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Private Blockchains

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While public blockchains have enabled censorship resistant digital cash,
they were not designed to solve problems that traditional businesses
have. What are the challenges within existing businesses, and how might
concepts borrowed from public blockchains help improve how they
operate?
Business-to-business communication
Processes within an organisation have, over time, been made efficient by
use of internal systems, workflow tools, intranets, and data repositories.
However, the sophistication of technology used to communicate between
organisations has remained low. In some advanced situations, APIs
(application programming interfaces) are used for machine to machine
communications, but in the majority of cases we rely on emails and pdf
files. It is still common for pieces of paper with wet-ink signatures to be
couriered across the world.
Duplicative data, processes, and reconciliation
Businesses trust their own data but not anyone else’s. This means that
businesses within an ecosystem duplicate data and processes. Digital files
businesses within an ecosystem duplicate data and processes. Digital files
and records are often replicated within and between multiple
organisations, with none of them being the golden source. Version
control of documents and records is painful unless a third party is paid to
be the golden source. Reconciliation only goes some way to solve these
pain points.
Consider a digital invoice issued by company A to company B. The
invoice could be a pdf file which is created by someone at company A,
perhaps signed off by someone else in company A before a copy is sent
from the accounts receivable department to someone at company B.
Someone at company B receives it in their inbox, saves a copy on their
hard drive, and forwards a copy to someone else, perhaps their manager,
to sign off. Another copy goes to the accounts payable department and,
when the invoice is paid, everyone needs to be updated. There could be
ten or more copies of the same asset—the invoice—floating around
various computers, none of which are kept in sync. When the state of the
invoice changes from ‘unpaid’ to ‘paid,’ this is not reflected on all of the
copies of the invoice.
Private blockchains
So it is not surprising that businesses have become interested in concepts
popularised by public blockchains such as unique digital assets, trusted
automation, and cryptographically secured ledger entries. However, the
radical transparency of public blockchains is not attractive to businesses
that quite legitimately may require a level of commercial confidentiality.
Private blockchains have been inspired by public blockchains but are
being designed to meet the needs of business. They adopt some concepts
from public blockchains and reject others. By relaxing the strict
requirements of public blockchains around permissionlessness and
censorship resistance, private blockchains do not need mechanisms such
censorship resistance, private blockchains do not need mechanisms such
as the energy-intensive proof-of-work mining.
Some technology inspired by public blockchains do not have blocks in
chains at all! They are sometimes more accurately called ‘distributed
ledgers’. Corda, a distributed ledger platform built by R3 and a group of
banks, is an open source platform that uses many of the concepts from
public blockchains, but it doesn’t bundle transactions up into blocks for
batch processing and distribution across the whole network. This
addresses some privacy concerns as only the businesses who are involved
in a transaction see it.
A key benefit of blockchains and other similar data structures that use
chains of hashes is that parties have the ability to know for themselves
that a set of statements is complete (not missing any) and that the
statements themselves are complete and untampered. Each party can
verify this for themselves without having to check with another party.
This is useful in many business situations, not least banks who need to
know that their list of trades is complete and the data within the trades is
consistent with their counterparty.
Private blockchains aim to increase the quality and security of technology
used in business-to-business communications. They allow unique digital
assets to move freely and reliably between companies without the need to
have a third party act as a record keeper. Private blockchains can provide
transparent multilateral workflows in the form of smart contracts, and
demonstrate that the agreed workflows are adhered to. This is what is
meant by ‘trustless automation’. Instead of having to trust a business to
perform as agreed, a smart contract ensures that pre-programmed
processes are followed.
Private blockchains may be useful any time a business interacts with
another business to share workflows, processes, or assets. When does this
another business to share workflows, processes, or assets. When does this
happen? Pretty much all of the time! Most businesses don’t operate in a
vacuum; they need to interact with other businesses. The financial
services industry was the first to invest, to understand, and to use this
technology, specifically for wholesale banking and in financial markets.
This makes sense, as the industry is dominated by business-to-business
workflows, intermediaries, and digital assets; and the ‘back office’ had
not received significant investment in decades. Perhaps the fact that
Bitcoin was described as a cryptocurrency also made it interesting to
banks.
Let’s revisit the invoice example. Imagine now if the invoice was recorded
on some sort of ledger that was kept in sync between both companies,
bilaterally, and as soon as it was approved, signed, or paid, both parties
would know about it. This could streamline many business processes, and
the concepts could be extended to any document, record, or data.
Of course, many business-to-business workflows could be digitised and
automated if you could find a party to store the data and be the golden
source. In some cases, they are. SWIFT and Bolero are examples that fit
this category. But in other cases, a third party may not be viable, either
because everyone wants to be it or no one wants to be it, or there are
regulatory or geographical reasons preventing the emergence of such a
party. Industries can be suspicious of single points of power and control,
and wary of the monopolistic behaviour that often emerges from this.
Central repositories of data could have competitive implications if leaked
or misused. So there are a number of reasons why an apparently obvious
solution of having a third party may not be viable.
Non-financial industries are now becoming interested in exploring the
technology for, among other things, digital identity, supply chains, trade
finance, healthcare, procurement, real estate, and asset registries.

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