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Technical and Financial Advantages of Permissioned Blockchains in Banking
November 09, 2020
Permissioned networks are the ideal solution for banks in building their own blockchain. In this article, we will detail the technical advantages of banking blockchains and how these advantages lead to financial advantages, as well.
Differences between Public and Private Blockchains
In what follows, we summarize the difference between public and private blockchains:
They are lighter than public blockchains. Thus, they act faster. The blockchain data is smaller, and there are fewer transactions than in a public blockchain.
They can identify their customers with certainty. Since each customer is provided with public and private keys, there are very few risks of identity theft.
They do not consume energy in irresponsible ways. Indeed, they do not use a mining-type proof-of-work. Instead, they usually employ a multi-party voting scheme.
The consensus is not ruled by financial interest. Instead, the consensus is based on notaries and cryptographic multi-signatures, and is conducted by the desire to provide a safer blockchain, not by ‘greed’.
Hard forks can be done very fast. Indeed, hard forks do not require community approval like public blockchains. Therefore, they can be performed by administrators with authoritative power over the private network.
Audits for compliance with banking regulations can be done easily as the systems are within a controlled network, with known actors, and ideally with centralized key management, as well as banking grade HSMs.
Finally, a permissioned blockchain retains most of the ‘positive’ aspects of the blockchains:
Decentralized data with better data protection;
The immutable, inalterable blockchain acting as a secure ledger;
Permissioned blockchains have several financial advantages, with many of them coming from the technical advantages they provide. Generally, they reduce costs because they remove intermediaries, which becomes unnecessary in the blockchain protocol.
A Santander FinTech study showed that permissioned blockchain networks could reduce bank infrastructure costs between US$15 billion and $20 billion per year in 2022.
In a blockchain network, there is no need for complicated audits since the blockchain maintains its own permanent ‘audits’ and directly publishes transactions through the blockchain. This obviously reduces costs since bank external audits, which are of course mandatory, can be extremely expensive
Some slower, expensive payment networks with a quasi-monopolistic position can also be bypassed with the permissioned blockchains. This also reduces costs for banks.
Maintenance costs for the networks are also reduced since, for many aspects, the blockchain network can ‘self-maintain’ itself.