Coin Center: Closed private chains are not compatible with electronic cash, and public chains are the real electronic cash

The well-known non-profit blockchain organization Coin Center has released a 62-page blockchain report, "开放的意义：为什么无需许可的区块链对未来互联网至关重要？ " (Download the full text of the document library). The report carefully examines the "blockchain" craze, helping regulators to eliminate interference and take seriously the impact of various financial technologies inspired by Bitcoin.

The report was written by Peter Van Valkenburgh of Coin Center. The report analyzes open consensus mechanisms and closed consensus mechanisms in detail, and believes that permissionless public chains are crucial to the future of the Internet, and that closed private chains are incompatible with electronic cash. Only the Bitcoin public chain can bring true electronic cash and function like cash.

The report points out that the most useful aspects of Bitcoin blockchain technology are not found in consortium-based solutions - at least when it comes to certain specific applications, such as electronic cash. In addition, the consensus mechanisms used by various consortium blockchain systems (i.e. private chain systems) are different from each other.

Blockchain is not a panacea

For many, "blockchain technology" is a vague and undefined term. Many of the world's largest banks have rejected Bitcoin, but have chosen to embrace the technology underlying the peer-to-peer digital cash system; however, the report points out that a distinction needs to be made between open and closed consensus mechanisms.

The phrase ‘blockchain technology’ is seen by the report as a tagline that turns true technological innovation into a broad antidote to all industry problems. The report states,

“The phrase embodies a vague design paradigm that ends up being touted as a solution to all social and organizational problems.”

Consensus mechanism is the key

“The consensus mechanism… is the real disruptive, appealing, and critical component of this design.”

These mechanisms are key to many of the benefits of blockchain technology.

The report also explores proof of work (POW) , proof of stake (POS), social consensus mechanisms , and closed alliance consensus . The report points out that from the perspective of innovation policy, since no permission is required to create applications, open consensus mechanisms are better than closed consensus mechanisms, that is, public chains are better than private chains.

For open consensus mechanisms, anyone with an Internet-connected computer should be eligible to play a role in the consensus data writing process;

For a closed consensus mechanism, only those whose identities have been confirmed and authorized by a centralized institution can participate in the consensus.

Open blockchain tokens are like cash

Due to the limitations of closed blockchains (or what the report calls ‘closed consensus mechanisms’), some specific applications may be better suited to open, permissionless blockchain systems. One of the key applications of such systems today (perhaps the only one that has gained significant usage so far) is digital cash – primarily Bitcoin.

The report states that closed blockchain money transfer systems cannot function without additional effort from end users.

“For a closed blockchain funds transfer system, if I don’t have an account and a legal relationship with a company, then there is no way to send or receive funds.”

The fact that users cannot receive any tokens on a permissioned blockchain without registering an account means that the token system cannot function like cash. As long as a system requires permission from other institutions to create accounts and send transactions, the system is by default incompatible with the digital cash model.

It’s worth noting that even Bitcoin hasn’t completely solved the permissionless transaction problem. Due to the lack of advanced privacy features, the ability of Bitcoin miners to censor specific transactions has not been completely abolished. Improvements are being made to this area, but it’s not a huge issue right now.

It has to be said that Bitcoin should theoretically be able to serve as a better digital cash system than a consortium blockchain.

“Only an open consensus mechanism that fully automates the creation and maintenance of a ledger based on pre-created rules and economic incentives can provide electronic transactions that work just like cash.”