The missing blockchain category

Summary: in long-term we need a hybrid neutral blockchain network operated by (semi-)public agencies to gain adoption, efficiency and also control for hundreds of blockchain applications

The future of payments. The end of all trusted intermediaries. A new world currency? The holy grail for ... everything? Blockchain technology is booming and has been named as the most revolutionary technology since the Internet. The hype started in 2015, but is still continuing. Meaning the added value is difficult to commercialize, but also that the potential might reach beyond our dreams. This 3-year hype delivered us tens of usable blockchain platforms, hundreds of use cases and thousands of startups and corporates diving into the technology. Interestingly, as no real blockchain application is yet in production, except of course cryptocurrencies like Bitcoin. The question is how the future will look like in which we have many sustainable blockchain applications. In my opinion we've done a great deal, but one major category of blockchain networks is missing.

Public and private blockchains

So far we basically divide blockchain in two categories: public blockchains and private blockchains. Everyting started with public blockchains, which are accessible for literally everyone and there is no threshold to enter the network. These public networks use their own cryptocurrency to provide financial incentives for validating new transactions and be attack-resistant. Examples are Bitcoin, Ethereum, Litecoin, etc. There are hundreds of public blockchains, all with their own fluctuating crypto currencies. Their total market cap is at 180 billion dollars at moment of writing.

Corporates and governmental institutions do not like public blockchains that much, as these networks are uncontrollable. These 'formal' organizations cannot guarantee the availability and functionality of the blockchain, which scares them a bit. At this moment also scalability (amount of transactions per second) and confidentiality (who can see your transactions) are huge showstoppers, but both problems seem solvable when technology matures. Because these organizations need control, they created the so-called 'private', 'closed' or 'consortium' blockchains. In these networks, the consortium decides what companies can have access to the blockchain administration. It can control in that sense that data isn't spread all over the globe and it will keep in charge regarding the availability and functionality of the protocol. However, consortium blockchains have their own challenges in generating sufficient adoption.

Suppose that we have a consortium blockchain for insurances, initiated by ten global insurance providers. Once scalability/privacy has been sufficiently solved, this might work excellently. The blockchain could facilitate in the administration of an insurance, claim handling, selling/buying insurances and reinsurances. The consortium does not depend on a central administration intermediary and each insurer is sovereign in handling and sharing its insurances. Faster and cheaper then ever. But now the consortium wants reach, because their network reach is relatively small. Thus we add another 50 insurers. This requires some effort, as each of these 50 insurers need to negotiate with the consortium about entrance fees, transaction fees, Know Your Customer (KYC)-practices, IT configuration, dependence on the consortium, voting rights, IP, etc. And do these new 50 insurers have equal voting rights as the 10 initial members? After finalizing the 60-insurers consortium, the next step is of course to unlock the rest of the world to facilitate a global insurance administration platform. Meaning that hundreds, hundreds and hundreds of new insurers will enter the become-a-member process. The more insurers, the more voices, the harder the decision making process for future functionality or new members. What do we do if an insurer goes bankrupt, or services sanctioned companies? It's a massive task to contractually negotiate with all those new insurers, and there might be too much disagreement on functionality or desired new members to reach consensus in the consortium board. But, it's certainly possible and it is currently the best possible way to adopt blockchain in corporate organizations, while staying in control. We'd rather have business challenges then being technically not in control.

For comparison, let's jump back to the public blockchain movement. If the consortium exchanges the private blockchain for a public blockchain such as Bitcoin or Ethereum, we could be done implementing this insurance platform within a day. Probably faster. Within a few hours all hundreds of insurers individually download the public chain software and the history of all previous transactions, generate some wallets and deploy the smart contracts. Within hours, the consortium has their blockchain administration for insurances, ready for global use (assumption).

Hybrid blockchains

So neither one of them is perfect. Public blockchains facilitate only control on transaction level, you cannot control the functioning of the protocol. Private blockchains will have their challenges in scaling up, slowing adoption. Time to introduce our third category, the 'best of both worlds': hybrid blockchains. A hybrid blockchain is a public blockchain, with an extra layer on top in which access roles can be defined. Implementing a hybrid blockchain application takes the same small amount of effort as implementing a public blockchain, but more control can be gained by creating an 'inner circle of trust'. An example of this is the idea of Ripple's trustlines in Ethereum. The concept of trust lines is that you first need to configure other blockchain wallets as trusted, before you can exchange value or data with them. This gives corporates full ability to stop transactions to and from unknown entities. Using Ethereum, our above mentioned consortium can then decide that only verified insurers can share data with each other, and we can make sure that the collection of insurers will have enough liquidity to pay out in case of an unlucky event. We now have a closed permissioned system, on top of an open blockchain. Control is in our hands, and we can for 100% guarantee that nobody who hasn't been verified can participate in our insurance system. Hence, with hybrid blockchains adoption and reach are amazing, and corporates and governments have more control.

Still I have a hard time to believe corporates and governmental institutions will use hybrid blockchains. Though they will be satisfied by the knowledge that they can control the amount, spread and use of their transactions, they have no full control over their application. Because it's built on a public blockchain, which no-one controls. Meaning that the functionality, availability and trustworthiness of their application is in danger. Imagine that within 10 years an insurance system is implemented in a hybrid fashion, thousands of insurers participating. Sounds amazing, but we are at risk. For example, a certain blockchain feature we use is scheduled to be deleted, because it takes too much capacity. These insurers then have a problem, because their system won't function anymore with the new version. And they cannot stop it, because they aren't the majority in the network. To be rigid, the majority can be anonymous, and it's vision can be unknown. The majority might even be interested to blackmail these insurers, as they use a feature the majority has the power to remove. Unlikely, but possible. Next, we cannot guarantee availability. The blockchain node software might be compromised or suffering from attacks, and consequently transactions cannot be validated for some time. Imagine the economical damage if at a sudden point no-one in the world can set up, claim or reinsure insurances for a couple of days. Speaking financials, as it is built on a public blockchain, there is also no control over transaction fees, and with a sudden increase in popularity or with heavy applications (e.g. Initial Coin Offerings) transaction fees might get sky high and we can choose between overpaying or waiting. Costly.

