Welcome back. In this video, we look at the challenges of implementing a public blockchain compared to a private one. Let's start with the issue of privacy. Privacy is a right for private citizens in many democracies. Yet, lots of jurisdictions, like in Canada and the United States, limit the privacy of corporations and corporate executives. Corporate insiders for example must disclose trades in their company's stocks. Mutual funds and some hedge funds must disclose their holdings. You may recall, we looked at transparency as a strategic asset. It can be a strategic opportunity for firms and their executives to build their brands and their reputations and opportunity to earn customer and market trust and respect. The procedural solutions for privacy like using multiple IDs are central to public blockchains, the downside of multiple addresses is that privacy comes at a high cost. Identity creation may be free but the transactions come with fees. Other than costs nothing really prevents us from using a random number of IDs and hiding their identities. The struggle to be transparent, yet protect our identities and our trade secrets continues to be one of the greatest challenges of implementing blockchain, whether it's a public or a private one. The use of high-tech solutions like zk-SNARK to attain privacy is quickly becoming a strategic asset. You may remember, a zk-SNARK is a zero-knowledge proof protocol, which basically means that it allows you to confirm that a transaction has occurred and is valid without knowing many other details. Let's look at smart contracts. One of the most appealing features of blockchain technology. Axle may want to deliver something to Bettina, but Axle may worry about exposure of its intellectual property, because all transactions and information on the blockchain are visible to both parties and the public. A zk-SNARK would protect Axle's property by concealing contract details and confirming final delivery. There's procedural workaround from public blockchains can apply to private or permissioned blockchains as well, but private blockchains provide further options. Whether a user can create multiple IDs is really just a design choice. The economic incentives for proof and settlement of transactions is also a design choice, that includes the cost for using multiple IDs. Private blockchains may have features for masking user identity or features limiting visibility of transactions only to certain parties. More critical for private blockchain is this, users must understand the identity setup. They must understand the network governance and the information available to all network members. These are important questions to ask, is the setup identical to a public blockchain, or must all users have gone through a know-your-customer procedure? Are there limitations to ID usages? Do all network members use IDs in the same way? Do customers of networks have equal access, or do network operators give some customers more information than others? Handling information and identifiers would require much preparation by any consortium looking to introduce private blockchains. If a bank consortium is running a private blockchain then any institutional investor needs to understand which information is visible and to whom, corporate users should have similar concerns. A business partner may make a subset of information visible to build a good reputation but selective disclosure, rather than full transparency makes it difficult to construct the baseline for meaningful comparison. Lots of possible information asymmetries come up with private blockchains. In the history of finance it's been difficult to change transparency regimes without resistance, financial institutions already face heavy regulation, then they may face another challenge, the challenge of dispersing information among members and non-members without creating conflicts of interests. Regulation of private or consortium blockchains could be quite tricky if users are dispersed across multiple jurisdictions particularly if those jurisdictions have different regulatory regimes. There are two main outcomes to consider as blockchain technology and the financial industry evolve. The first, is private, permissioned blockchain networks in which verified, non-anonymous nodes can post transactions to the ledger and confirm other transactions. Such networks are typically also read limited to that same network of verified nodes, but the network could allow a larger audience to read the data. A subset of that network could allow further control over read and write access, so that I can use a much simpler form of consensus, one based loosely on a supermajority vote of the nodes rather than on the more CPU intensive proof-of-work system that Bitcoin, ether, and really most other coins have used. Such a network can also accommodate a much higher transaction volume than that which is typically provided by proof-of-work blockchains. Many of those building distributed ledger applications for the financial industry and for the Industrial Internet of Things, to just take two examples, prefer this model. It may also prove more valuable for those building certain public facing applications such as educational credentialing,carbon-emissions monitoring, or fiat currency administration. The second outcome, is financial institutions and other enterprises could design a distributed ledger similar to their current system, essentially moving what they've got to a new technology platform. The R3 consortium formed by many of the world's largest financial institutions promotes its own version of a distributed ledger which it calls the Corda system. The Corda system is an open distributed ledger. It is designed to preserve member privacy. A member can see only the information pertaining to it. It is a system of bilaterally agreed upon and verified transactions. Algorithmic notaries provide conflict resolution. People have called Corda the AOL of the 21st century. Private blockchains hold lots of promise and will likely be widely used. However, they have some disadvantages that must be acknowledged, for one, they can become large, lucrative targets for hackers. Now, depending on the protocol a single compromised member could expose the whole network, though distributing consensus across many members should make this more difficult. On the flip side, public blockchains like the Bitcoin blockchain are very secure as they are proof of work protocols which of course requires an attacker to control over 51% of the network's computing power. That control comes at a steep cost to the attacker. Tampering with records is economically infeasible and self-defeating on these public blockchains. For more detail about permissioned blockchains check out the new preface to the paperback edition of blockchain revolution. If you have any questions, please click over to the discussion forum.
