Below is a text transcript summarizing our latest report, which outlines our comprehensive vision for the long-term development of Cosmos towards private and hybrid chains. For an optimal experience, we suggest reading through the original document, feel free to view this slideshow or download the pdf version.
PREFACE:
Following on from our previous report covering the Cosmos Ecosystem as a potential host for a decentralized B2B2C Network, this one delves into the intricate world of private, consortium and hybrid blockchains, providing a comprehensive analysis of their architecture, functionalities, and applications. Our aim is to furnish readers with a nuanced understanding of how they operate, and the challenges that need to be addressed to harness their full potential.
INTRODUCTION:
In today’s digital age, blockchain technology is often heralded as a solution for numerous challenges related to security, transparency, and data integrity. However, it’s important to acknowledge that, more often than not, a blockchain isn’t necessary. To determine whether it is truly required, we will present a streamlined set of questions that one should answer. By using this rational framework, we quickly realize that most of the business uses of distributed ledger technologies will fall down the realm of either private or consortium chains, simply because their organizational or industry needs require to certain degree of control over the read and write access.
The key difference between a private chain and a consortium resides on the fact that the latter generally requires all participating parties to gather in the consensus, making it more secure and decentralized. Whereas the private chain only has a single consensus operator, the finalized ledger is then copied and distributed to participants.
CHAPTER 1: TYPES OF CHAINS
Fundamentally, there are four distinct types of chains, each serving a different purpose as we highlighted previously. In this report, we will focus on consortium and hybrid blockchain systems. However, it’s important to note that we anticipate a majority of ledgers will be private, accessible to authorized parties.
Why private blockchains ?
The cryptographic primitives used in blockchains are incredibly effective tools for removing trust assumptions. We estimate that beyond a certain adoption threshold, these systems could become the regulatory compliance standard for operating digital businesses. Restricted partial read access would be granted only to relevant oversight and tax authorities, while write access would be limited to customers and business partners. This topic was extensively covered in our previous report, where we discussed businesses exchanging information and value via IBC (the InterBlockchain Communication protocol) in a complex routing system akin to roads and streets in a city.
Blockchains come in different types, each with its own unique characteristics. Public blockchains are decentralized and open to anyone who wants to participate, making them suitable for cryptocurrencies. Private blockchains, on the other hand, are owned and controlled by a single entity or organization, restricting access to authorized participants. Consortium blockchains are a hybrid of public and private blockchains, controlled by a group of organizations that work together to govern, maintain and validate the network. Lastly, hybrid blockchains combine both public and private blockchains, allowing for flexibility and transparency depending on the network’s requirements. Each type of blockchain has its own strengths and weaknesses, making it important to choose the right one for a particular use case. To summarize, the essential aspect that characterizes public against private chains is their permissionless or permissioned nature, which inevitably raises the governance issue.
An important term that is generally overlooked in the blockchain industry, is the word cryptocurrency, which relates to the native unit of account that a public blockchain use to reward its decentralized operators and prevents numerous kinds of attacks. We need to understand that in the context of a private blockchain environment, we don’t need to raise a cryptocurrency. Most of the attack prevention can be handled by the permissioned access to read and write. In a private blockchain situation, these access are granted and revoked by one authority.
However, controlling these access in a consortium requires a method to coordinate untrusted and unaligned participants, hence why they need on-chain governance. A so called governance token allows these parties to own differents weights in a built-in voting mechanism.
Hybrid chains being at the frontier between public and private have some specific properties. They may or may not want to raise a native currency to secure and govern the permissionless part of their processes. If not, then a governance specific token must allow the public to govern some of the permissionless processes.
we skipped a few sections, view the original document slideshow to reveal them.
CHAPTER 2: NEW TRADE OFFS
The blockchain trilemma, also known as the scalability trilemma, is a concept proposed by Ethereum co-founder Vitalik Buterin. It posits that it is challenging for blockchain networks to achieve three key attributes simultaneously: decentralization, scalability, and security. Typically, blockchain systems can excel in two of these areas but at the expense of the third.
