The Blockchain Challenge: Private vs. Public!
Both are great but watch as banks push for private chains
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A blockchain-based financial system is becoming more real every day, with asset tokenization and stablecoins poised to become the norm. But on what chains will they operate- permissioned or permissionless?
This is an ongoing battle, and the sides are clearly drawn: crypto aficionados demand permissionless or public chains, with banks railing against their inadequacies.
Banks are used to own or have some control over the systems they use and want permissioned or private chains, also known as distributed ledger technology (DLT).
Which chain companies pick is a key strategic consideration that echoes the battle between openness and control but also hinges on security, privacy, and settlement finality.
The reality is that much of the financial industry is not overwhelmed by public blockchains because they can’t control who uses them, and their speed and cost are not up to banks’ high-volume needs.
While permissionless decentralized chains are the utopian dream and asset managers are already exploring them, I don’t expect banks or exchanges to support asset managers ’ enthusiasm. Both will try to push assets and payments onto their own permissioned chains where users and transaction fees can be tightly controlled.
Is this bad?
Yes, if you have the utopian dream of many in the crypto world for a Web 3 where all assets are available everywhere to everyone. No, if you are in the highly regulated securities or payments industry where speed and privacy are key.
Ultimately, we’ll end up with both, and Fireblocks, the report's author, proposes that both systems maintain interoperability—a practical if not predictable solution.
I expect the balance to tip strongly in the direction of private chains because banks, exchanges, and payment companies will not relinquish their grip or risk their reputations on public chains.
👉The Private vs. Public Dilemma
Use cases for permissionless blockchains
🔹 DeFi: Enabling a wide range of financial services like lending, borrowing, and trading.
🔹 Digital identity: Providing secure, verifiable identities. Voting systems: Ensuring transparent and tamper-proof election processes.
🔹 Content distribution: Allowing creators to publish content and receive direct compensation.
🔹 Payments: Facilitating fast, secure, and low-cost transactions, especially for cross-border settlements, pay-ins, pay-outs, and
Use cases for permissioned blockchains:
🔹 Interbank settlements: Streamlining transactions between banks.
🔹 Tokenizing repurchase agreements (Repos):
🔹 Facilitating the digital representation of repurchase agreements.
🔹 Fund distribution: Managing the distribution of funds securely and transparently.
🔹 Supply chain management: Tracking the provenance of goods and ensuring timely information access.
Challenges faced by financial institutions in adopting permissionless blockchains
🔹 Regulatory hurdles: a compliance conundrum. Regulatory requirements for risk-managing financial services delivered via permissionless ledger technology are often inconsistent or disproportionate, or both.
🔹 Scalability: the throughput dilemma. Blockchains still struggle to match the transaction throughput required by large financial institutions.
🔹 The double-edged sword of transparency: the public nature of blockchain transactions can inadvertently expose sensitive client information.
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