Summary. Cryptocurrencies and blockchain are often thought of as a singular technology. The singular “blockchain” idea is actually a collection of composable technologies that when combined provide novel and emergent value propositions and applications. This primer aims to demystify blockchain technology and digital assets, from the most relevant high-level concepts to value propositions and applications. Some of the topics discussed are blockchains, smart contracts, consensus, incentives, digital assets, mining, valuation, and private blockchains. The primary objective of this primer is to clarify what blockchain technology is, how it can be used, and, crucially, why education and exploration is imperative for investors, governments, and financial institutions all in plain English.
Why pay attention?
The world is digitizing at a greater and faster rate than most realize. This shift is irreversible and accelerating, and will permeate major facets of life, including our methods of transacting and information sharing, modes of communication, and approaches to investing. This global trend has been built in large part on the back of the existing internet architecture, and more recently, the mobile revolution. In the past few years, blockchain technology has increasingly been recognized as a foundational piece of the puzzle that is a fully digitized world. The integration of the existing technology infrastructure with the rapidly improving blockchain architecture will be a multi-year evolution that will further transform huge portions of the global economy, from supply chain management to medical records to money and the internet itself.
The story of the blockchain and digital assets evolution has been to some degree hijacked by a retail-driven crypto asset price bubble, alongside a financial press corps eager to capture the enthusiasm through clicks. In addition to a hijacked narrative, the simultaneous breadth (“it affects everything”) and depth (complex cryptography) of the technology have made understanding it challenging from a practical perspective.
The deeper and more sustainable story than the spectacular rise and fall of crypto asset prices in 2017 and 2018 is that the technology underpinning Bitcoin has an unprecedented potential to disrupt the existing system, from the macro (industries, money, the internet) to the micro (individual companies, applications). Broadly, we can break the impact down into three categories:
The Global Financial Crisis (GFC) dramatically diminished confidence and trust in the global financial system, from investment and commercial banks to central banks to government leaders. It set the stage for an unprecedented monetary policy expansion from which the world has still not managed to unwind. Alongside this monetary experiment, sovereign debt levels have increased to unprecedented levels, and banks consider the government their most important customer. Such systems embed high degrees of correlation during any extreme or negative situation.
In the aftermath of the GFC, many questioned the way central banks managed monetary systems and markets, and sparked a desire to shift the control of money from a central authority to people, eliminating untrusted, costly, and inefficient third-party intervention in transactions. Bitcoin emerged as a verifiably scarce digital payment system that does not rely on a trusted third-party intermediary. Its fixed supply and difficulty adjustment act as a reliable method for limiting the stock-to-flow ratio changes irrespective of the growth in Bitcoin’s value or its network resources. Because of its permissionless, peer-to-peer, and digital bearer nature, Bitcoin enables monetary sovereignty and allows its holders to have full control over their ownership and usage of the monetary system. Bitcoin kickstarted the search for digitally sound money and new payments systems, and has opened up the possibility for a more free and accessible market for money for the global citizen.
Most people think of the internet as decentralized. In fact, it is increasingly centralized, and therefore less secure. Large internet properties present enticing opportunities for sophisticated hackers to attack, often with devastating success. Seemingly each week we see another attack affecting tens of millions of unsuspecting and innocent targets. The business models of large social media providers are predicated on selling shockingly detailed information on customers to almost any buyer. This has long term implications for privacy, security, and individual independence.
True decentralization through blockchain technology, also called distributed ledger technology, presents a more secure alternative and can function as a “better back of the TV” than our existing internet architecture. Storing information in a decentralized and cryptographically secure fashion has a number of benefits, including security, transparency, and giving back agency to individual users of the internet.
While markets are “efficient,” in that more information is transparently available than at any other time in history, and “liquid” in that high-powered quant systems match buyers and sellers, they are also full of friction. The process of investing, from loan settlements to private placement subscription documents, is complex and time consuming. Markets are closed at artificially determined times (e.g., weekends), and a large portion of the world is incapable of participating in our existing market structures. Since the securitization of the bond markets, the financial services industry has attempted to create innovative structures to reduce these frictions, including the explosion of the global ETF market. A natural next step in market structure innovation is the digitization of assets. These digital assets (or “tokens”) are nothing more than a digital wrapper for existing market risk. In a fully tokenized world, secondary sales of private placements would be far simpler, investors from all around the world would have access to coveted US markets, and fractional ownership of previously inefficient asset classes (e.g., art) will be more broadly accessible, thereby blurring the lines between public and private assets.
