JP Morgan has generated an incredible amount of hype among the crypto and blockchain community with the recent launch of its JPM coin, a stable coin released on its private blockchain project Quorum. While many are proclaiming this development as a significant step forward for the legitimacy of blockchain applications, it once again begs the question: Are private blockchains the best answer for enterprises and consortiums looking to use blockchain?
It was a vital question we needed to answer when designing our platform. We identified four key elements that would be critical to make sure a solution on the public chain would work:
- Network Benefits — What kind of innovation is happening in each space, and how much would it benefit our clients?
- User Experience — What offers us the most flexibility to build tools that are easy for our users and require the least knowledge of crypto/blockchain?
- Security & Risk — What is the security risk of building on a public blockchain
- Privacy — Is the public blockchain ecosystem mature enough to offer privacy benefits seen on private blockchains?
In the end we determined that starting on Ethereum’s blockchain allowed us to develop a solution that properly addressed all four critical elements, and below is a look into why we feel this way.
I really like the proverb “It takes a village to raise a child” as a corollary to the benefits of building on a public chain. When a single provider or consortium attempts to build such a grand vision behind a walled garden, it is like raising a child in isolation. For example, if a project like Quorum ever shifted down the priority list in the JPMorgan roadmap, what does that mean for the project and community behind it? At what point does that become a business risk for companies building on top of it? More importantly, who gets the distinguished (horrifying) honor of trying to maintain and update that codebase? What’s the cost of a consortium member rebuilding on a new chain from scratch because all the work done is only applicable to that private chain?
On the other hand, building something in a community offers a multitude of benefits that a single provider may struggle to offer. It allows you to partake in benefits of people who have already spent time solving really difficult problems, it widens your scope of what is possible in the world, and it creates a strong base that others can grow on. In the case of the evolution of public blockchain, it expands upon ideas such as ‘controlling your own data’, ‘simplification of global trade’, and ‘eliminating redundancy’. These are very complex issues that have the potential to unlock tremendously more efficient ways of how we go about daily life if solved. When solving a myriad of problems of such magnitude, it is often best to rely on the village.
One of the biggest challenges our team tackles is ‘how do we deliver value through our platform before making people learn blockchain concepts?’. It’s probably the biggest challenge most companies developing a blockchain solution face, and we wanted to ensure that whatever solution we started with allowed us flexibility in our approach.
As mentioned in the previous section, the benefit of the public network community is that there is a whole ecosystem of companies working on all of these problems! When everyone is playing in the same sandbox, we all benefit from it. In a community, we don’t have to spend enormous energy or resources trying to redefine how consensus mechanisms work or how to make accessing wallets more frictionless; plenty of smart people are already doing that! A public blockchain allows us to focus on our core value proposition of making real estate capital markets more effective, and integrate smart solutions by others that are additive to that mission.
Contrast that with private blockchains which are heavily driven by narrow business cases. If a group of businesses forms a private blockchain that works just well enough, what’s the point of improving it? In other words, why teach the child how to read when their job just requires counting? It’s not like anyone in their consortium can easily leave or use an alternative — the nature of a private blockchain makes switching costs a very real thing, especially for large organizations that move slowly.
The point here is that bleeding edge technology ease of use evolves with innovation, and small groups of guarded consortiums are going to have a hard time trailblazing in this area. Meanwhile companies building on public chains are already focusing on critical improvement areas like frictionless logins to make wallet knowledge upfront irrelevant, or blockchain analytics to detect money laundering. Private blockchains have no incentive to solve things like this unless a central authority deems it important, and even then they need to rebuild the wheel in order to make it work in their world. This is why we think public blockchains will drive innovation in the space, and why we think incremental solutions like private blockchains will lag behind.
Security & Risk
A lot of concern with public blockchain comes from fear of 51% attacks, which happens when miners on a proof-of-work blockchain control enough mining power to do things like double spend funds. This is a real and legitimate concern, particularly for smaller networks where it is not expensive to buy mining power. However, public chains like Bitcoin and Ethereum have become so large that it creates large barriers to this ever practically happening. For example, the site Crypto51 shows the potential cost for trying to commit a 51% attack against a network. For Ethereum, you would currently need about $80,000 just to control 4% of the mining power of the network for a hour, making rogue attacks near impossible. Since that’s only rentable cloud computing, it gets even more expensive from there since additional power would need a large amount of mining hardware, physical space, full-time staff, etc.
In fact, about the only practical way to go about this is attempting to collude with miner companies whose entire business model relies on the currency being valuable and worth something. This leads to my point — what is going to be the more probable attack vector — attempting a multinational collusion scheme that will clearly trace back to the culprits of the attack, drawing international attention and ire, or phishing someone’s credentials that works in a private consortium? It’s not like this has never happened before.
With private blockchains, one of the biggest drawbacks is the inherent centralization that they use to offset the disadvantages of public blockchains. When you are part of a private blockchain, by design you are placing your trust in a central source. This has implications both from an innovation standpoint, which we outlined earlier, as well as from a security standpoint.
Here’s another scenario: What if a disgruntled employee in a private blockchain consortium obtained access to one of the few voting nodes in private chains and voted in some negative way? What if the nodes display a transaction and the node participant decides they can front-run a trade before it goes through? Unless the private blockchain utilizes a 100% privacy layer, they are actually at an increased risk of perverse behavior — why? Centralized nodes paint a clear target for anyone looking to hack into a network.
Private blockchains initially took off when people started realizing that enterprise clients need particular requirements fulfilled that public blockchains in their nascent stages just could not provide — such as privacy, speed, and security. With institutions that we’ve spoken with in particular, the ability to conduct private transactions is a feature that has been brought up quite often. However, the industry has evolved and continues to evolve at a staggering pace. In fact, many of these problems are either being addressed or already have live solutions on public blockchains.
One of the things we’re most excited about in the immediate future is the application of Zero Knowledge Proofs to blockchains, which allow the ability to confirm something without revealing the actual details behind it. This is one of the key areas to bringing a privacy layer to public blockchains, and could be one of the most significant transformative technological applications of the 21st century. Even private chains have begun partnering with projects like Zcash to better understand applications for Zero Knowledge Proofs to their solutions.
In our next post we’ll provide an in-depth overview of our journey integrating privacy on a public blockchain, why this is a such a massive deal for issuers and investors worldwide, and a fun partnership announcement on how we’re making it all happen! If you want to learn more about us in the meantime, you can read a complete description of the RealBlocks’ platform and mission in our whitepaper.