There are three ways to make a living in this business: be first, be smarter, or cheat.
In the FinTech world, the permissioned vs permission ledger debate shows no sign of slowing down.
Even Nick Szabo (who many believe to be the polymath behind the name Satoshi Nakamoto) has stepped into the fray, advising the banking industry that the benefits that they are seeking lie within the permissionless arena.
But the permissioned ledger advocates are pushing ahead. I’m in awe of Gideon Greenspan’s lateral thinking skills in his comparison of the blockchain to a global database concurrency control mechanism (MVCC), but his claim that this ends the debate seems a bit premature.
The rational behind the assumptions on the incentive structures are less well defined.
But if, say, we had a highly regulated financial system, in which bitcoin’s model was inapplicable, perhaps we could accept a pre-approved list of miners after all? If we had enough of them, and spread them well enough between institutions, and had legal contracts with all of them, are they really likely to gang up and undermine the network they depend on, when doing so will land them in jail?
But does picking and choosing who can join your own private blockchain really offer the protection that it promises? Can the legal eagles write a binding contract that offers the banking industry assets the same protection as an SHA-256 hash on the world-wide-ledger? There are two main obstacles to overcome.
Points of Centralization
The reason that bitcoin (a permissionless digital currency) has survived for the last 6 years is mainly due to the fact that there is no-one to pre-approve who gets to mine the blockchain, no-one gets to decide who can open an address “account” on the blockchain and no-one gets can stop any address from transferring value from one address to another. The lack of a central point is a core strength of the network.
With a permissioned ledger, “some central identifiable entity” has to provide the permission. The moment this entity becomes visible, they become the focal point for every possible attack from both external and internal players.
“are they really likely to gang up and undermine the network they depend on”
Wall St attracts the best, sharpest minds. But the lure of Wall St treasure doesn’t just attract those with “the smarts”, every industry has those. Wall St. efficiently filters out “the chaff” to leave only the most insanely competitive, ruthlessly efficient people on the planet. Every aspect of a centralized entity will be evaluated for weakness and exploited. The answer to the question posed above is a resounding “yes”. They will undermine and destroy it all if if it is profitable for them to do so.
Here’s Richard S Fuld Jr dancing around the oversight committee in the justification for his $484 million salary, despite destroying Lehman Brothers and bringing the western world to the brink of financial collapse. “All thats left is Fat Cats and Sad Sacks…..”
External Incentive Structures and the Network Effect
Bitcoin has an internal incentive structure. The process of securing the network earns bitcoins, and bitcoins have greater value the more secure the network gets. This works in a virtuous circle.
A permissioned network has two choices, either to deploy an internal value token, (similar to bitcoin) or to rely on a token external to the blockchain.
Internal Value Tokens: A new “bitcoin” has been shown over and over again to fail. There are thousands of “alt” coins, both permissioned and non-permissioned who have fallen at the hurdle of getting traction to overcome the $4billion network effect that bitcoin has. Without a significant technical advantage, it would be foolish to believe that a new coin would be any different.
External Value Tokens, making a new coin a representative of an external asset (such a dollar, pound, diamond, lump of cheese etc.) mean that the incentive to secure the network does not lie within the system. The virtous circle is broken and external incentive structures are required to secure the network. As of yet, I’m not aware of any technical alternatives to these structures, so they require either external economic incentives (ie in a permissioned blockchain owner would have to pay the incentive for people to secure their blockchain, or rely on external legal frameworks). Again very, very difficult to implement in practice.
In Conclusion
The permissioned ledger debate is still just beginning, and rightfully so.
Permissioned ledgers provide a stepping stone for the banks and asset managers of today to step towards a more efficient digital system, saving cost and improving the lives of the global community. I hope, for the sake of our society, that a way forward can be found, as the alternative is a flight from fiat capital at such a rate that it will devastate entire communities.
The network effect that bitcoin has created is strong, but not completely insurmountable. Technical innovations which build on bitcoin are possible and have a chance to steal the crown.
Ethereum offers a decentralized software platform which builds on the innovation of bitcoin to build out a de-centralised application platform powered by a coin (ether). I’m yet to fully comprehend the incentive structures which can be built on this platform, Oliver Bussmann and Alex Batlin from UBS Level39 are currently working on deploying a UBS coin into this arena, so there is obviously something to it.
Similarly, Ripple and Stellar offer alternative perspectives on the issue which deserve some attention. I’ll explore both the these perspectives in a later article.