Compliant digital securities based on blockchain and smart contracts lie at the intersection of traditional financial products and digital assets. These innovations can lower fees and automate service functions by reducing the complexity, cost, and paperwork required with security management, including deal execution, compliance, and governance. Furthermore, assets that do not currently exist in digital form (such as receivables, interests in private funds, or ownership of art) can be digitized, enabling broader liquidity and potentially larger investor bases. Beyond asset or risk digitization, there are significant opportunities to digitize and organize a lot of the data we generate and utilize, as digital records that are structured, secured, and distributed can eliminate intermediaries, reduce friction, lower costs, and enable greater efficiencies and new innovations.
What is a blockchain or digital ledger?
What is it?
The technology behind blockchain is actually quite simple. Think of an Excel spreadsheet where each tab has a list of organized records and each tab has a timestamp when the records were authenticated. The tabs are linked sequentially to one another with unique identifiers. Blockchains are just that — data structures (container that stores data in a specific layout) that organize and link data records.
A blockchain or digital ledger links batches of records and transactions, which are aggregated into “blocks” and given a timestamp and unique identifier that allows us to tell it apart from other blocks (also known as a “hash”). Blocks are linked together using these hashes to form a “chain” of blocks. Hashes are a concept in the branch of mathematics known as cryptography, which when applied to information science, enables data confidentiality, integrity, authentication, and non-repudiation.
The blockchain ledger is distributed, and other network participants create consensus around each transaction. This creates a permanent and immutable transaction record that is resistant to modification and tampering, providing a secure way to record and maintain data history.
Why is this useful?
While we live in a digital world, much of the current data we generate, store, and use on a daily basis is unstructured, disorganized, and is prone to unwanted (either accidental or malicious) changes. Digital records that are structured, verifiable, and shared can enable far greater efficiencies — and that’s not even considering the world of transactions and commerce still done on paper. The application of using shared, digital records are immense, with just a few examples highlighted below:
It can’t be that simple — is it really?
Yes and no. The blockchain is just a data structure — there are many types of data structures and the innovation doesn’t lie in how the data is organized. The innovation of blockchain lies in three parts: 1) the automation and performance of agreements or transactions, 2) how the blockchain is verified and participants achieve consensus on the records, and 3) broad applications of programmable value and information.
What are smart contracts?
What are they?
Smart contracts are computer code that sit on top of the blockchain and contain a set of rules that facilitate, verify, and enforce the negotiation or performance of an agreement or transaction. If and when the pre-defined rules are met, the agreement is automatically enforced.
Why are they useful?
Smart contracts are basically tasks, transactions, and operation automation. Importantly, they are self-verifying (they operate per their coded design), self-executing (they remove manual, expensive, and untrusted middlemen), and tamper-resistant (the inputs, functions, and outputs of the contracts can be verified and therefore can protect against manipulation). Smart contracts can automate legal obligations, guarantee greater security, reduce the reliance of intermediaries, and lower transaction costs.
What can smart contracts be used for?
An example of a smart contract is insurance performance. Imagine you purchase flight insurance and miss your flight. A smart contract can take the input (verification from the airline you missed your flight), perform the contractual agreement (that you are entitled to receive the full refund value of your ticket), and pay you out instantly. There is no need for an agent to manually verify you missed your flight and there is no need to wait 3–5 business days before the insurance company writes you a check. There is no need for expensive human intervention and costs can be dramatically reduced. The design space and applications of smart contracts are practically infinite, but examples include:
- Automated copyright privileges where usage of the copyright automatically creates a royalty payment in real-time
- Automated escrow and title transfer between parties (mortgage, art, supply chain, etc.)
- Automated payments based on contract performance (employment, dividends, interest, covenant triggers, etc.)
- Package and delivery tracking and authentication with sensors in the Internet of Things (“IoT”)
What is consensus, incentives, open protocols, and permissionless innovation?
Now that we’ve covered the basic structure and automated operations that blockchains can enable, we can turn our discussion to how the digital records are authenticated and verified by participants.
