Community
Ethereum recently wrote an interesting blog explaining the difference between public and private blockchains. However, I believe there is a much more fundamental question that needs to be answered – what does a distributed consensus ledger (DCL), such as a blockchain, enable that cannot be achieved with commonly used technology such as a centralised database, whether open to all (public) or under private control?
I have seen little that comes close to answering this question, but I am convinced it needs answering before we can be clear on which DCL use-cases will succeed. Claims that DCLs will disrupt Financial Services beyond recognition, saving tens of billions of dollars in costs while reducing risks and improving services, strike me as mere hypotheses until proven through hard evidence and analysis.
I don’t have an answer to this critical question, but I can take an initial step by observing differences between a centralised database with open access, and a DCL.
Some of the unique features of a fully public DCL I can identify are:
I am sure there are other differences between DCLs and centralised databases, but the overriding one to me is that of control. A fully public DCL such as Bitcoin has no controlling authority, it is governed by consensus of its users, and its rules are enforced by cryptography. A centralised database has a controlling authority, which can enforce rules through software logic, but it has no specific dependency on cryptography.
Therefore, it strikes me the use-cases where DCL s will succeed are those where distributed, evenly balanced control can make a difference, for example, where a central authority is not feasible – typically where cross-border transactions occur, such as in international payments; or where centralised controls exist that create unnecessary inefficiencies, set up by, for example, intermediaries.
It is less obvious why DCLs are better suited than centralised databases to use-cases where central authority is possible and necessary e.g. land registry, car registration; and it is also less obvious to me why so-called private DCL s, or private blockchains, whether internal to an organisation or shared between a closed group of consenting organisations, are any different to a centralised database where control starts to look more centralised than distributed.
Non-cryptographic technology already solves for requirements such as reach, speed, access, authentication, authorisation, validation, risk, resilience and codified (“smart”) contracts, and has done so for years. However, it is the use of cryptography for control in DCLs that is the real game changer – by enabling control through consensus across a disparate group of entities; and by bypassing control barriers set up by middlemen, rent seekers and gatekeepers who create inefficiencies, risks and unnecessary costs, sustained by their own self-interests and by the inertia of legacy business models.
There is clearly a lot of hype in the world of DCLs and blockchains, with 100s of millions of dollars being invested in FinTech companies to exploit them, with senior bankers leaving well paid jobs to join them and with banks competing to announce DCL initiatives.
We may be in a classic hype-cycle, where today’s high expectations are followed by a trough of disillusionment before we start seeing the true potential of DCLs. It will be very interesting to see what developments come from these FinTech companies and the bank innovation labs over the next 12 months - hopefully, we will soon start seeing breakthroughs leading to a clearer understanding on the DCL use-cases that will succeed and the true scale of benefits they will bring.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Tachat Igityan Founder and CFO at destream
03 December
Victor Irechukwu Head, Engineering at OnePipe Services Limited
29 November
Nkahiseng Ralepeli VP of Product: Digital Assets at Absa Bank, CIB.
Francesco Fulcoli Chief Compliance and Risk Officer at Flagstone
Welcome to Finextra. We use cookies to help us to deliver our services. You may change your preferences at our Cookie Centre.
Please read our Privacy Policy.