The big banks from New York, Washington, and London are grabbing headlines with announcements to develop their own blockchains for settlement and clearing, primarily among themselves. For instance, Goldman Sachs Group Inc (GS) and Bank of America Corp (BAC), along with formidable consortia like R3 and DBS, are all designing systems that use distributed ledger design patterns, inspired by Bitcoin. However, unlike Bitcoin, these networks will be centralized, closed, and secured by signatures from known actors. For instance, Goldman’s patent filing describes using “trusted authorities” to validate assets.
In contrast, Bitcoin stands as an open, decentralized, and public network — like the World Wide Web. Its primary innovation is creating an environment where it’s safe to conduct transactions without the need for trusted authorities. It’s young, and the banks have many reasons for not using the cryptocurrency nor its protocol, primarily because of privacy and regulatory compliance issues. Plus, banks don’t really want, or need, the breakthroughs that Bitcoin provides. However, the concept of sharing a distributed ledger revealed new possibilities for banks to collectively make their infrastructure far more efficient.
So, they’re attempting to build their own private blockchain networks. Many argue that banks are missing the fundamental innovation, which isn’t the blockchain itself, but a unique combination of parts which facilitates digital transactions with unbreakable security through a decentralized environment. Centralizing the network undermines the immutability of its blockchain. However, the banks are aiming to solve a completely different set of problems. So, they’re making investments to revamp some of their infrastructure with private networks of shared ledgers that have no centralized point of control.
These two separate movements have many observers asking which type of blockchain will win: open or private? I believe we’re at the beginning of two different revolutions that won’t collide for a long time.
The Open Blockchain (Bitcoin)
Bitcoin’s initial breakthrough created something new at the edges of society — programmable money that can’t be censored, inflated, or arbitrarily seized. Transactions between people are packaged into blocks and stored in one long chain of history that is unhackable. This public ledger stores just enough information to record transactions and it cannot ever be changed. Adoption of the Bitcoin currency doubled in 2015, and the Bitcoin network has been running without interruption for the last seven years.
Bitcoin‘s framework is made up of three layers: the database (blockchain), the transfer layer (protocol), and the currency on the top (application). The ability to build various kind of apps on top — in addition to the currency — make Bitcoin’s open network analogous to the web in many ways. The Internet was built upon a transfer layer (protocol) for sending packets of information. On top of that layer, many kinds of diversity of flourished. Bitcoin’s protocol is similar, but it transfers value instead of data. And a broad spectrum of services are being built on top of that settlement layer to take advantage of its network and security. And companies like Blockstream are doing promising work to extend the Bitcoin blockchain with side-chains, which could dramatically extend its flexibility and usefulness. And Blockstream just received Blockstream just received $55 million in Series A funding from investors who believe that building out infrastructure connected to Bitcoin’s secure protocol layer will have immense commercial value.
Permissioned Blockchains (Banks)
While disruptive technologies can fundamentally threaten incumbents, the banks are largely ignoring Bitcoin for now. Rather, we hear a confusing refrain that “the real genius behind Bitcoin is the blockchain.” This is unfortunate because it’s not true and confuses the public.
We are just entering a new age of distributed ledger apps, hybrid clouds, smart contracts, and a world of innovation that uses blockchain technology. These will be private networks that create enough security by signing blocks of transactions with groups of known actors, rather than the mining system used by Bitcoin. While permissioned blockchains are not public nor immutable, they can be fast, flexible, and offer unique kinds of value. Ethereum is an example framework that developers use to create highly customized and decentralized solutions.
Today, every bank has the burden of maintaining their own complicated and expensive legacy infrastructure for record keeping. A shared system of record between banks could dramatically reduce cost and complexity, similar to the efficiencies achieved within utility sectors. So, the big banks are joining new blockchain initiatives in an attempt improve their internal infrastructure. Keep in mind, it’s still early, and they still don’t know details about how these types of implementations will address critical factors such as performance, privacy, security, and the dynamics of mutually shared power.
The IBM-led Hyperledger Project is another consortia, overseen by the reputable Linux Foundation, but one that is attempting to build a blockchain framework which does it all. They want to create an infrastructure capable of being as open and immutable as Bitcoin while lacking any limitations so it can be flexible and efficient in every way. John Wolpert, IBM’s Director of their “Global Blockchain Offering”, unfurled a keynote speech talking about the problem with today's blockchain developers and why he believes a more collaborative approach is needed for blockchain implementations:
“It has to be immutable and modular. It can’t be this is the consensus algorithm, this is the token, all of that has to be modular. It has to be scalable. Interledger-ing is important. You have to inter-op between chains and different things.”
Even though his statements are confusing, it sounds like this is IBM’s “strategy.” While no technical breakthroughs have been made, IBM is attempting to place themselves at the center of a community that doesn’t want to be left behind. Wolpert concluded, “It’s either going to be a holy mess or it’s going to change the world.” Unfortunately, this frat-boy like approach to technology confuses the general public into thinking “blockchain” is all the same and leads some investors to believe in blockchain magic.
The Bottom Line
Technology implementations are always driven by motivations that force trade-off decisions. Bitcoin is striving for individual sovereignty, openness, and security. Banks are striving for regulatory compliance, speed, and cost savings. Both of these initiatives are up front about their goals and will likely co-exist for a long time as part of separate revolutions. Anyone who predicts their imminent doom is probably misinformed. We’re entering an age whose future we can’t even begin to imagine.
Times like these are also ripe for abuse by charlatans, so beware of melodic salesmen with blockchain cure-alls. Confidence is cheap, and there is no magic. Every single technology implementation makes trade-off decisions to achieve particular aims. It's by not doing everything that good design manifests a perfect fit between an object and its tasks.