Consensus of the ledger
Blockchains are just data structures. These data structures can be private (only one individual can see the records), shared selectively (such as with a small group), or public (such as with digital assets like Bitcoin). The nature of the transactions and applications dictates how the data should be authenticated by its participants, or in other words, how the participants achieve “consensus.” Say you want to keep a log of your personal spending. You could create an Excel workbook on your computer, and aggregate transactions by month into tabs. When it comes to authenticating the data, there is probably no need for others to authenticate your data since only you are allowed to write data to your sheets. In addition, the value of the information being stored isn’t inherently valuable (such as with a multi-billion dollar cross-border settlement), so you are likely better off authenticating the data by yourself.
What happens if you want to share your ledger with others? Imagine a group of banks sharing their respective trade blotters (records of trades for a given period of time) with one another. But often there are discrepancies in the trade blotters, and the banks spend a considerable amount of time, resources, and capital reconciling trade data. Presumably, they could create one master blotter and appoint one bank to be in charge of writing data to the ledger to avoid discepencies, but if something happens to that bank’s computer (shuts down, gets infected with a computer virus, goes offline, etc.), the data it writes to the ledger may not be valid or live. Clearly, this isn’t a safe way to manage records: If only one party is responsible for maintaining and verifying data, there is a single point of failure and potential for catastrophic consequences. But what happens if there is faulty information or malicious actors in the network? How does the network come to consensus on the state of the ledger (the validity of the information)?
The consensus problem is an age-old computer science problem of multi-participant systems and requires agreement among the participants for data values. Some of the participants may fail or be unreliable, so consensus protocols (or the process by which a network can achieve agreement on data) must be fault tolerant and resilient. The consensus processes must somehow put forth their values, communicate with one another, and agree on a single consensus value. Coming to consensus in systems with faults is extremely important in systems engineering: picture a nuclear reactor with three sensors. Two of the sensors tell the operators that everything is fine, while the third tells the operators that there is a leak. How do the operators know what is the true state of the reactor? One approach to generating consensus is for agents to agree on a value through a simple majority. In the example of the trade blotters and banks, the majority of the banks in the network can vote on the state of the ledger to verify the records are valid. However, one or more faulty processes may skew the outcome such that consensus may not be reached or reached incorrectly. What becomes the correct threshold for validity?
The processes and rules for maintaining fault tolerance are known as consensus mechanisms, and they are a part of our everyday lives. There are a wide variety of consensus mechanisms. Some of them rely on a single party confirmation (such as Amazon confirming and providing your order history), while others such as the “Proof of Work” consensus mechanism upon which Bitcoin leverages a global network of participants to provide a fair, real-time, reliable, and secure mechanism to ensure that all the transactions occurring on the network are genuine and all participants agree on the status of the ledger.
Naturally, data and information is only valuable if it is true, and participants must be incentivized to maintain data integrity and consensus. While many systems rely on good actors and altruism (we rely on our utility companies to provide us accurate information to the state of our utility usage), it’s clear that many systems can’t operate under those premises. Enter incentives.
Participants on networks usually have a set of “carrot and stick” incentives, or simply “reasons to do good and to not do bad.” In the bank analogy, the “stick” of faulty trade data is expensive reconciliation, wasted resources, and potential litigation, while the “carrot” of valid data is time and cost savings. Digital or crypto asset networks rely on a similar set of incentives: the “carrot” for validating and verifiying transaction computations is compensation in crypto assets and a valid, secure network. The “stick” is the economic cost of transaction validation; in “Proof of Work” systems seen in many public digital asset networks such as Bitcoin, the economic cost of validation is the capital investment and operational expenses necessary to validate transactions. Through dual incentive structures, participants are incentivized to achieve consensus of valid records and maintain the network.
Open protocols & permissionless innovation
Networks can either be public or private, allowing for private or public consensus and enabling private or public innovation. Open, public networks are decentralized and use peer-to-peer connections without a single, centralized hub. They provide efficient information creation and sharing without a centralized entity that can manipulate or censor the data, or stifle competing projects.
Open networks can also remove the inherent information and influence asymmetry that is present in today’s internet. Since anyone can join and contribute to the network, the development of the network is no longer restricted to just the centralized hub. Through open networks, people can share and agree on virtually anything without intermediaries, and the economic incentive that aligns the keepers of the network and users is an innovation in social accountability. The centralized nature of today’s internet also poses a security concern as single points of failure make data an easy target for hackers, potentially compromising personal and sensitive information through centralized attacks. Without competitive forces, centralized firms that disproportionately control the internet have little incentive to innovate and protect private information. By offering a neutral and stable platform, open protocols and networks offer some solutions to these problems and provide potential innovation for the future development of the next iteration of the internet. 
