Hybrid Blockchain: Decentralized Option for Highly Regulated Markets

Few players in highly regulated markets have adopted blockchain technology. However, hybrid blockchain will change this.

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Despite the benefits of decentralization, not many players in highly regulated markets have adopted blockchain technology. Local laws and regulations tightly control these markets, which current blockchain options cannot accommodate. However, one Singapore-based non-profit called XinFin is developing new hybrid blockchain technology to solve this problem. XinFin’s hybrid blockchain will make it possible for highly regulated markets to benefit from decentralization while remaining compliant with local laws.

What is Hybrid Blockchain?

The best way to understand hybrid blockchain is to start with understanding the benefits and limits of traditional blockchains. Below, I explain the difference between public and private blockchains. I then explain what hybrid blockchain is, the strong business case for its implementation, and how XinFin is responding.

Public Blockchain

Traditional blockchains (e.g. Bitcoin, Ethereum) are public. They are completely open. Anyone can join the consensus protocol and participate in maintaining the shared ledger. The reason users join a public blockchain is the incentives it offers, including mining or staking rewards and operating in a decentralized system.

However, public blockchain has its limits. One is visibility. Data is transparent on a public blockchain so anyone can see it. This is a privacy concern since not all information needs to be shared with everyone. Some of it should be restricted, and public blockchain can’t do this.

The public blockchain is also energy intensive. The proof of work (PoW) consensus protocol is one of the main ways public blockchain is being implemented. PoW requires high computational power and large amounts of electricity. These resource demands limit who can join the network. Connectedly, there are scalability concerns with public blockchain because the consensus protocol limits the speed and number of transactions it can process.

Finally, there are security concerns with public blockchain. The security consists only of the consensus mechanism. There are no additional checks and balances. Thus, interacting with the network can be quite risky.

The public blockchain is a poor fit for highly regulated markets for these reasons.

Private Bockchains

Private blockchains are similar to public blockchain except they are not open to anyone. To join a private network requires an invitation, which usually must be validated by the network starter or by a set of rules put in place by the network starter.

Private blockchains are permissioned networks, which means you can customize how they interact with certain people, or with users in general. Unlike with the public blockchain, restrictions can be placed on who is allowed to participate in the network and specific transactions.

Thus, private blockchains respond to three issues with the public chain. They address privacy concerns by limiting the visibility of data to those who have access to the ledger. They require less extensive consensus mechanisms because they operate with a trusted network (this also makes scalability easier). The ability to restrict visibility also addresses security concerns. If it’s possible to control access to the ledger it makes it harder for malicious individuals to enter the network.

The central drawback of private blockchains, however, relates to the fact they are not as decentralized as the public blockchain. This is why private blockchains — despite responding to some issues with the public chain — are also a poor fit for highly regulated markets.

Hybrid Blockchain

A hybrid blockchain is unique in that it is decentralized while also making it possible to restrict the visibility of information on the network. Thus, a hybrid blockchain is appealing for regulated markets as it offers the benefits of public blockchain and private blockchain together.

The Business Case for Hybrid Blockchain

There are massive markets characterized by a lot of cross-border money transmissions, trust networks, legal systems, paperwork, settlements, remittances, etc. Examples include the asset and bond markets, infrastructure sector, settlements and Forex. The primary actors in these markets are governments, businesses, and banking and global financial institutions. These entities could benefit tremendously from the efficiency and transparency that blockchain technology allows.

Yet, few have adopted it. The reason is these entities need to interact with networks governed by centralized laws and regulations, as well as networks around the world governed in different ways. Existing blockchain options either cannot accommodate this or do not offer the full benefit of decentralization. Thus, it’s effectively impossible for entities operating in highly regulated markets to use existing blockchain technology to any significant degree. This is the use case for hybrid blockchain. It represents a platform that can bridge decentralized economies currently using public blockchain with regulated and centralized markets.

XinFin’s Hybrid Blockchain

XinFin is the first project to implement a full-fledged hybrid blockchain that works for global trade and finance. Hyperledger’s Fabric and Ripple both implement hybrid blockchain ideas, but neither are hybrid blockchains strictly speaking.

XinFin’s blockchain is a kind of consortium. It connects every single blockchain, public and private, and supports relay chains between them. It uses the public blockchain as a “mainchain,” which connects to multiple private blockchains via shared nodes. In this way, the different chains can communicate with each other without having to be directly connected at any point. The private blockchains remain permissioned with limited access. Thus, XinFin’s hybrid blockchain allows highly regulated entities to use permissioned networks that limit access to some data, while also interacting with any public blockchain when it makes sense to do so.

XinFin’s approach perfectly suits the needs of highly regulated markets. Private blockchains used to maintain local compliance can interact with other local private chains, as well as the public blockchain. Thus, entities that currently don’t want to use blockchain for compliance reasons could use XinFin’s hybrid blockchain to get the benefits of decentralization while keeping security intact. This type of platform would give governments and businesses the flexibility and control they need to maintain local compliance while letting them reap the benefits of a decentralized blockchain.

  • Consensus Protocol Flexibility

XinFin’s platform uses a delegated Proof of Stake (PoS) consensus mechanism for its main chain. PoS means any person can mine or validate block transactions according to how many coins he/she holds. The “delegated” aspect involves using validators called “witnesses” who are rewarded for validating and creating blocks on the chain. The number of witnesses is limited and can be removed if they are determined to be malicious. However, while XinFin’s will use DPoS on its main chain, the private blockchains it interacts with can use any consensus mechanism that suits their purpose.

  • dApp Development

To showcase the functionality of its blockchain for different regulated business sectors, XinFin is building a number dApps. For instance, TradeFinexis a decentralized peer to peer marketplace platform that brings together governments, institutions, buyers and suppliers. The TradeFinex dApp aims to minimize the global infrastructure deficit by unlocking financing and making the sector more efficient.

XinFin also offers an integrated wallet solution for real-time payment and settlement across the globe. Individuals, corporations, and financial institutions can use the wallet services to facilitate cross-border real-time payments for trade, financing and remittances.

Conclusion

The tight control exercised by governments over certain markets is not going to disappear anytime soon. At the moment, it dramatically limits the adoption of blockchain technology in sectors like global finance and infrastructure development. XinFin’s project is fascinating in this regard because it is the first to create a genuinely functional hybrid blockchain that could meet the needs of such highly regulated markets. The development of hybrid blockchain could be an essential step toward to mainstream adoption of decentralized technology.

Originally published at https://blog.goodaudience.com on November 14, 2018.