Some people think that licensed distributed ledger technology might work better than open blockchain because it is fine-tuned to solve their problems. Such systems are also referred to as “permitted blockchain”, as if blockchain were a higher-level concept and “permissioned” was one of their variants. But this claim is controversial and below you’ll see why.
Is “allowed” decentralized?
There are many other options in DLTs to choose from: Licensed, Private, Enterprise, Affiliate DLT, etc. And honestly, sometimes it is not easy to differentiate between them. Let us therefore compare DLT with blockchain for this level of discussion.
A licensed DLT and the variety mentioned in it are not decentralized. This shouldn’t be a fallacy as it can be fatal to a project. While some who oppose this claim claim that decentralization is possible to some extent, and of course the permissionless blockchain is more decentralized.
Let’s just say it. When someone is between two counterparties in a transaction and there is nothing you can do about it, the transaction is centralized. If a normal user on a public blockchain doesn’t want to rely on miners to include their transaction in a block, they can compose their transaction and mine a block themselves. If the block is valid, the network will accept it. Of course, mining today requires enormous computational resources, but there are no technical or formal barriers – you don’t need to get permission to mine. In DLT, network users have different roles and permissions, and normal users cannot create and validate blocks. There is nothing wrong with having a centralized system; it’s just a matter of understanding what you are dealing with.
Related: What is the difference between blockchain and DLT?
Permitted DLTs can only be decentralized from one perspective, that is, by having a group of independent members (organizations, companies, etc.) operate the network with exclusive rights to form blocks. The control of a few less affiliated companies by a beneficiary does not mean that it will be decentralized.
And remember that any conjugated structure with independent members can be hierarchical, but only for those members – it will always be centralized for everyone outside the club.
Is DLT a cartel?
A DLT company (private / authorized) can be viewed as a company. Sooner or later the antitrust authorities could question this. A security strategy ensures that the association’s terms and conditions are formulated in accordance with antitrust law.
By the way, a fully centralized system is much safer. But a centralized system will never achieve the level of trust and credibility that blockchain can achieve. It will be as vulnerable as any other centralized system, and here is why.
A centralized DLT is not immutable. The ledger can be arbitrarily rewritten by one (or more) people who control it or by a cyberattack. Because of its open and competitive nature (mining, staking, etc.), any blockchain can achieve immutability and therefore its records are trusted. Thousands of independent nodes can guarantee unprecedented resistance to any type of attack.
Usually it comes next after discussing immutability. How do you correct a mistake? What if you need to change your smart contract? What if you lose your private key? Nothing goes backwards – changes in the blockchain are impossible. What has passed has passed. In this respect, DLT is often compared to an alternative to the blockchain. You will hear that DLTs can be designed for those in control of the network to verify transactions as they are entered, and therefore, non-compliant transactions are not allowed to happen. But it would be a mistake to believe that the censorship on the network will eventually eliminate all errors and unwanted transactions. There will always be a chance for failure. So what? A retrospective change as a last resort? But if you could change history, you would ruin the whole idea of the blockchain. No other technology can guarantee such a level of data immutability. This is not one of the advantages of the blockchain – this is its clear advantage.
Related: Back to the original purpose of the blockchain: timestamp
However, immutability is viewed as something that hinders its legal application. Let’s say your circumstances have changed and you need to change the smart contact. The answer to this is that properly designing an application doesn’t undermine the immutability of the ledger. Smart contracts must be designed so that a user can attach a new transaction to reflect the change from the previous transaction. Blocks are definitely chronological and only the last transaction reflects the current status, while all previous transactions are historical references. You don’t have to change the course. Blockchain is a public repository for evidence of everything that happened. There are several methods of drafting applications that solve all sorts of legal problems; E.g. this and this scientific paper suggested solutions for asset rights management in blockchain registers. These topics are also discussed in a number of articles I published last year.
No blockchain is allowed
If anyone has questions about your system, they’ll be right. For more discussion of why licensing is not a blockchain, see this scientific article, but in brief: Not every blockchain is a blockchain. The connection of time-stamped data blocks with hash functions was invented by Haber and Stornetta in 1991. But nobody called it “blockchain” because blockchain is more than just a chain of blocks. It’s about how these blocks are generated and validated. Blocks are created through open, decentralized and uncensored competition. This is the definition of blockchain and that is what Satoshi Nakamoto designed. Hence, anything centralized (licensed, private, etc.) is anything but a blockchain.
Unfortunately, everyone is free to assign the word “blockchain” to any technology, as there is no legal copyright or legal protection for the word. Proponents of DLT have gone to great lengths to break the boundaries between these concepts. But it was only a matter of time before a few top-down hacks by private DLTs exposed the real difference between DLT and blockchain and changed the situation dramatically. There is a big difference in the number of nodes that guarantee the security of the network, i.e. a handful of known nodes on the DLT network or thousands of anonymous nodes worldwide on the blockchain network.
In theory, this can be argued, but when it comes to losing money due to weaknesses in the system, no one is going to listen to enthusiastic talk about DLT. People will start asking questions. If you are using “private / authorized” you should be ready to do so.
Related: Blockchain technology can change the world and not just through cryptocurrencies
If you still want to be licensed
A safe strategy would be to use the word “DLT” in all communications. Possible vulnerabilities may not be fixed, but then you can say: “We never said it was a blockchain.” By the way, ENISA (European Cybersecurity Authority) always uses “Distributed Ledger” instead of blockchain in its reports. In contrast, her colleagues at the National Institute of Standards and Technology in the United States used “blockchain” in their earlier report.
Do you want to create your own public blockchain network? This isn’t necessarily a good idea unless you have reliable technology and a strong plan in place. The first day, [permissionless] Blockchain is not secure by default. To achieve a high level of immutability and resistance to attack (hence the reliability and high capitalization of your coin), you need thousands of independent nodes worldwide. If you have the resources to build your community on this difficult path, your network will survive and you will reap the rewards. But what are the chances?
If you are still considering building your private or licensed network, consider how that infrastructure will be maintained. If this is just your network, you may have a solution for this as network maintenance can be done by the commercial applications that you develop on it. But you have to understand – maintaining the network is entirely up to you.
If you have a team of members, how do they translate infrastructure costs? There is a separate mechanism for this in a blockchain – cryptocurrency. Independent nodes compete to mine coins. This is how the entire infrastructure is created and maintained. People who develop applications on blockchain have to worry about fees, not infrastructure.
But what about your DLT? Is your DLT for personal use among network members only? In this case, the means must ultimately be justified, which is why independent market participants set up their own DLT network to cover the costs they bear for its establishment and support.
Consider another story of DLT members developing the network for external users. Of course, you have to design a model …