What can you do with public blockchain that you can't do with permissioned, and why is it worth all the trouble?

There are two kinds of blockchain, plus a third kind that you can only unlock after failing to achieve meaningful real world adoption with the other two.

The first type is public blockchain, such as Bitcoin's. These blockchains are completely public, accessible to anyone and are often run as communal open-source projects. They offer some unique and potentially very useful features, but are prone to problems such as scaling issues, data privacy concerns, unpredictable costs for users, cybersecurity risks, governance woes and regulatory uncertainty.

The second type is permissioned blockchain. These private blockchains are closed networks, privately owned and managed by one or more specific entities, who mutually agree on each other's level of control. They eliminate many of those public blockchain downsides, but they don't allow for all the same opportunities as public blockchains.

The third kind is hybrid blockchain. These are networks which allow for permissioned chains that can interact with a public blockchain. They're intended to help bring the best of both worlds.

When people try to methodically solve the problems inhibiting enterprise blockchain adoption, while trying to retain the core benefits of public blockchain, they tend to arrive at hybrid blockchain solutions.

Business appetite for public blockchain

Insolar is one of the projects that made this journey from inception to hybrid blockchain, picking up a number of enterprise-level customers along the way. While some of its customers and partners are known, others are still described only in vague, indistinct terms, as is typical in the enterprise blockchain space.

"We have a few exciting customers that will be announced in the next couple of months," said Insolar co-founder Peter Fedchenkov to Finder. "One of them is a leading Fortune 500 company in financial services. Another one is a commodity company we helped with a blockchain-based system to facilitate commodity trade settlement. But we can't announce anything now."

But right now, Insolar may be an especially interesting example of enterprise blockchain. It's built specifically with enterprise customers in mind. It just launched its mainnet – its public blockchain component – on 3 February 2020, and it ostensibly has enterprise customers lining up to use it.

The reason this is so interesting is that every large business and their dog has been experimenting with permissioned blockchains, but live public blockchain use has been much more limited. And yet, that public blockchain side of things is where so much of that elusive blockchain magic happens.

As such, this would be a good time to start asking what exactly businesses want from public blockchain that they can't get with permissioned chains and why, if they want to use public blockchains, they aren't going with existing public blockchains.

"We've seen quite a lot of adoption of private networks so far and most, if not all, deployments of blockchain in the enterprise space are private by nature for a number of reasons," Fedchenkov said. "But, surprisingly a lot, when we talk to clients — that's mostly in Europe and North America — more and more often we hear about their desire to deploy something in the public domain."

"Our vision, which looks like it coincides with the vision of our customers, is that in a couple of years — maybe in five years — we'll have more public deployments in the enterprise space than we have private ones."

Successful deployments will create a self-reinforcing cycle, Fedchenkov suggests, where good examples of public blockchain use will motivate more businesses to start looking into it and eventually normalise it. Additionally, if the precedent set by the development of the Internet is any example, this could also create network effects to exponentially grow public blockchain use.

Just like the early days of the Internet

The development of blockchain, in the sense of separate private and public spheres, also mirrors the development of the Internet, Fedchenkov pointed out.

"It started with a bunch of intranets and universities and defense organizations in the US, but then they figured out they just want to connect to each other," he said. "And that's what they did. I think by nature people like to start with private things, such as enterprises started with private blockchain deployments, or researchers started with their own intranets."

Public versus permissioned blockchain layers can also, respectively, be understood in the context of the World Wide Web versus private intranets.

"I really like this analogy between the Internet and intranet," Fedchenkov said. "Let's say we're in the same organisation. We have our own intranet and we can say 'Okay we deal a lot with Company X. Let's invite a few people from Company X into our own intranet... we can specify their access rights, so they can only see some of the information that relates to them, but they cannot read all of our emails."

"Okay? You could do this. But then you say 'Okay we also work with Company Y. Why don't we extend our intranet to them?' But then they have their own intranet, and now it becomes a clash. How do you connect those two networks together?" he asked.

"This is the power of the Internet. We all have our own local networks, but we have an ability to message each other and we have an ability to just post some information on a website that everyone can access, while we can keep some of the information private."

