The Public vs. Private Blockchain Debate: Likely Answers Already Exist in the Telecom Historical Record
Taking a step back from the price-related discussion around when this crypto-winter will finally start thawing, I wanted to revisit one of the ongoing debates that remains far from yet settled within the realm of public opinion. Namely, the “who will ultimately win” debate between the fully public (decentralized) protocols such as bitcoin and ethereum on the one end, and the private (permissioned) consortium-backed models such as Corda (R3), or the Hyperledger Fabric initiative. As a point of clarification, the above four projects are simply the easiest examples that come to mind, but the blockchain space is uniquely analog (funnily enough for “digital” assets) in the sense that the low barriers to entry result in the existence of many projects that fill the spectrum between the types of bookend example categories.
While public data is fairly sparse on the development, adoption, and future roadmap of the private blockchains as compared to the large public projects, I believe history already contains a great case study in how the underlying physical infrastructure of the modern / mobile internet has seen an inexorable shift towards sharing (instead of walling off) assets for the network scaling and investment cost benefits which ultimately outweigh the competitive “advantage” of closed-door development and any initial early first-to-market beachhead advantages gained. Please note, I’m not saying that the B2B consortium-affiliated distributed ledger technology investments will bear no fruit, but rather, I believe that as this ecosystem matures, they will capture less of the incremental value-add when compared against whichever public blockchains ultimately competes successfully in the likely pareto-governed marketplace of ideas.
Cell Towers and Datacenters: Then vs. Now
Since the early 2000s, the number of cellular macro towers in the United States (excluding small cells / distributed antenna systems) has risen roughly 2x, to numbering over 200k. At the beginning of this era, most wireless operators (what are now AT&T, Verizon, Sprint and T-Mobile) owned their own towers upon which they attached the high-powered radio equipment that beams connectivity (then voice, now data too) to everyone’s mobile handsets. And yet today, every one of the large wireless carriers has sold off their assets to publicly traded companies like Crown Castle, American Tower, and SBA Communications. These companies specialize in managing these steel structures, and have enabled more efficient allocation of this pool of fixed capital through a third-party rental model that has in turn, unlocked more dynamic network engineering for the wireless companies, and economies of scale for the tower companies as their portfolios grew (who also give back some of these unlocked gains to the wireless carriers when their rental contracts get renewed as a result of a sometimes-contentious negotiation process).
Looking at another segment of the communications infrastructure ecosystem that’s evolved over the last 20 years, we can take a look at how typical enterprise deployments have changed from on-site colocation of mission-critical hardware running their applications (often within the physical footprint of their main corporate campus) to today, where most companies have diversified their architecture to incorporate some element of the public and private cloud solutions, including using third party retail and wholesale colocation providers like Equinix or Digital Realty. These equal opportunity providers today (along with the major hyperscale cloud providers like Amazon AWS, Microsoft Azure to name a few) have enabled far more competition in the mobile and desktop software landscape for early-stage firms to test product-market fit without requiring the large and upfront fixed investment that was needed in the past, which is ultimately a good thing as these software solutions ultimately improve our lives as consumers either directly (if B2C) or indirectly, if it allows other companies to operate more efficiently.
The two above paragraphs are just two examples, but overall, we have seen a greater movement to open-source as opposed to closed-source software within any given tech stack (e.g. the current popularity of heavily open-source components of popular web development stacks like LAMP), and even the large corporate behemoths have given away some of their previously proprietary code (Google’s TensorFlow library, Facebook’s image recognition algorithm, etc.) to as part of marketing or retention for the rest of their service suite. So why does this happen, and how might this continued force favoring public assets over time impact the development of the digital asset ecosystem?
Sources of Friction in Private Ledger Solutions
It’s pretty obvious what the initial goals of permissioned private ledgers are — figuring out the best mousetrap and then using the deep combined pockets of the fellow members within the consortium to then scale the solution aggressively to capture TAM before the competition adapts their own product or go-to-market strategy (interestingly enough, as of the date of this publication, the R3 website section with the most opening right now are within the Sales category which has 6 openings, as compared to any other category). Another positive for these private permissioned blockchains might be not having to rely on the noisy environment of public permission-less blockchains which are much more vulnerable to price volatility, 51% attacks, or misaligned incentives between developers/users (see the Grin mining $’s invested compared to the difficulty in raising $ to fund just 1 full-time developer for a 6-month period).
