This is NOT about hacking Blockchain, rather how the creation of Private Blockchains is taking away the innovation offered by this technology.
As a tech company, CoVi Analytics regularly explore the potential of new technologies and this month Team CoVi kicked the tires on Blockchain.
Here are our thoughts on Private Blockchain. As this technology is still in early days, please don’t hesitate to fire at the gaps in views expressed in this article.
We explored the “Private” flavor of Blockchains that is growing in popularity. These Private Blockchains come about when a Blockchain application is deployed to a restricted number of users or a consortium of companies.
We broke these Private applications into three components:
- Data: this the Blockchain distributed ledger itself.
- Compute: the compute-technology that powers the platform, commonly referred to as mining.
- Interface: how users interface with the application to access and update the data.
We intentionally simplified a Blockchain application to these three components to avoid the enticing rabbit hole offered by sexy sounding words like Crypto hashing, mining, digital signatures, hybrid PoS/PoW and so on.
Creating Private Blockchains
Getting started required a vendor well versed with the technology and a consortium agreeing parties to participate.
Key Challenge: This infrastructure project starts with all members agreeing on a common set of data attributes with a consistent syntax. Finding common ground on the syntax is no easy task, consider that companies use – teams, business units, functions and market units – to describe the same data attribute.
Example (to bring things to life): Blockchain for marine insurance contracts where the members of the consortium include x3 insurers, x2 ports and x6 shipping companies. The Blockchain, in this case, is used to access insurance details by any of these parties for verification purposes and let’s say capture claims information.
Up and Running
We are now up an running. Each participant who has transacted on the application retains a copy of the Data (distributed Blockchain). Ports can confirm that appropriate insurance is in place without asking insurers or shipping companies. Data is always live and up to date. Great!
Let’s explore whether we get the benefits of Blockchain for this Private deployment:
Is it really owned by everyone? All members have a copy of the data so they all sleep easy knowing there is no need for middlemen – very exciting and empowering. But will everyone have means to interface with the data without a “middle-man”? In other words, if the technology vendor is taken out of the equation will the application survive?
There is no incentive for tech vendors to make their proprietary algorithms available to the members of the Private Blockchain. The tech vendors will happily share the compute-technology (for mining) but I suspect they will hold onto the IP which could allow anyone to build an interface with the Blockchain or replicate the application elsewhere. So although every participant has the data, their means for accessing is tied down to a single counterparty.
Is it really immutable? Immutability is the active disruptive ingredient of Blockchain in my opinion, fundamentally changing our conventional concept of “Trust”. Because of the network effect, it is almost impossible to break the element of trust in an Open Blockchain environment but is that true for Private Blockchains?
In our example, if the shipping companies decided to collude and change certain terms in existing contracts, they can make favorable updates since together they represent more than 50% of the network. This may sound like an extreme case but we have seen this happen in banking and oil industries.
Is it really secure? Keeping the private keys secure not just from external threats but also from disgruntled employees will be challenging to say the least. Insurers and Ports in our example may have sound cyber-security, however other members in the network potentially introduce backdoors to what was otherwise a secure system in the absence of the Private Blockchain application. In our example, shipping companies (majority of the network) are not known for their cybersecurity prowess
At the risk of stating the obvious, a breach in security also compromises immutability of the data.
From an outsider’s perspective, most Private Blockchain initiatives I have come across in the financial services space are not really leveraging the innovation potential of the technology.
The most commonly quoted motivation for these initiatives is empowerment – “everyone will have their own copy” – but I am not convinced. The members will still rely on proprietary algorithms to access the data and the counterparty that owns the algorithm will own the system. The point of middle-men is simply shifting from the database layer to the interface layer in my opinion.
That said, these initiatives are bringing significant operational efficiencies to the current fragmented processes in many verticals. In the case of marine insurance contracts on a Private Blockchain, this application eliminates operational overheads. However, if the participants are relying on a single counterparty to provide the technology then I am not sure why a more conventional, well tested and understood approach can deliver the same outcome. Feels a bit like a sledgehammer to a nail.