The future is in hybrid blockchains
The safest way to exchange anything of value is to invite the public to verify the transactions, instead of relying on a centralised authority to mediate transactions. That’s the premise Satoshi Nakamoto incorporated in the bitcoin whitepaper that discusses how decentralised public verification on a public blockchain prevents double-spend and enables peer-to-peer transactions in a safe and secure way.
On a blockchain, a distributed network of nodes timestamp transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. Each participating node has a stake in processing and verifying new blocks of data appended to the blockchain. This is what enables blockchain to guarantee data integrity at all times. It is the technology’s key value proposition, however, it is also one of the major hurdles towards mainstream adoption.
On a public blockchain where the nodes are widely dispersed amongst a range of participants, the ability for a group of participants to modify the blockchain is very small. In a private blockchain where nodes could be held by a small community of participants, the ability for them to modify the blockchain is increased.
Among financial institutions there has been an increasing appetite for blockchain-based solutions, yet due to the transparency a public blockchain requires those same institutions have been hesitant to transition from proof-of-concepts to operational applications.
BC Gateways has found the ideal solution in a hybrid blockchain approach, where transactions occur on a private blockchain and the generated hashes from that activity are verified on a public blockchain.
To understand what that means, we need to distinguish public and private blockchains and determine the strength of each type of blockchain deployment.
Public blockchain: permissionless, trustless, anonymous
Public blockchains offer a reliable process of public transactions verified in real-time by all the nodes connected to the network. It is a permissionless system in that anyone is able to create an address and participate in verifying transactions through the mining mechanism – a crypto-economic system driven by proof-of-work consensus models that reward people with tokens to run network nodes.
Every transaction on a public blockchain is verified by a large decentralised network and consensus is reached by the majority of CPU power. Due to the fact that no participant knows anything about other participants, nodes are prevented from forming a majority and coordinate an attack on the network. Because any changes to a transaction have to go through a similar verification process it is also nearly impossible for a single attacker to tamper with the history of the blockchain and corrupt the data. Scale is essential as the more independent users take part in the verification process, the more secure and decentralised the chain becomes.
What is often misunderstood is that while the ledger itself is public and visible to all participants, the actual identity of the transacting parties is never revealed. Ethereum block explorer Etherscan is a good illustration of what this looks like: blocks and transactions are visible, but identities remain pseudonymous. Mediating the transactions does not require trust in a single authority, but rather in the technology that allows the anonymous majority to verify the transactions. This form of transparent anonymity and decentralisation is deeply rooted in the ethos of the crypto community which believes in the disintermediation of centralised authorities to achieve financial sovereignty.
However, for financial institutions working in a highly regulated industry, such anonymity is often not acceptable as they must comply with strict KYC/AML regulations. Additionally, the open nature of a publicly accessible ledger that exposes all transaction data to anyone in the network heavily conflicts with data privacy and confidentiality obligations. Indeed, the financial institutions transacting assets or time-sensitive and confidential information need more control than a public blockchain is able to provide.
This is why many proof-of-concept blockchain applications built for financial services are run on private blockchains.
Private blockchain: permissioned, partial trust, community
A private blockchain, or permissioned blockchain, shares a lot of features with its public counterpart: it is decentralised, distributed, secure and transparent. Participating nodes timestamp using hash verification to authorise transactions. But instead of consensus being achieved through a mining-mechanism, private blockchains do this through proprietary frameworks and algorithms.
For example, Hyperledger Fabric reaches consensus by performing two separate activities: ordering of transactions and validating transactions. The operating assumption for Hyperledger developers is that such business blockchain networks operate in an environment of partial trust.
A major difference between public and private blockchains, however, is that whereas a public blockchain is a publicly accessible network of anonymous nodes, a private blockchain is more akin to a gated community where each participant is defined and to some degree known to others. In fact, only approved parties can join this community and run a node that validates transaction blocks.