However, I think there are other negative factors associated with private blockchains that offset some of the positives, such as onboarding cost, comparative inefficiency versus existing enterprise database systems, and different coordination challenges (as compared to public blockchains) that are nevertheless impediments to adoption speed. Onboarding costs vary greatly for the permissioned platforms, but one example from IBM Blockchain showed a $2,000/month membership + peering fee cost, compared to free for developers utilizing most public blockchain platforms. From a data resiliency / efficiency of storage perspective, I am similarly unsure what benefits these still-permissioned systems offer versus traditional database-based accounting ledgers that are in use today, beyond perhaps better visibility into providence (balance over time / tracing of asset origination). Any incremental efficiency gain seems to me to be more than offset by the heavy development and maintenance costs and ultimately, subscription-fee price hikes as those early-stage investors will need to recoup the R&D dollars spent on developers and infrastructure.
The coordination problem of permissioned blockchains deserves its own paragraph. There are already signs of trouble within or between the permissioned blockchain coalitions which highlight some tendencies to slow down, instead of speeding up, innovation. A great example of this was the series of lawsuits between Ripple and R3 that spanned from 2017 through September 2018’s closed-doors settlement, which clearly took some amount of management focus, legal expense, and other resources at both parties to reach a resolution. In general, disagreements between these types of permissioned platforms, or even with respect to the stakeholders associated with a given private protocol, distracts or delays focus on their missions, while public blockchains have fewer ways to get snagged up on intractable disagreements (and ultimately, can fork off if there’s a critical mass of dissent). To be fair, one of the bigger challenges that public, permission-less chains often face is balancing renumeration / incentives for the developers of clients/implementations of the associated software, as compared to the permissioned projects who tend to have bigger fiat war chests / funding and can afford to a much larger payroll. While some projects have set aside money upfront (a “founder’s reward”-style pool from which to pay developers) or specifically allocating future inflation to fund developers, most solutions are probably still sub-optimal from the perspective of incentivizing consistent development effort– although thus far, this type of decentralized, voluntary development has worked well-enough (nobody paid Satoshi to write the white paper, the original code, or paid for electricity during the period of solo-mining, as far as we know).
Scaling Private Ledgers vs. Public Blockchains
There’s a funny way that the proprietary nature of permissioned blockchains acts as a kind of limiting factor on the creativity of solutions offered, in the same way that a market with fewer participants and fewer liquidity is less likely to result in an optimal allocation of resources since fewer parallel options are being tried out at once, and the cycle time for whether an idea is working is also longer to evaluated (when compared to public blockchains which often have very liquid markets that react with ever-increasing precision to impactful news).
Simultaneously, the universe of public blockchains are competing against each other for capital and attention, comprising myriad variations on technical parameters, governance solutions (on and off-chain), consensus mechanisms, tokenomics, consumer adoption pathways, and methods for incentivizing dApp developers, just to name a few factors. In contrast, your typical permissioned private ledger, while having the benefit of capital, likely has a set roadmap that’s inflexible and limited in degrees of technical freedom and is further restricted by more layers of corporate hierarchy (e.g. the CEO/CTO’s product vision having to be followed at all times and re-visited only ever so often).
Conclusion: Public Solutions Better Positioned in the Long-Term
While the answer is not black-and-white, I find it increasingly unlikely that the relatively fewer private, permissioned, platforms are structured to out-compete public, permission-less blockchains over the long-term, despite potentially being better mouse-traps in the near-term, (e.g. the recent news with R3 testing out a Proof of Concept using SWIFT’s GPI platform, ostensibly using XRP). However, over the long-term, I think many early private ledger successes can likely be emulated and subsumed by public / open protocols over time, especially given a cost-avoidance motive from developers. I’ve given some examples of how more open sharing has played out in connectivity infrastructure and software over time, and while history never repeats itself completely, I tend to agree with Mark Twain’s apocryphal saying about its propensity to rhyme.