buckets of Permissioned, Permissionless, and Permissioned Permissionlessness Ledgers, several questions are often posed by decision makers in Financial institutions when considering using a public chain
- What happens if you pay a fee to a Bitcoin/Litecoin mining pool in a sanctioned country?
- What if the same bitcoin or Litecoin miner processes transactions for illicit goods and services from dark net markets ?
- How to identify and contact the miner/mining pool in the event something happens – sent wrong instruction/double spend attempt/slow confirmation time
This has led to banks and Wall Street firms to look into permissioned ledgers – alternative distributed ledgers that check off their minimum requirements.
Permissioned ledgers take a different approach at achieving consensus and irreversibility. Security is implemented via legally binding contracts with identifiable validators who have real world identities and reputations. Validators, are contractually responsible for fulfilling a terms of services, a fundamental feature of its design.
This clear governance structure, solves the perceived problems banks view of permissionless ledgers
“Can existing legal systems recognize a system of property titles that can be reversed by anonymous, pseudonymous validators”
Some experts seems to think not, and is the reason why banks and FIs are looking into ways of developing their own forms of ledgers detached from costs of public ledgers. In essence, there is little need for added costs such as censorship resistance, when the objective is to run a ledger between known entities that abide by government regulations.
Truth be told, many Bitcoin start ups today, are building permissioned systems on top of permissionless systems. There is no doubt that a replicated, distributed shared ledger is genius architecture,but, why use a cryptocurrency? Or proof-of-work for that matter? When all the participants are trusted and known, is there a need to be wary of subversion by unknown actors?
My point is, there is a real need for designing a permissioned ledger, that captures key benefits of the blockchain – settlement finality (irreversible), without the added risks and costs of censorship resistance. Offchain assets in form of securities, titles and fiat are more suited to this type of system.
Censorship resistance as a desired quality
In all this talk however, bitcoin still remains the only censorship resistant digital bearer asset in the world. Regardless of all the discussion on ‘blockchains’, censorship resistance is an extremely valuable quality for an asset in today’s financial global system. Bitcoin (the currency) will play a crucial role in the next fiat crisis. I am yet to see any solid arguments against this characteristic. Which is why, I am bullish on bitcoin in the medium and long term.