"We believe that's the ability that the enterprise blockchain really needs. Whenever we talk to our customers in North America and Europe, we hear that they're definitely thinking and interested in public blockchain deployments, but they also want to have their sensitive information stored in a private network. And that's where the hybrid network comes in, by enabling businesses to share some information in the public domain, while keeping more sensitive data, such as contract terms or some payment information, within the private network."

Distilling the value of public versus permissioned blockchains

Any value chain can be broken down into a series of relationships between entities. These relationships include contractual obligations, payments and data sharing.

Your job, as the blockchain fairy who flies around waving your magic blockchain wand at value chains, is to optimise these relationships. In other words, you want to make sure contractual obligations can be filled, payments can be settled and the correct data can be shared between any parties as needed, in precisely the way that's needed, as efficiently, cheaply and automatically as possible.

On paper the optimal answer is to give everyone access to everyone else's money and data, so participants can easily take anything they need whenever they need. But for some reason, this isn't considered a realistic real-world solution.

That's why you introduce private blockchains, which can be customised by participants. Now participants can impose their own rules on the system that make it safe to share sensitive information, make payments and fulfil obligations to each other.

So why can't you just stick with these permissioned blockchains chains?

For one, because there are effort costs associated with sharing information on private chains. The data on private chains is only private insofar as you control who it's shared with, but this means it needs to be shared on a case by case basis. There are some situations where it's best to just hit the "send to all" button, or post something on the Internet. Anytime you want the general public to engage with the blockchain, such as in the case of peer to peer energy marketplaces, you probably want that public blockchain layer.

Pharmaceutical serial numbers are another good example, Fedchenkov said.

"There are various regulations, but in many countries you have to have those serial numbers. You have to send a number of reports to the regulators. Retailers... have to check those numbers versus the publicly available registers. They're responsible for making sure they're selling drugs that are compliant and are not harmful to the general public."

"You could store the drug serialisation numbers in the public blockchain, which means anyone could access it. Regulators could access it, the general public could access it, and maybe some of the fulfilment providers whom you hire, and are not fully part of your value chain, could also access it for their own compliance purposes."

"I guess you could technically do it in a private network," Fedchenkov added. "But it becomes so cumbersome, and it's not scalable. Say it's a global drug, and you want logistics providers and regulators across the globe to have access to serial numbers and all the information that's related to them. It will be very cumbersome to keep inviting them to the private network as opposed to saying 'guys, I'm posting all the information here'."

But, compared to simply posting the information on a website, there are a number of advantages to putting that information on a public blockchain.

Benefit How it helps Immutability The data cannot be erased or changed, even by the participants. Verifiability Participants can see which parties agree and disagree on the current state of the data. Auditability Any changes leave a permanent paper trail. Accessibility Anyone can access the data. This includes third party developers and other organisations. Tools built for public blockchains can often be used by anyone, so organisations don't need to build everything themselves. Transparency All participants can verify that the system is tamper-proof and working as intended.

These features are often simply boiled down to the notion of trust; something that is completely tamper-proof, transparent and immutable can be perfectly trusted. And if you have complete trust in something, you don't need to spend time and effort auditing, verifying, chasing or suing it.

This level of trust can let you build viable frameworks for sharing information that you would previously keep to yourself.

"I think it's just this period of time that requires businesses to share their data in a responsible way to remain competitive," Fedchenkov mused. "You have to share and align the data across your, well, your entire ecosystem of partners, suppliers, vendors, clients... and that's what public networks are for."

That said, it's important to mention that these features, and this level of trust, are not exclusive to public blockchain. You can also get them to varying degrees on permissioned blockchains.

