A Case for Public Blockchains12.14.2016
Permissionless public blockchains have gotten a bad rap within the financial services industry as the market spends more time focused on developing permissioned private blockchain to connect its members.
“Private blockchains allow you to do what you were doing before but possibly more efficiently and cheaper,” said Christian Catalini, assistant professor of technological innovation, entrepreneurship and strategic management at the MIT Sloan School of Management and co-author of a recent research paper on the topic. “They do not change the market structure so that current incumbents can maintain their roles.”
Blockchains, or distributed ledgers, reduce the costs of verification and operating a network dramatically, according to Catalini.
With every transaction, there is a need to verify the counterparties, the good that is being exchanged, and the good’s provenance.
“All these attributes are important for the well functioning of markets,” said Catalini. “The more asymmetry of information there is, the more things can go wrong. With blockchain, if you design a system in which those attributes are recorded accurately on a distributed ledger, then suddenly you can perform verification quite quickly with practically zero costs.”
Private blockchains, like public blockchains, share this benefit but tend to fall short when it comes to the cost of network operations.
When setting up a trusted network, such as Swift, the ACH, or the web’s Domain Name System, there is an inherent cost and fragility.
“The reason why DNS is so fragile is that it has trusted nodes that hackers can attack,” said Catalini. “But if you ported web servers, such as the DNS, to a blockchain then you would be able to create a network that would be much more resilient to attack.”
Financial institutions should not fear disintermediation due to the adoption of public blockchains, he added.
“There will be an important role for intermediaries and possibly a more important role,” he said. “It is just that the intermediaries will do different things that what they currently do.”
Catalini sees financial institutions taking on the responsibility of certifying the assets that they create. “All of that is going to become more important once you can scale verification costs down,” he said.
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