- Decentralization ensures that no single entity has control over the entire network.
- Scalability refers to the network’s ability to handle an increasing number of transactions efficiently.
- Security involves protecting the network against attacks and ensuring transaction integrity.
Achieving all three at once is difficult, and blockchain networks must often make trade-offs to prioritize certain attributes over others. To better understand the unique challenges faced by private blockchains, it is essential to transition from the broader blockchain trilemma observed in public networks to a more tailored set of trade-offs specific to private environments.
Interoperability is the ability of a private blockchain to interact and integrate seamlessly with other blockchains and existing systems. This includes standardized protocols and compatibility with other platforms.
Trade-off: Focusing on interoperability can limit the level of privacy and performance. Standardized protocols may not support the most advanced privacy techniques, and ensuring compatibility across different systems can introduce inefficiencies that affect performance.
Performance in private blockchains refers to the system’s ability to handle a high volume of transactions quickly and efficiently. This includes high throughput and low latency.
Trade-off: Optimizing for performance often involves compromising on privacy and interoperability. Simplifying transactions to improve speed may reduce the robustness of privacy measures. Additionally, performance optimizations tailored for a specific private blockchain setup can make integration with other systems more challenging.
Privacy ensures that sensitive data is only accessible to authorized participants. Achieving high levels of privacy can involve encryption, access controls, and private transactions.
Trade-off: Enhancing privacy can complicate interoperability and performance. Complex encryption and privacy-preserving mechanisms can slow down transaction processing and data sharing between different systems or networks.
CHAPTER 3: THE CHALLENGES
The balance of control within a private blockchain directly influences its governance, meant to decide the level of desired interactions with the outside world. Similarly, the need for business data confidentiality conflicts with regulatory compliance. Lastly, costs will constrain performance as it is proportionally scaling with the blockchain’s level of demand.
By addressing these interconnected challenges, we transition from the technological trade-offs of the previous chapter to a broader strategic framework. This comprehensive approach is essential for understanding the multifaceted nature of private blockchain adoption and for developing solutions that are not only technologically sound but also operationally, economically, and legally viable. In the following sections, we will delve deeper into these issues, examining how to effectively navigate governance, meet regulatory requirements, and manage costs to facilitate the successful implementation of private blockchain solutions.
Blockchain networks have many stakeholders, each pursuing unique outcomes through participation in blockchain consortia. Governance agreements can support or even replace traditional forms of corporate governance, such as legal contracts or behavioral norms. Thus, blockchain governance agreements may be of significant interest to C-level executives and boards. Van Pelt et al. provide a framework for blockchain governance based on extensive research and validation. The framework has six major components:
- Formation and Context: Reflecting the blockchain’s purpose and ideology.
- Roles: Determining responsibilities and accountability.
- Incentives: Motivating community members.
- Membership Processes: Defining criteria for blockchain participation.
- Communication: Ensuring coordination and performance.
- Decision-Making Processes: Including consensus and conflict resolution.
A potential conflict between on-chain governance and interoperability arises when different blockchain networks have incompatible consensus mechanisms or fail to follow interchain standards and protocols that structure data transfers.
It is essential to maintain these compatibility standards with the public infrastructure to allow seamless interactions if a private or consortium chain wants to integrate with other protocols. Without adherence to these standards, private networks risk isolation, reducing the potential benefits of cross-chain functionalities such as asset transfers, data sharing, and decentralized applications that span multiple blockchains.
Also note that IBC allows endless customization for chains that decide not to abide by the interchain standards. Additionally, they can build their own complex interactions via tailored IBC middleware development. In case of data incompatibility, any IBC channel can be closed unilaterally and can only be restored by a mutual agreement (called a handshake).
All blockchains typically have higher upfront costs but can be more cost-effective in the long run for organizations. The main expenses relates to hardware infrastructure, software development, and maintenance.
