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…