Blockchain Short Story 009: Striking the Balance

In the realm of blockchain technology, we can observe two extremes: private permissioned chains and public permissionless chains.

Private permissioned chains create controlled environments that restrict access to a select group of participants. By emphasizing privacy, scalability, and compliance, these chains excel in delivering enhanced control and faster transaction speeds, making them particularly appealing to the financial industry. However, the very nature of restricted access, which makes private permissioned chains attractive, also imposes limitations. Expanding beyond the initial set of participants and use cases becomes a challenge.

On the other hand, public permissionless chains foster open and decentralized networks, inviting anyone to participate and contribute. Transparency, immutability, and censorship resistance are the distinguishing features of public permissionless blockchains. However, the openness and lack of control inherent in these chains present regulatory complexities. The absence of well-defined responsibilities within these chains leads to “decentralized” being misused as “not responsible if something goes wrong.” This poses a significant hurdle for banks operating in highly regulated environments.

For banks to progress beyond proof-of-concepts and achieve scalability with digital assets, striking a balance between these two extremes is one of essential aspects to cover. How this can be done?

1. It is crucial to create an ecosystem in that all relevant responsibilities are clearly defined. Since not everything can be embedded in an immutable algorithm, people or organizations are involved. This requires regulation and permissioning.

2. Despite the permissioning and regulation, the ecosystem also has to be open for collaboration on everything that is not essential for competitive differentiation, while still allowing room for competition. Close collaboration on building standards and infrastructure, competition at the application level.

3. the ecosystem must be credibly neutral. Having a completely trustless ecosystem is impossible to achieve, so the next best, credible neutrality has to be achieved in the sense that “rules of play” of the ecosystem allow for openness, inclusion, and competition.

By attaining this balance, banks can harness the transformative power of blockchain technology while complying with regulatory frameworks.

Image generated with DALL-E.