Public vs private blockchain trust Consider a trifecta of organisations sharing a permissioned blockchain, where any changes require approval from at least two thirds of the participants. If any one of the parties finds itself at odds with the ledger, they know it's because they're the odd one out and they have a clear paper trail to prove it. This broad principle can potentially make it faster and easier to reconcile inter-organisational data and track down errors. So it's still a permissioned chain, and it doesn't offer the same degree of "pure" immutability, verifiability, accessibility, etc, as a public blockchain, but it still provides these features to a meaningful degree, where they can be used in practical ways. You could think of public and private blockchains as bringing different "grades" of trust. When a handful of companies want to reconcile data faster, you can settle for the cheap and convenient low-grade trust offered by a permissioned blockchain configuration. But when you need an ironclad level of trust, or when you want to create a completely disintermediated censorship-resistant digital currency, you'll need to use the unadulterated 100% pure, premium-grade trust offered by a solid, completely decentralised public blockchain. It's expensive and inconvenient, but sometimes you just need the best. With permissioned chains, the participants can manipulate it to the extent that's allowed by the rules of the system. But with perfectly decentralised public chains, theoretically no one can manipulate them. It should be noted, though, that not all public blockchains achieve this degree of perfect immutability, and not all of them are trying to. "We're not mining Bitcoins here," Fedchenkov said. "In the Bitcoin network, no one really knows anyone, everyone has zero trust in everyone else. But in business you deal with your counterparties on a daily basis, so there is some trust. You don't need that level of decentralisation in business that you need in some consumer applications, especially systems like Bitcoin." In a similar vein it's also worth noting that, through various cryptographic tricks, it's possible to tap into that high-grade public blockchain trust without putting potentially sensitive information out there for the whole world to see. For example, using the same one-way cryptography that underpins Bitcoin mining, an organisation could hash documents to a public blockchain to create a tamper-proof timestamped record of their existence and contents, without disclosing what they actually say. The point is that there are a lot of shades of grey and fuzzy edges. A public blockchain doesn't always guarantee that everything is public and completely immutable, and a permissioned chain doesn't always mean that everything is confidential and manipulable. Organisations are more interested in finding the blend of features that works for their intended applications, rather than rigidly adhering to certain categories of blockchain.

What's 100% pure high-grade public blockchain trust good for?

One easy way of spotting areas that can benefit from a higher-grade of trust is to look for spots where the existing "trust infrastructure" such as the rule of law, isn't bringing the desired results. Pharmaceutical supply chains are once again a clear example.

There are also situations where you can never have enough trust, and more is always better. Consumer trust falls squarely into this category.

"We believe that we are entering a new age when businesses need to assure consumers of the responsible use of their data," Fedchenkov said. "Yes, you can still share the data with Facebook, Google or Amazon, but many people are concerned about how these guys are using our data, and how do we ensure that they're using it in the right way, according to how they said they will be using this data?"

"And this we also see in the business to business relationships. More businesses are opening up their data to suppliers and customers just to stay competitive, so we think, again, something like blockchain can help with assuring consumers that their data is not being used in the wrong ways. Basically, by tracking this data and tracking access to this data and creating immutable logs. Who shared this data with who? Who had access to this data within Facebook, within Amazon? Within any other company?"

By committing to the transparency and immutability of a high-trust public chain, businesses can prove to their customers that their data has been used responsibly and in accordance with standing agreements.

It's also good for compliance, Fedchenkov points out, and proving to regulators that your business is handling data correctly.

"Businesses just need the tools and solutions to be open and collaborative but keep the data secure and keep it under control," he summarised.

More esoterically, some blockchain startups have also noted that this high-grade trust is a useful ingredient when trying to kickstart a viable blockchain network.

Like the Internet, blockchain is most useful when you have a lot of participants engaging with each other and creating network effects, but many companies are understandably not keen on joining a network as an unequal partner, doing anything that benefits their competitors, or willingly becoming dependent on a provider that could transform into a gouging, monopolistic overlord further down the line.

Here, using public blockchain as the trust infrastructure for a new network lets participants verify that they're all on a level playing field. There's an argument to be made that public blockchain-grade trust is a necessary prerequisite for the creation of many networks.

Unfortunately, but not unreasonably, no level of trust does anything to make public blockchains any less difficult and complex. It's still an innately tough sell, Fedchenkov said, which is one of the reasons so many blockchain pilots seem to stay in the pilot stage forever.

Achieving liftoff

"When you do a pilot and it's just a couple of your suppliers or customers, it doesn't really matter, right? Everyone wants to do something, you just have a few nodes and you just try out a use case. But most companies have tens of thousands of suppliers or customers across the globe. Take pretty much any large company... for them, once a pilot is successful, to scale it to tens of thousands of participants is a huge issue with current technologies."

"That's why we see that many pilots still stay at the pilot stage, because it's really, really hard to scale. How do you convince your customers? Like, 'guys figure out what blockchain is, run a node, contribute some IT infrastructure and then there will be some benefits for you'."

The sheer complexity of public blockchains is a pernicious problem. The main way it's been approached to date is with managed node services such as Blockdaemon, but it also adds complexity, and some scalability and data privacy issues of its own.

