Private Proofs of Concept, Permissioned Ledgers, and Blockchain Patents

Baozou Comment : Proof of concept is very common in the emerging blockchain field. We often hear such news that a new proof of concept has been successfully tested. Proof of concept helps blockchain companies evaluate the complexity of transactions, the preparations required to adopt this new technology, the significance of this technology to end customers, and the cost of adopting this technology. After figuring out these, the next step is to cooperate and work on the practical application of blockchain technology.

Translation: Flora

As 2016 draws to a close, major banks are still forming blockchain alliances to develop platforms and test blockchain technology. The most notable ones are R3CEV, Hyperledger Project, etc. While we are considering withdrawing from R3 and other alliances, new alliances are also being formed (China, Japan, Russia).

We often hear about a new proof of concept being successfully tested. But what do they want to gain from these proofs of concepts?

These current trials and difficulties are crucial for banks and other related organizations. To put it in a metaphor, only by risking dirty hands and reaching into the black box can you get first-hand information about what is inside the box. The proof of concept helps them evaluate the complexity of these transactions, the preparation required to adopt this new technology, the significance of this technology to the end customer, and the cost of adopting this technology. After clarifying these basics, the next logical step should be to cooperate with other parties with the same interest and work on the actual application of this technology.

But if we follow what we have seen, the next step may be to quickly protect the information they have obtained, and some banks in the alliance will operate in isolation in small groups. There are several reasons for this protective mentality.

First, there is the issue of trust. In other words, there is a lack of a central authority. The financial industry has been regulated for centuries, and this will not change in the foreseeable future. Players and rules are generated and regulated by the so-called regulator, and both traditional players and newcomers (fintech) must go through the strict supervision and approval of this central authority. But blockchain, or distributed ledger technology, can be seen from its definition as a decentralized and self-regulatory technology. Banks can really be called the remnants of the centralized ancient system, so it is not surprising that they reject decentralized systems. They believe that decentralized systems will not provide them with anyone to turn to if something unexpected happens.

The fact that blockchain-based systems are freely accessible and open to everyone makes them more vulnerable to attacks and vulnerabilities (attacks on Bitcoin, attacks on DAO). But these attacks did not occur because of failures in blockchain design. Some people with access abused certain fixed vulnerabilities. In the real world, the trust of billions of people involves a lot of money. It is necessary to protect this technology from malicious attacks.

Permissioned ledgers are one way to address this problem. A central security controller grants users access to the ledger, so if errors occur, they can be corrected quickly. At the same time, we must be aware of the possibility that the same controller can be targeted and leak information about all nodes on the ledger. Even so, R3 has recently established its open source platform Corda and is taking steps to collaborate with its competitor Hyperledger Project.

Do the public and investment community need regulatory and governance bodies to manage their financial transactions and assets, or an unregulated, permissionless network? The answer to this question will have a huge impact on the use of distributed ledger technology and its impact on the financial ecosystem.

Another issue is privacy. Major banks want to apply for their own blockchain patents to protect their business interests. Goldman Sachs' patent application reads:

“These systems face significant privacy issues because they need to protect the balance of transactions in a publicly accessible ledger on a distributed server.”

Goldman Sachs also made a case in the application: In foreign exchange transactions, this basically means that once the bank's blockchain is exposed, competitors will have the opportunity to publish completely opposite transactions, thereby reducing the competitive nature of the transaction and hitting the basic business goal. By applying for a blockchain patent, the bank will focus on the combination of the advantages of blockchain and technologies with security and privacy, and act in accordance with the rules.

Regulators joined the fray in 2016 in a more supportive way. In Europe, the Bank of England began exploring how blockchain could be used in central banking, launching a “regulatory sandbox.” In Asia, the Monetary Authority of Singapore and the Hong Kong Monetary Authority developed sandboxes with similar functions. North America is still lagging behind in this regard.

In 2017 we hope to see these issues resolved and banks begin to apply blockchain technology to cross-border payments, clearing and settlement, as well as other areas such as stock trading, smart contracts and digital identities.