Bitcoin, blockchain, and cryptocurrency are words most people have at least heard of since the industry exploded into public consciousness in 2021.
In this series of articles, we’ll dive into the basics of the industry, providing an introduction to cryptography that will give you a solid grounding in the technology and a lexicon for its terminology – cryptographers should never be allowed to name everything the audience will possibly need to know – in short, enough to understand what people are talking about and decide if you want to know more.
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So what is a permissioned blockchain?
One answer is that it is a blockchain accessible only to users approved by a central authority. Another is that it’s an oxymoron that actually makes a lot of sense.
After all, isn’t the main characteristic of a blockchain to be decentralized?
Anyone can see public transactions on a blockchain, and anyone can buy a computer, download the code and a copy of the blockchain’s blocks, and set up a node without asking anyone’s permission. For a block of transactions to be added to the blockchain, the nodes must agree that it is valid. Consensus is reached, transaction collection becomes an immutable part of the blockchain. That’s how it works.
Because this consensus is necessary, if enough people in enough geographically and politically diverse places create nodes, blockchains are effectively uncensorable and immutable. And when that consensus is reached, a blockchain becomes useful: two unknown parties can transact securely without the need for a trusted third party.
As pseudonymous bitcoin creator Satoshi Nakamoto made clear, that’s the whole point: decentralization allows transactions without permission and without trust. That’s why decentralized finance, or DeFi, allows users to thumb their noses at things like anti-money laundering rules.
So, to slightly reframe our original question, why a permissioned blockchain?
Because there are many business uses of an immutable ledger where everything is immediately traceable back to its source.
That’s why JP Morgan was building its own permissioned blockchain, Quorum, with its own cryptocurrency, JPM Coin, soon after JP Morgan Chase CEO Jamie Dimon called bitcoin a “fraud” and threatened to dismiss one of its tradesmen “dumb” enough to trade.
Quorum was used to power the 300-member Interbank Information Network, which has since evolved into JPMorgan’s Onyx Unit Liink.
Read more: JPMorgan uses the Liink network to help financial institutions innovate in payment economics
Some of the largest licensed blockchain platforms include Linux Foundation’s Hyperledger, incorporating Hyperledger’s IBM Blockchain flavor, Fabric; Quorum, based on Ethereum technology and since sold to ConsenSys; and R3’s Corda, which started out as a competitor to cross-border payments platform Ripple, fighting for the right to take on SWIFT.
Save dollars, save lives
We’ll go into detail about how permissioned blockchains work and the benefits they offer, but let’s start with an example of how they’ve been used. One of the first breakout successes in the world of permissioned blockchain was the IBM Food Trust network, used by Walmart, Nestlé, Dole, Shoprite, the French supermarket chain and B-to-C blockchain pioneer Crossroads, and many more.
Walmart started out by testing a private blockchain on mangoes, but quickly pushed it into a much larger sector: leafy greens. If you’re not a serious carnivore, you’ll remember that in 2018, romaine lettuce had a Annus horribilis after several salmonella outbreaks caused several deaths, numerous illnesses and weeks-long forced recalls that saw several thousand tonnes recalled and landfilled.
While the outbreaks originated from geographically small regions, by the time the lettuce reached consumers, it had been mixed with supplies from so many other regions through so many intermediaries that it took the Food and Drug Administration weeks to to go back to the source. At each level, he had to go to all the intermediaries, have them trace their supply chain on their own systems, and start all over again one step further down the supply chain.
Enter the blockchain. walmart mandatory all of its leafy greens suppliers to connect to its private Food Trust-licensed blockchain. At each stage, each container of lettuce received is recorded on the blockchain as a transaction – in fact no different from what happens when you make a payment with bitcoins – rather than (or in addition to) the own database from each supplier. Only Walmart suppliers were allowed to use the blockchain, and Walmart could limit what each member saw – so suppliers couldn’t use it to spy on competitors.
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As a result, this Caesar salad could be tracked instantly from farm to table. Tracing salmonella-contaminated lettuce would take moments, and thousands of farmer suppliers to Walmart would not have their livelihoods tossed in the trash. Carrefour did the same with organic chickens, but affixed QR codes to the packaging that could be scanned by shoppers for information on the specific farm where that bird was raised – a marketing tool.
Walmart China Later combined both, allowing consumers to track the provenance of pork after a series of serious food safety concerns pushed consumers away from the staple. Sustainable sourcing, fair wages for workers and legal compliance are some of the things that can also be tracked.
In January, Harvard Business Review published a case study of Walmart Canada’s use of blockchain enabled for invoicing, allowing it to automate payments – using blockchain’s self-executing smart contracts – to 70 third-party freight carriers making 500,000 shipments per year. This incorporates 200 data points ranging from time zones to fuel used. Disputed invoices have dropped from 70% to less than 1%.
The same techniques now track more than half of shipping containers worldwide thanks to a blockchain project authorized by a consortium, TradeLens, launched by shipping giant Maersk and joined by many of its biggest competitors who have seen not only the benefits, but also the privacy protections available. Bring Internet of Things (IoT) technology-based thermometers on board and milk buyers can see that a liter has never lost refrigeration – and distributors can be alerted if it has.
How it works
Permissioned blockchains tokenize every transaction, which is exactly what it sounds like – but instead of a cryptocurrency whose price depends on market factors, the tokens are simply issued for tracking purposes.
Because nodes are centrally controlled, there is no need for expensive systems like mining or staking rewards or transaction fees that compensate node runners.
See also: PYMNTS DeFi Series: What is Staking?
Because they are controlled by a single entity, or a group in the case of enterprise blockchain consortia, there is a clear governance structure – a central authority that verifies members, determines who has access to what information, and can provide security against hackers exploiting code vulnerabilities. That said, without independent node runners, the possibility of a 51% attack that allows bad actors to interfere with transactions is greater – although it is also easier to identify and the damage easier to fix. to fix.
Read more: The 51% Attack: Crypto’s Double-Spend Achilles’ Heel
Smart contracts to automate invoices, payments, and really any kind of tracking can be shortlisted for defects. And decentralized nodes mean decentralized storage of information, which is encrypted but also backed up.
And, because participants are known rather than anonymized behind private key code encryption, transactions can be reversed and bad actors identified and expelled. There is no need or use of independent developers who can write bad code without consequences.
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And because the blockchain is always immutable, no one with the right passcode can alter transaction details. Beyond that, blockchain doesn’t have to replace legacy systems, but can be built alongside them.