Consortiums often have lower costs compared to private blockchains, as infrastructure and maintenance expenditures are shared among participants, distributing the financial burden and reducing individual pressure. Additionally, multiple participants help decentralizing the consensus, which in turn enhances the chain’s security and liveness.
Choose an efficient consensus algorithm that suits your network’s needs. For consortium chains, algorithms like Proof of Authority (PoA) or Practical Byzantine Fault Tolerance (PBFT) can offer faster transaction times and lower operational costs. Whereas, hybrid chains should favor Delegated BFT allowing public participation in consensus and/or governance without losing control of the actual block production (as shown in the example on your right).
Regulated entities that accept crypto assets must ensure that the laws and regulations they are subject to permit the acceptance of such funds. Today, many of these entities rely on so-called transaction screening tools: software or services that analyze the blockchain to identify potentially suspicious activities, connections to illicit addresses, or other non-compliant transactions. Screening tools typically express the risk associated with each transaction through a risk score. This score is based on the destination of the transmitted funds and their transaction history. Privacy-enhancing protocols can be a challenge in that regard. They remove the visible link between deposits and withdrawals. Hence, in the presence of a privacy-enhancing protocol, a risk score would have to consider the proofs and assign a score based on the association set.
Privacy and regulatory compliance are often seen as incompatible, but this perception can change with the use of privacy-enhancing protocols that allow users to prove certain properties about the origin of their funds. For instance, users could demonstrate that their funds are not connected to deposits from known illicit sources or show that their funds are part of a specific set of deposits without revealing any further details.
A consortium of commercial banks could establish an association set that includes only their customers’ deposits. This setup would ensure that any withdrawal proving membership in this set has undergone the necessary KYC and AML procedures at one of the participating banks, while still maintaining customer privacy. Such a configuration can create a separating equilibrium where honest users are incentivized to prove their membership in a compliant association set while preserving their privacy within that set. Conversely, dishonest users would be unable to provide such proof, allowing honest users to dissociate from unwanted third-party deposits and use their funds within a regulated environment.
CHAPTER 4: REAL WORLD EXAMPLES
In today’s digital age, private and hybrid blockchains are emerging as essential tools for solving complex industry challenges. While the intricacies of blockchain technology necessitating to introduce a consensus mechanism, cryptographic security, and decentralized governance can be complex, these very features enable transformative benefits.
In fields such as supply chain and logistics, digital commerce, and data privacy, private and hybrid blockchains offer significant advantages. They enhance coordination and transparency, streamline digital payments with increased efficiency and security, and ensure robust data privacy and ownership. By adopting these advanced blockchain solutions, organizations can achieve greater operational efficiency, build trust, and drive innovation, leading the way in digital transformation. Let’s explore some of the most promising application of these technologies.
1. Logistics:
Interoperability is crucial in the logistics industry, where multiple stakeholders, including manufacturers, suppliers, transport companies, and retailers, need to coordinate and share information seamlessly.
- Cross-Chain Communication: Implementing Inter-Blockchain Communication (IBC) protocols allows different blockchain networks (public, private, consortium) to interact and share data securely. This is essential for tracking goods across various supply chain stages while maintaining total sovereignty of participants.
- Standardized APIs: Developing standardized APIs enables seamless integration with existing logistics and supply chain management systems, facilitating smooth data exchange and transaction processing while leveraging all the advantage of cryptographically secure interoperability.
- Smart Contracts: Smart contracts can automate and enforce agreements between different parties, ensuring that logistics processes are carried out as planned. These contracts can trigger actions like payments or inventory updates when certain conditions are met.
- Transparent and Immutable Records: The blockchain provides a transparent and immutable ledger of all transactions and movements within the supply chain. This ensures traceability and accountability, reducing the risk of fraud and errors. Consensus slashing ensures cooperation within the system.
By maximizing interoperability, the logistics industry can achieve greater efficiency, transparency, and collaboration across the entire supply chain. Leveraging hybrid chains allow for elected validators to commit on the publicly visible data while the confidential information is processed using Trusted Execution Environment (TEE) which can process encrypted information without decrypting the ciphertext.
