Will banks eventually switch from private to public chains?

Marc Andreessen, the famous venture capitalist and inventor of the early web browser Mosaic, tweeted this in December:

“Big companies are eager to pursue blockchain without Bitcoin. This is very similar to 1994: Can we access the Internet without the Internet?”

In the mid-90s, the advent of the web led to private companies trying to create proprietary information sharing networks (think AOL and CompuServe, for example). But the Internet as we know it today triumphed over each individual proprietary network because it didn’t restrict these large companies, and the development of proprietary protocols stagnated.

Banks are making the same mistake today, showing surprising interest in private distributed ledgers (or private blockchains) rather than open source ledger systems and embracing public blockchains and cryptocurrencies such as Bitcoin.

The Internet and the web have taught us that breakthrough technologies are often built on an open protocol layer that level the playing field and allows anyone to innovate on it. Companies like Google and Facebook are made possible by the openness of the web.

There’s no doubt that using private distributed ledgers could bring immediate improvements to the creaking infrastructure of the financial services industry, especially the securities settlement back office. However, the industry’s interest in proprietary networks is, as Anderson put it, like “going online without the Internet.”

To be sure, Bitcoin transmission (the primary purpose of this public blockchain) has some limitations today. Bitcoin can only hold a limited number of transactions per block, and the community is engaged in a heated debate over its scalability issues.

Bitcoin’s limited smart contract development environment has also sparked competing public blockchains such as Ethereum, which can theoretically run more complex contracts.

Moreover, the transaction confirmation time of public blockchain is generally longer than that of private network.

But new research shows that Bitcoin's technology can also be refined to overcome these limitations and gain more benefits. For example, developers are working on a cryptographic tool called confidential transactions to improve security. The tool can verify a transaction on a public blockchain without knowing the number of inputs to the transaction, providing better privacy than the original transaction. This technology allows users to settle a transaction without revealing its amount or showing others the amount of your account.

Privacy on public blockchains will be further enhanced through the use of “zero-knowledge proofs,” which reveal no information other than the validity of a statement. Such projects include Zcash, an open-source cryptocurrency that facilitates payments on a public blockchain, but keeps the sender, receiver, and transaction amount private. Just as it is possible to build secure e-commerce transactions over the Internet today, it will be possible to build private businesses on public blockchains in the future.

At the same time, developers are trying to solve Bitcoin's scalability issues through "sidechains", opening up new possibilities for experimentation. Similar to Ethereum, Rootstock is building a fully functional "Turing-complete" smart contract platform on a sidechain of Bitcoin, which means it can be used for more complex transactions, not just the exchange of value between two parties. The platform will allow the creation of highly complex smart contracts that can serve as the basis for securities settlement applications, for example.

With these developments building on Bitcoin, public blockchain infrastructure will become more reliable and scalable. It won’t happen overnight, but history shows that open technology always triumphs over closed garden approaches.

Siddharth Kalla is the Chief Technology Officer at Acupay, a New York-based technology provider focused on cross-border finance. The opinions expressed in this article are solely those of the author.

Original article: http://www.americanbanker.com/bankthink/the-case-for-banks-to-use-open-public-blockchains-1079783-1.html
By Siddharth Kalla
Compilation: Overnight porridge
Source (translation): Babbitt Information (http://www.8btc.com/banks-public-blockchains)