What are digital and crypto assets?
Digital assets are programmable value. The assets can be issued natively (such as Bitcoin or natively issued shares of a company) or can represent value in the real world (such as digitized real estate or art). Digital assets enable authenticity, proof of ownership, provenance, and flexibility for complex transactions and contracts. Picture digitally native interests in a credit fund: borrowing companies can send automatic digital interest payments via a smart contract at the agreed upon date to a credit fund manager, where another smart contract automatically deducts fees and expenses before ultimately distributing the current income to verified owners of the fund’s interests. Such innovations can help reduce inefficiencies (both time and cost), remove expensive intermediaries, and create “trustless” contracts and connectivity (in other words, there is no need to “trust” a middleman in charge of transferring payments). Digital assets can be used to:
- Create liquidity
- Enable divisibility
- Speed up settlement
- Govern assets
- Permit compliance
- Automate service functions
The term “digital assets” can be used to describe a wide variety of programmable value including “crypto assets,” which are native assets of public blockchains that utilize cryptography, such as Bitcoin and Ethereum. The term “cryptocurrencies” is also used, but is a misnomer since many of the assets do not intend to be a currency. As such, we will refer to natively issued assets on public blockchains as “crypto assets.” We will briefly highlight two of the main digital assets, Bitcoin and Ethereum, and highlight how their technology can potentially compete with traditional incumbents.
What is it?
Bitcoin is an independent alternative system for global money that does not rely on 3rd party intermediaries to facilitate transactions. Bitcoin combines the benefits of digitization and finality of cash settlement, creating a reliable and fast method for borderless payments. Bitcoin (1) utilizes a distributed, verifiable ledger, (2) is cryptographically secure, (3) is practically resistant to threats, and (4) bears no counterparty risk or reliance on a trusted third-party. Bitcoin’s method of consensus and public ledger solves the “double spend” problem, a potential flaw in a digital currency system in which the same single digital unit can be spent more than once. This is possible because a digital token consists of a digital file that can be duplicated or falsified (imagine duplicating a digital cash file to essentially mint money at will). Since decentralized digital currencies have no central agency verifying that a unit is being spent only once, there is a risk that a unit can be spent more than once. The original author of the Bitcoin whitepaper, Satoshi Nakamoto, proposed a public, timestamped and log-based mechanism to generate computational proofs that would be able to verify the authenticity of each transaction and prevent double-spending (in other words, achieve valid network consensus). Bitcoin solves the double spend problem by having a publicly-verifiable ledger. If an individual attempts to spend his or her bitcoin more than once, the miners will reject the invalid transaction. The ledger of transactions is updated with each new block, so that participants can calculate an individual’s balance and verify whether they are attempting to double spend.
Bitcoin is digitally scarce, with a known and fixed supply issuance limited to 21 million bitcoin, and its supply growth is fixed and constant in Bitcoin terms with programmatic supply issuance declines approximately every four years. In contrast to modern central banking where newly minted money is used to finance government spending and lending, newly issued bitcoins are compensated to individuals who expend resources to secure the ledger. The method that modulates supply creation with increased network resources, otherwise known as the difficulty adjustment, limits stock-to-flow ratio changes and makes bitcoin fundamentally unique from all other forms of money. Changes in bitcoin’s value also cannot increase or decrease its supply or affect its issuance, as the supply of Bitcoin is naturally bounded by the hard-coded algorithm and the dynamically adjusted difficulty of the network. Network security relies on the asymmetry of the costs in performing the “Proof-of-Work” necessary to validate transactions and the cost of verifying completeness and truthfulness: it is relatively difficult and expensive to perform the calculations in the first place, but trivial to verify the correct computations.
Framing Bitcoin’s volatility
The presence of a conservative monetary policy and the difficulty adjustment allows Bitcoin to succeed as a digital store of wealth and as money. Bitcoin’s volatility today, while still early in its global adoption, is a result of its programmable inflexible supply and predetermined growth rate; demand changes of the underlying units do not affect the creation or destruction of the units. Therefore, as bitcoin adoption increases, each incremental adopter will have a decreasing impact on the price of bitcoin, leading to a dampening of volatility in the long run. Bitcoin’s volatility is natural and quite expected during its early stage of global adoption, but this volatility should not be confused with its expected volatility at mature adoption. Bitcoin is one of the few assets that has strict limited scarcity and cannot be debased. Bitcoin also does not have any of the physical drawbacks of traditional money or stores of wealth: the cost and speed of transfer and general storage of Bitcoin is a significant improvement over traditional media.