Thirdly, trustworthiness an issue. Image a hack like the DAO happens, the community cannot reach consensus, and the network splits into two different forks. What fork does each individual insurer choose? Chances are high that in the future forks are politically motivated and insurers are divided, meaning that forking will damage network reach.

The fourth category: the Neutral Hybrid

We need control. We need neutrality. We need continuity. We need adoption. Above three types of blockchain networks might not be our best choice in long term to deliver this to us. To still try and develop a suitable blockchain protocol which can gain global reach and many different applications (insurance, securities, global trade, payments, KYC, etc.) can be used in an interoperable fashion, we need a fourth category of blockchain. The Hybrid Neutral. It's hybrid as it has characteristics of both public and private blockchains. Neutral as transactions will be verified by objective logic and financial incentives play no role.

The 'hybrid neutral' blockchain should be as public, open, and economically and politically neutral as possible. Though it will not be open for every individual in the world to run a node. Theoretically and philosophically a 100% neutrality can never exist, but we can come close practically. In a hybrid neutral blockchain network, each country or region will have an agency hosting a couple of nodes. And that's it. This agency will not host applications, will not take care of membership procedures, and will not have the ability to stop or alter transactions. This agency should also not be profit-oriented, if possible. The country or regions' government can initiate such an agency, but it needs to be distanced from local politics.

There are a few ways to organize such a 'Neutral Node Network'. Some options for organizations hosting the agency are:

• Governments / Regulators
• Central Banks
• Internet Service Providers
• Federation of public/private companies
• Member states of United Nations

Each agency will power on a node of the preferred blockchain type (for example Hyperledger, Quorum or Corda), and will connect the node to the nodes of the other agencies. It will be a closed network, but with global reach. API's will allow that anyone can send transactions, see transactions or run applications, if given permissions. KYC and AML, part of membership services, should be organized by a separate entity, as these services are more politically dynamic and will fall under stringent regulation. Our above described insurance platform could work very well on the Hybrid Neutral blockchain. The consortium uploads their application to the Neutral Node Network, whereafter each insurer in the world can join within minutes. The rights to join, and controls to stop collaborations with sanctioned countries or individuals, will be decided by the membership service, which will thus not be organized by the node operator.

Sounds complex. Why do we need this? We need such a network because of the assumed unlimited potential of blockchain. Remember our insurance platform. There could be tens of those in ten years, spread across the globe with doubtful interoperability. Add to that 20 payment networks, 30 identity networks, 40 trade finance networks, 50 securities trading networks and for nearly all industries countless 'supply chain networks', providing transparency in documentation, guarantees, escrow payments, provenance, etc. Given the potential, and given that more and more industries are intensively experimenting this, we might expect hundreds of private blockchain solutions. Each of these solutions will need to go through the effort of scaling up to 100+ participants, to get the most out of it. Consolidation will only work if it facilitates enough control for all participants, but also sufficient sovereignty. A Hybrid Neutral blockchain network might be our answer in this quest.

I actually hope there are already plans for the above, but so far I haven't seen much. My guess is that Ripple tries to solve this gap, by controlling that only verified organizations run validator nodes. But this is still too incentive-driven (XRP currency) and there is low neutrality. Furthermore the EU is undertaking a "feasibility study on a possible EU blockchain Infrastructure" as presented on the Blockchain for Finance conference in Dublin a couple of weeks back, which might be a first step in a great journey to provide a Neutral Node Network for the European Union.

Which type of blockchain network will win?

All of them, I suppose. Each of the four categories has distinguished benefits no other category can fulfill. To start with, public blockchain cannot be stopped at all, and it's hard to imagine all interest will be lost. Opportunists have the opportunity to create their ideal loosely-controlled world leading to 'rough-edged' innovation, and the next generation of cryptography algorithms enables them better then ever to do so anonymously. Worst case scenario for them is that governments make the use of public blockchains illegal and set high fines, but still then there are hardly technical means to halt the chain. Hybrid blockchains will be an ever-easier option to gain more control on your blockchain application, and will be increasingly preferred the more trust and adoption the underlying public blockchain gets. Private chains will become the popular choice for corporates and governments as it is the best way to get a transparent, controllable and trustworthy administration among a group of peers. It basically will be the only feasible choice, the coming years.

That leaves us with the future of the Hybrid Neutral. Multiple successful private blockchain networks will strengthen the call for a neutral blockchain infrastructure. One big corporate could easily be part of 20+ blockchain networks and wouldn't like 20+ different implementation and become-a-member trajectories. Or to run 20 different node configurations within one system landscape. It takes probably years before we feel this problem and it is not wise to standardize and consolidate while in the early stages of getting blockchain to production. But it would be great if we could collaboratively investigate this option, together with governmental institutions, central banks, etc., to prepare our society for a well-functioning, semi-open and efficient blockchain infrastructure. Though I am fully aware that this new category might raise more questions than it answers and has it's own vulnerabilities, it seems to be worth while exploring.

 - views are my own.