Plus, solving problems by creating trusted intermediaries is so old fashioned.

So, Insolar did something quite a bit different, Fedchenkov explained.

"What we came up with is a novel architecture, and a different approach," he said. "You can invite your vendors or your customers to a network without forcing them to run a node."

The way it works is basically that all the requisite intermediaries are baked into the network itself, as active participants.

The Insolar economic paper visualises it as such:

At the bottom layer you have the actual hardware and nodes, and as you climb up the layers you get the cloud services, then the business services, and then the actual customers (the blockchain-using organisations themselves) at the top, taking advantage of that full layer of service providers.

It's mostly business as usual in this stack; just service providers providing services.

The main differences are that payments for these services are made with the network's native network XNS token, and that there are some very deliberate technical separations between the layers for the sake of security.

"It's fully secure," Fedchenkov said. "So if someone else is running your node, there is no way they could read your information. There's no way they could somehow tamper with your data."

"The bottom layer, the network layer, you don't really have to deal with that. You don't have to customise anything, you just work with business logic, and you work with it in Java, which is super easy."

As a business, Insolar Technologies Gmbh lives and works on the third layer, but it's also working to expand the number of service providers at all the other layers, and the number of customers for them to serve at the top.

Visualised along the same lines, something like Ethereum would be missing those two layers in the middle. Users at the top spin up their own nodes, and drill directly into the bottom layer. Hardware expenses, in the form of ETH transaction fees, are paid directly from users to the miners. You can still get permissioned sidechains and services from those middle layers, but they're more or less completely external to the system. Building things in the system requires you to adhere to Ethereum's overarching network rules, such as gas fees and block sizes.

This interesting design comes courtesy of Insolar's engineering team leaders, Fedchenkov said, and the lessons they learned trying to wrangle Hyperledger Fabric, R3 Corda and Ethereum "in a highly demanding enterprise environment" at a European bank.

The whole hybrid public-private blockchain arrangement was borne of similar lessons, and the business demand for public blockchains.

But while most businesses have a pretty good idea of what features they want in a blockchain, questions of governance are a bit trickier. In the case of Insolar, network governance is still up in the air.

How it shakes out is anyone's guess, but for his part, Fedchenkov likes the idea of Insolar eventually becoming a self governing fully decentralised autonomous organisation... along with most of the rest of the world.

Economic agency

"What we see is the number of economic agents in the world increasing from 5 or 6 billion - the population of the world today - to hundreds if not thousands of billions, which is the population of the world plus all of the intelligent connected devices," he said.

"These connected devices, could be a self driving car, could be an IoT enabled industrial equipment, could be a power system controller, could be a smartphone. We see that they're becoming increasingly intelligent and gaining abilities to transact.

"So, in some near future, I believe a self driving car will get its own digital identity and its own wallet. It will be able to pay road tolls whenever it needs to do so. Your smart home might be able to purchase electricity at the right time of day, whenever it's efficient. When your solar panel generates electricity it can sell it to a neighbouring household. So we get into this ability to transact without human intervention," Fedchenkov said.

"With hundreds of billions of devices, there's no way some person could control all of those quadrillions of transactions that will be happening. So part of our vision is the emergence of this new transactive economy, that's built on data... we'll have so much more data, we will have so many more economic agents."

"Decentralisation is happening like this... instead of me as a person taking full control of my home, I will delegate some of these responsibilities to my solar panel to sell electricity, to my power controllers to buy electricity when I need it, to my fridge to order milk... that's a very primitive example. I think much more interesting cases could be in manufacturing, and in business in general."

"So, the whole world is changing from a completely centralised model where there are highly hierarchical organisations... where you, as the owner of a car, control everything the car does, or any of your devices do... it's getting to a different paradigm where it will be decentralised in business, and in the consumer world as well."

"It will happen sooner than we think - within the next 10 years."

"And that's why we think decentralized systems are important," Fedchenkov said. "Because they match the patterns of those economic agents. So if you have a new power grid where everyone can trade energy with everyone, and consumers could generate energy and sell it, that's the decentralized network, with distributed ledger technology serving as the backbone to transfer data and transfer value."

"That's our vision for the world. That's the software that we want to build to power this shift to the new transactive economy, and that's why we need decentralisation."

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Disclosure: The author holds BNB, BTC at the time of writing.

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