The value proposition of Bitcoin
Government-issued money is susceptible to rapid supply increases compared to its existing stock through central bank activity, and therefore has the potential to lead to a rapid loss of salability, diminishment of purchasing power, and wealth depreciation of its current holders as we have seen throughout the late 1900s and 2000s with the suspension of the gold standard. This systemic risk exists in all portfolios that own traditional assets given the inherent links between global economics and financial markets, and therefore an allocation to Bitcoin that is expressly limited to inflation and untethered from the global sways of central bank activity, global economies, and financial markets can potentially diversify some of the systemic risk that exists in modern portfolios.
What is it?
While Bitcoin aims to be a global, decentralized money with a fixed and known supply, Ethereum emerged in 2015 as an open, blockchain-based distributed computing platform and operating system featuring smart contract functionality. Ethereum provides a decentralized computer power, which can execute transactions, smart contracts, and applications using a global public network of nodes.
Ether is the natively issued digital asset of Ethereum; ether can be transferred between participants and is used to compensate participants verifying records and transactions for computations performed similar to Bitcoin. In essence, ether acts as a commodity used to access a network’s scarce resources. The use of oil is a similar analogy to ether: ether acts as a fuel for the decentralized network, very similar to how we consume oil to operate cars or trucks.
Smart contract platforms, such as Ethereum, have the ability to revolutionize the existing foundational layers of the internet by running consumer and business applications in a permissionless and reliable manner, with 24/7 operations and contract execution.
How do crypto asset networks come to consensus and what is mining?
We briefly touched on two topics earlier that are particularly relevant for crypto assets: consensus and incentives. Crypto asset networks such as Bitcoin confirm transactions and come to an agreement about the state of the ledger using a consensus mechanism and incentives. This consensus process of transaction processing and validation, commonly known as “mining,” can come in a variety of forms, but the most well-known and common consensus mechanism is Bitcoin’s “Proof-of-Work” (also proof of work).
To implement this mechanism, Bitcoin transactions are organized into blocks. The proof of work scheme involves a game of brute force guess and check in a mathematical puzzle that transaction processors (sometimes know as miners) compete to solve first. Once the computational effort and electricity has been expended to satisfy the proof of work, the transactions are confirmed (processed), the block is chained together chronologically with the current ledger, and the block cannot be changed without redoing the work. As subsequent blocks are attached to the chain, the work to change a block would require redoing the work calculations for all the blocks after it. The network can verify the work a miner has completed by executing a single calculation.
The ledger of transactions is updated with each new block, so participants can calculate an individual’s balance and verify whether they are attempting to double spend. In return for completing the verifiable work computation, the miners are compensated in bitcoin through new bitcoin issuance (known as block rewards) and transaction fees. The native payment in Bitcoin provides an incentive for miners to compute and verify the transactions chain.
The expenditure of electricity and time creates an economic cost to miners that acts as a penalty if the miner is not acting honestly. If a miner attempts to cheat and falsify information, the miner will not receive bitcoin and will suffer the economic cost of mining. Costs include electricity, capital investments in specialized hardware, bandwidth, storage, and operational expenses. Compensation payments are irreversible upon the network’s consensus, natively digital and integrated, and operational 24/7 to support global transactions.
The system remains secure as long as the honest miners collectively control more computational power than any cooperating group of faulty or attacking miners. Bitcoin solves the double spend problem by having a publicly-verifiable ledger; if an individual attempts to spend his or her bitcoin more than once, the miners will reject the invalid transaction. Proof of work is not the only consensus mechanism that exists in public blockchains. New consensus mechanism such as proof of stake (transaction processors stake a deposit that acts as insurance against malicious behavior) are emerging and eliminating the necessary but costly energy usage that is present in proof of work systems while still maintaining the dual-incentive structure necessary for the success of consensus game theory.
Can crypto assets be valued?
Valuation theory and practices for traditional financial assets have become widely accepted through decades of research and analysis. In contrast, valuation theory and methodologies for crypto assets remain in their nascent stages because crypto assets exhibit a variety of novel characteristics that do not fit neatly into traditional asset valuation methodologies. The biggest insight into crypto asset valuation is that traditional economics and valuation frameworks do apply: they require an understanding of the use case of the crypto asset and how the asset works at an economic level. We will caveat this by noting that we are still early in the crypto asset lifecycle and valuation constructs with empirical proof still need to be formalized. Innovation is taking place at breathtaking speeds and we expect valuation constructs to evolve and crystallize as the space continues to mature.