In theory, it is especially well-suited for organisations to efficiently exchange information and record transactions without exposing confidential information to those who are not privy.
Many enterprises are now discovering the advantages of using private blockchains to exchange assets and information in B2B settings in a way that engenders trust, transparency and efficiency.
Comparing public and private blockchains
The public blockchain requires an incredible amount of computing power to operate its massive network of nodes. It is considered a necessary evil for creating the level of security and trust that such a network can achieve. The private blockchain has the advantage of being more cost-effective in terms of computing power and energy usage.
Another advantage of private blockchains is greater speed of transactions per second (TPS), which is often more difficult to reach by public blockchains. To illustrate, the bitcoin blockchain is a public, fully decentralised and incredibly secure platform. However, the network faces structural scalability challenges because it takes an average of 10 minutes to create a block and it is estimated to only manage a speed of 7 TPS. Ethereum performs slightly better at 20 TPS with upgrades such as the Raiden Network and Plasma underway to boost the performance significantly. Private blockchain Hyperledger Fabric achieves a throughput of 3,500 TPS.
That being said, private blockchains are not necessarily the ideal solution either. Because private blockchains lack the scale of a widely distributed network of nodes, it does not fully achieve the same level of data integrity that a public blockchain provides. The fact that the participants in a private blockchain have existing relationships outside of the network opens up the possibility of them forming a majority to falsify transaction histories and tamper with the validity of the blockchain. The unprecedented level of integrity reached by public blockchains is rendered unattainable by shutting “the world” out from the verification process.
BC Gateways resolves this problem with its unique hybrid blockchain approach.
Hybrid blockchain combines best of both worlds
The hybrid blockchain system strikes the ideal balance between public and private, and therefore has the most appeal in terms of enterprise-grade blockchain solutions. Particularly in regulated environments, the hybrid approach is perfectly suited as it capitalises on the auditability and verifiability features of blockchain technology without revealing time-sensitive and confidential information.
The Gateway combines both private and public blockchain networks to maximise the benefits of each system design. The platform’s core operates on a private blockchain which processes transactions and stores the data associated with those transactions. The public blockchain component is used to store hashes generated by the private blockchain. This prevents any modifications from happening and ensures BC Gateways or any of the community members do not have the ability to make any changes to the transactional record.
How this works on The Gateway
The Gateway is a gated community of users who have been permissioned by BC Gateways to interact with the network. Prior to entry, BC Gateways verifies all participants to ensure that each have legitimate financial services roles with the need to publish or subscribe to the data in the BC Gateways blockchain.
Community members use the platform to publish information to the Shared Source of Truth, which is then hashed, timestamped and recorded on the private blockchain. Subscribers download this information from the Source of Truth and re-hash the data to confirm a match. If the hashes match, it means that what was received is exactly what was sent. If the hashes do not match, the transaction becomes invalid.
With our Blocktree tool, the entire chain of custody is laid out in a visual way to show how a piece of data has travelled through the distribution network so that members can see if the data is authentic. Confidentiality across commercial relationships is maintained by revealing identities only to direct participants of a transaction.
Say a piece of data is distributed consecutively through 4 parties being A, B, C and D. Then C is allowed to see the real identities of B and D, but A remains pseudonymous. C can still operate with confidence because the Blocktree proves the integrity of the data, while the commercial relationship between A and B remains undisclosed.
All of the transactional activity is hashed and stored on the private blockchain. Hashes of those blocks are then committed to the public Ethereum blockchain. BC Gateways only uses the Ethereum blockchain to publicly verify the hashes generated on the private network, providing secondary authentication and auditability which is of use should a transaction ever be in dispute. Therefore, the limited transaction speed of the Ethereum network is not relevant as the time-sensitive transactions occur on the private and faster BC Gateways blockchain.
For enterprise-grade solutions in regulated environments, the hybrid blockchain is undoubtedly the ideal choice combining the best of both worlds. Its suitability has played a key role in generating interest for The Gateway across the financial services industry.