2. Payments:
Performance is critical in the online payments industry, where high transaction volumes and fast processing speeds are essential for user satisfaction and operational efficiency.
- Scalable Architecture: A high-performance network of blockchains with a scalable interconnectected architecture can handle thousands of transactions per second (TPS) per consensus instance. Organized in an interoperable mesh network ensuring that payment processing remains swift even during peak times.
- Optimized Consensus Mechanisms: Utilizing consensus mechanisms like Practical Byzantine Fault Tolerance (PBFT) reduces latency and increases transaction throughput. Moreover, failure risks are isolated in the even of local consensus failure, as other chains continue to run smoothly.
- Low Transaction Fees: Efficient transaction processing on a private blockchain can result in lower fees compared to traditional payment networks, making it cost-effective for both merchants and consumers.
- Instant Settlement: The BFT consensus enables instantaneous settlement of transactions, reducing the time required for funds to become available and improving the overall user experience. Additionally, synchronous composability is possible between the payment network if certain interoperability standards are followed.
By focusing on performance, online payment systems can provide a seamless and efficient service that meets the demands of modern consumers and businesses, while preventing privacy leaks or data extractions as the execution is split across multiple “cores” of execution with distributed consensus. Utilizing the native interoperability of IBC, this system also greatly facilitates the integration between different legal jurisdictions. Synchronous composability can also allow instant, multi-chain debt clearing which greatly improve the efficiency of the money supply in circulation in this system.
3. Healthcare:
Privacy is paramount in the healthcare industry, where patient data includes highly sensitive personal and medical information. A private blockchain can significantly enhance privacy while ensuring data integrity and security.
- Data Encryption: All patient records stored on the blockchain are encrypted, ensuring that only authorized healthcare providers and patients can access the information.
- Access Control: Implementing strict access control mechanisms ensures that patient data is only accessible to individuals with the necessary permissions. Smart contracts can automate these permissions based on predefined rules.
- Zero-Knowledge Proofs (ZKPs): ZKPs can be used to verify patient data and medical histories without revealing the actual data. This allows for privacy-preserving verifications, crucial for maintaining patient confidentiality while complying with regulatory requirements like HIPAA.
- Audit Trails: The blockchain provides a secure, immutable audit trail of all access to patient records, ensuring transparency and accountability without compromising privacy.
Most importantly, despite maximizing on the privacy features, the healthcare industry has several ramifications on the pharmaceuticals, medecine, insurance, research, trials, social benefits and payments. The interoperability will also play an important role by enabling seamless data sharing and collaboration, improving data integrity, enhancing operational efficiency, empowering patients, ensuring security and compliance, reducing costs, and facilitating personalized medicine.
CONCLUSION:
It appears that private blockchains are poised to be the subsequent stage in the practical application of cryptographic ledgers technology. These chains differ significantly from public networks, as they do not involve native cryptocurrency, nor offer opportunities for speculative acquisition or value accrual. Instead, they tackle real-world issues and provide effective solutions to eliminate trust assumptions and unnecessary intermediaries.
Additionally, the study introduced the “private trilemma,” a framework akin to the constraints of decentralization, scalability, and security in public networks. This framework shall greatly influence the expansion of private chains. The research also examined governance, cost, and compliance challenges that organizations must manage to maintain a balanced system of permissions.
In conclusion, it is essential for proponents of cryptocurrency to acknowledge the impending shift towards private chains, which represent a significant shift from the established public networks.
Closing thoughts: We sincerely appreciate your attention and engagement with our report. Your interest in exploring the potential of private and hybrid blockchains is invaluable to us. As we conclude, we invite you to review the comprehensive list of sources and references that informed our research and analysis. These resources provide additional insights and depth to the topics discussed, ensuring a well-rounded understanding of the subject matter. Please consult the original document to find them
Thanks for reading !
Greetings from the Govmos team, the governance arm of the PRO Delegators Validator