Relative valuations and utility theory in particular are applicable to crypto assets. We use these frameworks to value commodities and currencies. In the instances of commodities and money, the value of such assets is based on how much we value the utility the asset confers (direct utility for commodities and indirect utility for money). Even still, these existing frameworks can be useful in crypto assets. Using a similar construct for commodities and currencies, the value of a crypto asset is an “objective value” associated with its usage driven by its network effects and social acceptance, and “a decentralized premium,” or how much an individual is willing to pay for decentralization. While the “objective value” can be challenging to calculate at early stages, history has shown us the value of networks from money to the printing press to Facebook. A decentralization premium is a premia associated with the benefits of decentralization: strong fault and failure resilience, attack, censorship, and collusion resistance, and ownership over information and data.
Utilizing traditional frameworks and the value proposition for crypto assets, we can build valuation methodologies for crypto assets. For assets designed primarily to be a medium of exchange and support an economy, classic Theory of Money, Cambridge, and Keynesian economic constructs can help us model out aggregate demand or GDP based on its indirect demand for goods and services. For assets designed to be a store of value, such as Bitcoin, one valuation construct is a “transfer of wealth” methodology where stores of value serve as a “flight to safety” instrument during periods of economic or geopolitical stress. This can be in times of economic stress when monetary inflation threatens commerce, individual wealth, or when faith in centrally controlled fiat money is questioned. Anecdotal evidence suggests this is perhaps the case: Bitcoin buying volumes and premiums in comparison to the rest of world soared during Greek banking crisis in 2015 and economic turmoil in Venezuela, Turkey, and Argentina in 2018. Under this construct, the value of a crypto store of wealth in times of fiat stress is the probability-weighted, transfer-of-wealth in economic stress events of global fiat currencies. In addition, a relative valuation construct may also be applicable. Bitcoin can also serve a purpose of being digital gold, one that is provably finite, deflationary, and democratic, so a comparative valuation to gold may be appropriate.
The crypto assets that power smart contract platforms act as commodities that access a network’s scarce resources in a single currency, including operating/capital expenses, computing power, storage, network security, and its decentralized infrastructure. One way to value smart contract assets can be to value the sum of all the resources provisioned by a network plus a decentralized premium for 24/7 permissionless operation and benefits previously mentioned. The best example is Ethereum, where users pay network operators using the native currency, ether. Price is dictated by the supply and demand for the resource dynamics, similar to other commodities. In this instance, ether’s USD value increases, even if over time the cost of digital inputs like storage or computation decreases.
These are by no means complete frameworks, and just like the ecosystem they are constantly evolving. Emerging technology and asset classes offer a plethora of further areas for research, including: clearer economics, valuation, and pricing of launched systems through higher daily active users and more network usage, quantitative analyses of the decentralized premium and value of decentralization, and a deeper analysis of economic and valuation idiosyncrasies of each asset. 
What are the value propositions and applications of blockchain technology?
At its core, the value proposition of creating, sharing, and securing information sits at the foundation of our lives, and technologies that enable the transfer of value and information provide stepwise changes in technological and societal progress. In order to illustrate the design paradigm in blockchain technologies, we’ve created a simplified conceptual that highlights some of the technological design elements that can comprise an ultimate application; this general method of layer abstraction illustrates the interoperability of diverse technologies and communication systems within blockchain systems.
Public and private blockchains
Selecting and combining the elements above can create new applications and value. A private, permissioned ledger uses a simpler consensus model and limits the participants that can write, edit, or review the records, like in the previous bank record example; in contrast, an open ledger can enable anyone to authenticate and submit data, like Bitcoin. While they serve different use cases, they both share the same overarching architecture (albeit with different design elements) and create value in unique ways. Both public and private blockchains are designed to be peer-to-peer networks where each participant maintains a copy of the shared ledger of digitally-signed transactions, the ledger are kept in sync through consensus, and both provide certain guarantees of the immutability of the ledger, though private blockchains may have flexibility for data changes.
