A Shift to Private Blockchains Signals a Bright Future for the New Technology
Initial Coin Offerings were all the rage during the 2017 cryptocurrency boom. Most of it was catapulted by the promise that public blockchains such as Ethereum could fuel new investment opportunities and ways to fund technology projects. As speculators bought into the hype, ERC20 tokens were distributed, and even airdropped, with the promise of advanced participation in a cadre of upcoming decentralized applications. These ranged from supply chain solutions to crypto web browsers. Even crowdfunding giant Indiegogo flirted with the possibilities.
In reality, these so-called utility tokens were purchased as cheap equity in hot new startups built mostly on the Ethereum blockchain, and therefore depended on it for everything from liquidity to scalability.
PwC reported that “In the first months of 2018, a total of 537 ICOs with a volume of $13.7 billion [had] been closed successfully.” However, when Ethereum’s market cap fell from $133 billion to $13 billion within a year, the majority of these projects got the short end of the stick. The platform’s underlying currency, Ether, lost 90% of its value from an all time high at $1,389 to its current price around $140. All ERC20 projects have followed suit, at the expense of both investors and blockchain entrepreneurs.
Regulators have since caught on to the fact that many of these projects were in fact offering unregistered securities. In 2018, the Securities Exchange Commission ruled that token sales would be regulated. Although major blockchains such as Bitcoin and Ethereum were exempt, it was deemed that most ICOs failed the famous Howey Test and had to be registered.
More so, there were many other inefficiencies that plagued the ICO model from the get-go, aside from volatility. Public or permissionless blockchains are not ideal for private enterprise due to latent issues that result from prioritizing decentralization over functionality.
Established companies operate an enormous amount of transactions per second. More than any public blockchain is able to handle at the moment. The average transaction confirmation on the Ethereum blockchain ranges between 2–3 minutes, and up to an hour for Bitcoin.
Most public blockchains are still unable to handle basic applications at scale. In 2017, the famous CryptoKitties dApp suffered a congestion crisis after an overflow of users rushed in to buy and trade virtual pets. Many enterprise-level projects wouldn’t afford to have similar issues plague their services.
An oft-overlooked fact about public blockchains is that they do not offer anonymity. They are offer pseudonimity. Every Ethereum or Bitcoin transaction is shared with a whole network of peers, indiscriminately. Permissionless blockchains are no different than public databases where users operate under aliases. This raises important privacy concerns for enterprise-level applications. On these services, sensitive corporate information could be traced by competitors.
The current impasse has left blockchain enthusiasts at a crossroads. Once the SEC thwarted the efforts to use public blockchains as a bypass to traditional means of raising capital, many startups have resorted to more efficient and stable methods. Ones that don’t imply unregulated crowdfunding practices, volatile prices, nor slow throughputs. In the past year, the implementation of blockchain technology has shifted towards its permissioned iterations.
IBM’s Hyperledger Fabric program has become a leader in this field. As defined by Executive Director Brian Behlendorf, “Hyperledger is an open source development project to benefit an ecosystem of Hyperledger based solution providers and users. It is focused on blockchain related use cases that will work under a variety of industrial sectors.”
Hosted by The Linux Foundation, the project offers a number of advantages for enterprises over its decentralized siblings.
No underlying currency
The reason why this is a feature, not a bug, is because private enterprises cannot rely on the price fluctuations of an underlying cryptocurrency, as is the case with public blockchains. More so, private blockchains can choose different consensus algorithms. This means that they can do away with the mining process that clogs a high number of vital transactions, allowing for much more scalable solutions that benefit enterprise-level projects.
This technology also allows parties to make transactions visible only within restricted networks. Permissioned blockchains ensure that the confidentiality of every participant’s transactions stays within a closed group of peers. On Hyperledger, a user may sell a given asset to one party for a given price and then offer a discounted price to a competitor, all under complete privacy.
Another important feature is that blockchain solutions can be tailored to the individual needs of each company. As an open-source project, Hyperledger can be customized and tinkered with thanks to its plug and play approach to decentralized ledgers.
It’s no surprise that companies such as Deustche, Airbus, SAP, Huawei, Nokia, American Express, and J.P. Morgan have started experimenting with permissioned solutions. Even Ethereum’s umbrella company Consensys is part of the effort.
More so, projects that would’ve resorted to ICOs a few months ago are also turning to permissioned blockchains as a regulated option. For instance BRITE Investments is developing a white-label crowdfunding platform that help asset management companies raise funds on their own terms, in a jurisdiction of their choice. Thanks to private blockchains such as Hyperledger Fabric, they are able to offer services such as simplified investor pooling, portfolio management, and more importantly, the tokenization of traditional assets. All under the full scope of regulation. BRITE, in particular, will be fully compliant with all the Anti-Money Laundering and Know Your Customer best practices.
The digital securities or security tokens offered by these crowdfunding platforms are understood to be the next step in blockchain-based finance, precisely because of their perfect fit into the traditional finance world. Whereas decentralized solutions are clouded by inefficiencies, these regulated financial instruments combine all the accountability that regulated entities offer with the liquidity and ease of access of blockchain’s tokenization features. All while completely avoiding price volatility issues.
Asset tokenization allows fractional ownership, a notable blockchain use case that already took the art industry by storm. This feature helps small investors connect with real estate opportunities that would normally be out of their reach. It also helps startups organize crowdsales of their stock and equity and transforms illiquid assets into multi-owner assets.
Users on platforms such as BRITE can purchase small percentages of multi-million-dollar real estate for affordable prices, own shares in dozens of interesting new startups, as well as sell their own assets by the piece. More so, their asset ownership rights and identity information are kept under complete privacy thanks to the use of the Hyperledger Fabric private blockchain. Over 95% of present blockchain companies ignore this important detail.
As the blockchain space matures, much of the hype around decentralized applications has receded. Many blockchain projects that were initially developed on the Ethereum blockchain have switched to Hyperledger Fabric’s more accountable, modular, and efficient solutions. This is especially so in sensitive industries such as supply chain, smart manufacturing, and real estate.
The greater shift, however, comes by the hand of regulated crowdsales that combine the best of both worlds. ICO’s might become a thing of the past, but security tokens and fractional ownership models point to a brighter future for the nascent industry. One where the democratization of finance means more than speculation and get-rich-quick schemes.