Why Public Blockchains Will Outlast Private Blockchains

I’m in Los Angeles attending a crypto conference. I’ll bring you up to speed next week on the latest developments creating buzz or controversy in the crypto community.

In the meantime, I thought I’d alert you to a curious development I’m hoping will be discussed at the conference.

It’s something not everybody in the crypto community is comfortable highlighting or even acknowledging. It has to do with permissioned blockchains (also called private blockchains) surging ahead of permissionless (or public) blockchains.

Why is this such a sore subject?

For one thing, permissioned blockchains are not really decentralized or resistant to censorship. They typically employ consensus solutions that have existed since before bitcoin came on the scene (such as practical byzantine fault tolerance, for those of you who are curious about such things).

Even more damning, they require so-called trusted entities to administer the network. And those can be the very entities that crypto enthusiasts want kicked out of the club… like banks, for instance.

Some individuals from private corporations and banks and others participating in these private blockchain initiatives call them – rather dismissively – “blockchain without bitcoin.” Technically, it’s true. Most of these blockchain projects – like IBM’s Fabric (part of the Hyperledger project) and R3 Consortium’s Corda – are not built using bitcoin or Ethereum. (JPMorgan’s Quorum is a notable exception. It uses Ethereum.)

Private blockchain projects are moving from proofs-of-concept to real-world implementations. I write about them regularly in the monthly issues of First Stage Investor. And believe me, there are a ton of projects going on all over the world. It’s exciting.

And whether you like it or not, the reality is that bitcoin, ethereum and other major cryptocoins are currently bogged down in scaling issues.

How bad is it? Ethereum was expected to have deployed its proof-of-stake technology (called Casper) by now. It’s not live on Ethereum, and Casper research continues. Its Layer 2 network, Raiden – which is intended to boost speeds – is also not yet live on Ethereum’s main net. It’s way behind schedule.

Help may be on the way, though. Ethereum dapps (decentralized applications), including FunFair and Counterfactual, have built dapp-specific scaling solutions. There’s also intriguing research in developing “state channels.” And bitcoin now has more than 10,000 Lightning channels. (For a quick explanation of these new scaling technologies, this technical article is pretty easy to read and understand.)

So this is the state of affairs in the public blockchain world.

We’re left waiting for scaling solutions such as Lightning and Casper to be fully deployed. In the meantime, public blockchains will simply not be able to develop dapps at scale with anywhere near the ease and pace of permissioned systems.

It doesn’t make me happy. And I believe it’s partly responsible for crypto’s sluggish market.

But I’m not panicking, either. And true believers remain defiant. (One Twitter user’s handle is “bitcoin without blockchain.” I’m not sure what it means, but I admire his fighting spirit.)

Bitcoin is operating at a temporary disadvantage right now because it doesn’t have the luxury of a corporate IT team’s firewalls. It’s out there in the wild, fighting off threats as they happen… in the real world… in real time.

It’s not pretty. And it slows everything down. But it’s also going to help bitcoin grow strong and resilient. It will have self-protective coping and defensive mechanisms that permissioned blockchains will never develop because they’re being wrapped in a synthetic cocoon of safety like a helpless infant (or a Bubble Boy!).

If you put a wolf and a poodle in a room, which one is going to survive? Not the lapdog, but the dog exposed to a thousand years of threats in the wild.

Permissioned blockchains may be in the lead right now, but they’re not built to last. Time is not on their side.

Invest early and well,

Andy Gordon
Co-Founder, Early Investing