The major distinction between public and private blockchains is who is allowed to participate in the network, perform consensus, and maintain the shared ledger. A public blockchain network is completely open and anyone can join and participate in the network, while a private blockchain network requires permission and the invitation must be validated by either the organizer of the network or a set of rules. This naturally places limitations on who is allowed to participate in the network and the types of transactions it will allow. This access/control mechanism can vary greatly: existing network participants could decide future joiners, a regulatory authority could issue permits for participation, or a joint consortium can make the invitation decisions. A common misconception is that public blockchains do not allow for the creation of permissioned systems — in reality, they do. Public blockchains are designed in an open, flexible manner, where people can create both open applications (like a voting system for a park’s annual funding) or closed, permissioned applications (such as corporate earnings statements). The only difference is that the private, permissioned blockchain has the system permissioning as a core facet of the platform. Since public blockchains support identity management (via a system of public-private keys which we will later discuss), the developers can easily create a permissioned application.
There are a handful of differences around performance and transaction speed as well. Since private, permissioned chains usually have a much smaller set of participants maintaining the ledger and consensus, they can generally come to an agreement on the state of the ledger faster and therefore the blockchain throughput (speed at which new data can be added to the ledger) is usually faster in comparison to public blockchains. Consensus is naturally quicker if 2 of 3 participants on a private network need to agree on the state of the ledger versus a million participants securing the Bitcoin ledger in a proof of work system. This trade-off comes at a cost: because there are fewer participants maintaining the ledger, it is usually more susceptible to failures and is less secure than public blockchains with potentially millions of participants securing the ledger.
However, public blockchains have had a number of innovations over the years to tackle the speed and scalability issues. Improvements to the data structure and messaging have helped improve the scalability of private networks, but the real innovation rests with technologies known as sidechains or Layer 2 technologies (“side” blockchain ledgers that run in parallel to a primary blockchain and entries from the primary blockchain can be linked to and from the sidechain). Think of a coffee tab with a friend: instead of paying for each cup of coffee purchased for one another separately and requiring a network to confirm every payment, you can set settle periodically and summarize multiple transactions at once. There only needs to be a single transaction that settles the economic relationship and the data (multiple shared coffees) is probably not needed on a public ledger. The most well known example of a sidechain in practice is Bitcoin’s Lightning Network. It operates alongside the primary Bitcoin ledger and acts much like our coffee example, creating side “channels” where payments can be sent back and forth without requiring the network to confirm each transaction. Periodically, the balances are settled and there is a single confirmed payment for the economic transactions. These types of innovations can help solve the scalability and speed problem present in many public blockchains.
The similarities and differences of public and private blockchains are highlighted below:
Wait — what about security and privacy?
Much in this primer has discussed sharing records in an open manner. But vast amounts of our data can’t and shouldn’t be shared openly. Medical records, private business transaction data, personal finance records, the list goes on and on. Fortunately, these technologies do enable privacy and sovereignty over data. Private ledger applications can have a multitude of permissioned layers such that only certain permissioned individuals can view or edit the data. A company’s financial record ledger may allow the CFO and auditers to see all the records, but individual accountants may only have insight into portion’s of the records (say, a receivables analyst can only see the history and current status of the company’s accounts receivables).
Public ledgers can also enable privacy through a variety of common technologies, including cryptographic key algorithms, encryption, and a branch of mathematics known as zero-knowledge. Key algorithms secure vast portions of our global, digital infrastructure, and basically act like passwords to maintain security. They come in two main forms: symmetric and asymmetric key algorithms. In symmetric key mechanims, a “secret” (basically a special password that comes in a long text string of numbers and letters) can be used to encrypt or decrypt your data. These secrets can be shared with others, so you can create secure methods for sending information. Imagine a CEO and CFO sharing sensitive financial information prior to an earnings release: the two individuals can share a secret key that they both use to encrypt and decrypt files containing financial information to prevent hackers or unwanted individuals from seeing the naked information (to the hackers, the encrypted files and information come out as gibberish). Similarly, public ledgers can store encrypted data and messages, and only those with the secret key can view the information. Asymmetric key cryptography, otherwise known as public-key cryptography, can also enable security and privacy and forms the foundation of open, digital blockchains. Public-key cryptography uses a system of private and public keys; public keys can be distributed widely, while private keys are known only to the owner and are kept confidential. Only the paired private key holder can decrypt the message encrypted with the public key. The public key allows for the authentication and verification that a message was sent by the holder of the paired private key. The public key can be openly distributed without compromising security. This technology and a branch of cryptography known as elliptic curve technology also enables digital signatures, another important facet of our digital lives. Digital signatures are designed to verify that a message came from a particular sender, which prevents impersonation of the sender and denial by the sender of having sent the message.
