Permissioned blockchain networks are blockchain networks that are not public, e.g., they require users to apply for membership in order to gain access to them. Such blockchain networks use specific software to operate.
Usually, permissioned blockchains differ from simple ‘private’ blockchains in the sense that there are multiple layers requiring special permissions to operate. Usually, there are also control mechanisms and eventually centralized control mechanisms that operate at the top of the permission-hierarchy.
It must be noted that “blockchains” are not standardized or regulated. As such, they aren’t formally subject to fixed specifications. In fact, the term “blockchain” represents a sum of knowledge, experience, practices, and concepts, that mostly originated from “public” blockchain networks, including the Bitcoin network, the Ethereum network, and other cryptocurrency networks.
It is a common mistake to confuse the software used for these blockchain networks to operate and the blockchain network itself.
The most ‘popular’ software used to build permissioned blockchain networks are:
Permissioned blockchain networks can be used for non-public cryptocurrencies. They can also be used for a wide range of industries, including:
The main goal of blockchain networks and especially permissioned blockchain networks is to prevent fraud, counterfeit or forged documents, and collusion among rogue authorities to deceive validation or legal controls. Potentially any business or legal entity that needs to validate documents, or certify the origin of a product, may benefit from blockchain networks.
Blockchain networks are decentralized networks and their power comes from the forced cooperation between distrusting parties, thus reducing the risk of an ‘inside’ criminal conspiracy against a system.
There is virtually no limit to their application since they can be introduced into any system that produces secure documents, certificates, and validation.
Blockchain does not remove the signatures whether they are digital or not, instead, it enforces it by chaining the signatures among different users of the blockchain.
Cryptocurrencies are using blockchains to ensure the validity of transactions and prevent double-spending of digital currency. In fact in public blockchains, the cryptocurrencies and the blockchain are usually parts of each other.
In permissioned networks, there is a wide variety of usage and since there are no set ‘rules’ for creating a blockchain network, permissioned blockchains can use a mixture of centralized and decentralized features, and any entity is free to build their own permissioned blockchain network as they need it.
The end-goal of a blockchain is almost always to prevent inner fraud from within a network of users (banks, notaries, insurances, etc.). The way that blockchains can prevent fraud from within a system is by creating a chained record of blocks that grows over time, and where the records are under ‘collective’ control and validation.
To illustrate the theoretical concept introduced above, we will now examine how the Corda system works in building permissioned blockchains.
Corda is a framework used to develop and eventually run blockchain applications for private and business use. This framework offers a wide range of scenarios, with different consensus models. Algorithms such as MultiSig or RAFT can be used.
The blockchain applications that Corda develops are named “CorDapps.” They are published in a marketplace. They are classified by category (digital assets, digital cash and payments, digital identity, insurance, etc.) or by industry (motor vehicles, banks, legal, energy, natural resources, etc).
Some examples of CorDapps developed for the insurance market:
The Corda network provides the infrastructure needed to run a Corda blockchain application. It provides identity services, notary services, and other similar services.
There is a whole set of banking CorDapps. They can be found in the Corda marketplace directory under the “Digital Cash & Payment” section.
For example, Corda allows the development of e-currency which is very close to a CBDC project. The e-money blockchain project developed by Commerzbank and Daimler trucks using Corda is a good example.
In the e-money system, truck drivers receive e-euros for different purposes. The main purpose is for fuel payment. E-euros can be converted to fiat money. The reason is to prevent scams and fraud involving cloning fuel payment cards or enforcing the actual fuel payment cards systems.
Corda offers blockchain technology for banking without the problems of “traditional” blockchain networks:
The previous Corda example shows why banks need permissioned blockchains.
Permissioned blockchains are private blockchains equipped with permission access that fits the hierarchical structure of a typical bank organization.
Today, a SWIFT message is an established way for communicating and passing transactions. Such a SWIFT message will not be cleared until all the parties have screened and validated the message. This is time-consuming and costly. With a blockchain system, the SWIFT transaction can be validated and signed in an extremely fast way.
It may seem paradoxical that a technology initially designed to replace banks could be used by the same banks to enforce the security of their systems and increase their profitability. But on the other hand, it also demonstrates how technology works and how good concepts can be reused in different industries. In fact, it just proves that banks must adapt to the blockchain ecosystem in order to stay competitive.
This goal of this article was to describe and explain why permissioned blockchains with banking-grade HSMs are a good fit for banks.