Tuesday, December 08, 2015

Bitcoin: the blockchain ecosystem lubricant

As mentioned in a previous post, Bitcoin is a rather attractive solution for self contained market ecosystem. What is really attractive and useful is the underlying blockchain technology. Recently, banking institution and other financial institutions have started looking into the possibility to deploy blockchain technology to implement a distributed ledger system. However, these institutions might want to create a fully private self contained blockchain system, probably without any virtual currency functionality.

Private blockchain

Financials institution have an history of seeking privacy and control over the tools and mechanism they rely on. As a result, they will have the natural tendency to try to deploy their own private blockchain platform. Essentially, instead of having a fully public and uncontrolled network and state machine secured by cryptoeconomics (eg. proof of work, proof of stake), they seek the creation of a system where access permissions are more tightly controlled, with rights to modify or even read the blockchain state restricted to a few users, while still maintaining many kinds of partial guarantees of authenticity and decentralization that blockchains provide. The obvious objective for a consortium or company running a private blockchain is to be able to change the rules of a blockchain, revert transactions, modify balances, etc.

Private does not implies trust

The parties to a transaction have to be 100% confident that nobody can change the transaction. However, since you can change the rules at will there's a risk of manipulation of the system. The potential collusion, and lack of transparency for a system that requires an arbitration system to guarantee fair execution should be concerning for potential customer. Naturally, there is many incentive to have a private systems such that the need to protect the secrecy of transaction. But, you can still deliver such feature by relying on hybrid system where you have dark transaction pool sanctioned by the public infrastructure. Moreover, without a virtual currency to provide an incentive for uninterested third party to participate in the system, accountability remains difficult to ascertain.

Blockchain system lubricant : Bitcoin 

Public blockchain system is tied to a virtual currency, which reinforce its trust-ability while allowing an incentive in selfish participation. The principle is that blockchain consumer recompense participant in a form of tit for tat approach, allowing a more heterogeneous ecosystem preventing the dominance of a single type of participant as well as peer pressure to keep the system trust-able. Without it, the value of the currency will simply vanish and as a result remuneration from participation.
This heterogeneity prevent collusion (think LIBOR scandal) and make the system more robust and accountable. This is where bitcoin is really needed and shine, not for common everyday operations.