There is a branch of mathematics known as “zero-knowledge,” or methods by which one party (the prover) can prove to another party (the verifier) that they know a value without conveying any information apart from the fact that they know the value. The essence of zero-knowledge proofs is to prove such possession without revealing the information itself or any additional information. The applications and use cases for such technologies are diverse: a hospital could prove ownership of a patient’s medical records without revealing the contents of private information, a bank could verify its customer deposits without revealing specific amounts, etc. In summary, existing technologies can securely enable the transfer of value and information in both public and private manners.
So what are some of the applications and value propositions?
At a high level, these composable technologies enable programmable value and information. Technology design choices and the resultant applications achieve a diverse array of value propositions. Some of the value propositions of public and private blockchains are highlighted on the figure to the right.
Public, permissionless blockchain application examples
Global digital money — Bitcoin is most well known example of permissionless digital money. Digitally native businesses have exploded with FAANG dominating growth globally. The internet transformed the rest of the economy, but had not created digital money at scale until Bitcoin. Public blockchains enable decentralized, digitally native global money systems for borderless, 24/7 payments. These payment systems leverage an open, verifiable ledger with cryptographic and practical security and do not bear counterparty risk or a reliance on a trusted third-party.
Global computing platform — Ethereum and EOS are some of the most well known examples of global computing platforms.The growth of the internet was fueled by open and peer-to-peer networks, but the commercialization of internet has hindered permissionless innovation and application development. Decentralized global computing platforms allow for anyone to develop and create applications for consumer and business use cases. These platforms can execute smart contracts and operate applications using a global network of public nodes and can outlast any single government, company, or person.
Private, permissioned blockchain application examples
Digitized records, agreements, and contracts — Despite our global transition to a digital infrastructure, much of our data and records are still unstructured, inconsistent, prone to accidents and manipulation, and haven’t transformed from paper form. Enforcement and performance of agreements remain lengthy, costly, and dependent on 3rd parties and middlemen. The digitization, sharing, and automation of agreements can enable business, government, and personal efficiencies, improving speed of execution, ensuring correct performance, and reducing costs by removing rent takers. Applications include trade finance, supply chain, insurance, and payments.
Digitized securities — Compliant digital securities based on blockchain and smart contracts lie at the intersection of traditional financial products and digital assets. These innovations can lower fees and automate service functions by reducing the complexity, cost, and paperwork required with security management, including deal execution, compliance, and governance. Furthermore, assets that do not currently exist in digital form (such as receivables, interests in private funds, or ownership of art) can be digitized, potentially larger investor bases, and enabling broader liquidity.
Putting it all together
Blockchain systems have implications for the payments, savings, and banking space at large, but also create unique opportunities for non-banking applications. The space is still young, but the benefits are real such as social media, gaming, and FAANG-dominated areas. The blockchain and digital asset ecosystem sits at an inflection point of technological innovation across both public and private blockchains. In the public blockchain and crypto asset space, the largest crypto asset networks are experiencing growth in network usage, scalability, and institutional adoption: payment and transaction volume continues to grow, and both traditional Wall Street and Main Street firms such as Fidelity, CME, NASDAQ, ICE, Microsoft, and Starbucks are building solutions and businesses in the space. In the private blockchain space, blockchain fintech applications are originating financial products and assets, improving operational processes, and reducing costs by leveraging technology from firms such as IBM, Microsoft’s Azure, Amazon’s Managed Blockchain, R3, and Hyperledger. Future public and private blockchain use cases and applications are emerging, while many of today’s applications are seeing continued development and can ultimately lead to more efficient, secure, and value-creating digital infrastructure.
For further reading, please contact Galaxy Digital for additional research white papers that dive into some of the topics discussed, including On Sound Money, Crypto Assets: Extending Permissionless Innovation, and Crypto Asset Valuation.
References & Notes
 For further detail, please contact Galaxy Digital for our On Sound Money essay.
 For further detail, please contact Galaxy Digital for our Crypto Assets: Extending Permissionless Innovation paper.
 Bitcoin with an uppercase B refers to the network, bitcoin with a lowercase b refers to the monetary unit in the network.
 For further detail, please contact Galaxy Digital for our Crypto Asset Valuation paper.
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