The word “hybrid” holds much promise because it is seen as an amalgamation of two or more things that leverage the best of the individual entities. Almost all hybrid inventions, such as metal alloys, cross-bred animals, or hybrid cars, have been very popular and adopted to a great extent. Will blockchain technology follow a similar pattern in the near term?
Understanding the evolution of blockchain technology
Although it has been more than a decade since Bitcoin was invented, blockchain technology is still considered in its infancy. Bitcoin’s underlying blockchain technology has undergone an evolution cycle of its own. The phases of blockchain evolution are:
- Blockchain 1.0 – The first generation of blockchain was Bitcoin, which provides digital currency trading without intermediary involvement. This disruptive invention in the cryptocurrency space generated a lot of excitement, which still exists (1 Bitcoin is USD 49,000!). Although version 1.0 is fully decentralized, it has severe limitations around performance and lacks the flexibility to support other use cases. The high consumption of electricity by mining farms used to validate the transactions is another significant drawback.
- Blockchain 2.0 – The second generation of blockchain involved the Ethereum blockchain, a generic, fully decentralized, smart contract-enabled platform. Blockchain 2.0 also includes variants of Bitcoin and forks of Ethereum. The most significant advantage of Ethereum is the smart contract capability that incorporates business logic that gets enforced by all blockchain nodes to achieve distributed consensus. Numerous DAPPs (Distributed Applications) have been built over Ethereum, but it is plagued by high transaction costs (average transaction fee is 7 USD), low throughput, and lack of privacy, which is required for enterprise use cases.
- Blockchain 3.0 – The third wave of blockchain platforms comprises two types:
- Permissioned DLT (Distributed Ledger Technology) and blockchain platforms, which provide high throughput, low latency, data & transaction privacy, and enhanced security features. Permissioned blockchains were built to address enterprise use cases in which stakeholders form a private consortium to establish trust and execute B2B (business to business) transactions.
- More efficient and performant public blockchains, which provide higher throughput and lower transaction fees but with some compromise on decentralization and privacy. The range of use cases that could be implemented increased significantly with the added advantage of publicly verifiable and immutable proof of existence. Some public blockchain offerings like Hedera and Energy Web Foundation only allow the hosting of validator nodes to known entities.
Is there a need for Blockchain 4.0?
The obvious and easy answer to this question is “YES,” and the reason behind it can be understood from the following limitations that plague the current state of blockchain protocols.
- Degree of Decentralization: Blockchain purists across the world who believe in full decentralization do not favor permissioned blockchain platforms. For them, a true blockchain platform must be self-governed and not rely on any centralized control or administration.
- Privacy & Regulations: On the other hand, enterprises are not ready to adopt public blockchains because of concerns around privacy and regulatory requirements. Even though the latest avatars of public blockchain provide higher performance but organizations are reluctant to manage their business transactions on a public platform.
- Transaction & Infrastructure Costs: DAPP developers are hindered by the high transaction fees on public blockchain networks, while enterprises are hampered by the cost of maintaining the blockchain infrastructure of a consortium network.
- Interoperability: As described in my earlier blog @ https://www.networkcomputing.com/network-security/enterprise-integration-and-interoperability-blockchain, interoperability challenges also exist because of disparate blockchain networks becoming islands.
Considering these challenges for fulfilling the vision where blockchain protocol will be as seamless to adopt and use as the Internet is today, it is evident that a fourth or fifth generation of blockchain needs to be invented. Blockchain 4.0 will need to cater to performance, privacy, security, and interoperability requirements at the least, but the industry has not yet reached a consensus.
Case for Hybrid Blockchain
Blockchain 4.0 indeed seems like a distant dream that may not be realized in the short term. If we analyze the capabilities of the current permissioned and public blockchain protocols, it is evident that a combination can provide the “best of both worlds.” Hybrid blockchains hold much promise and deserve to be created. A private blockchain network setup that integrates or interoperates with a public blockchain network will provide the following benefits:
- Organizations can leverage private blockchains’ salient features by leveraging smart contracts, high performance, and complete auditability, while proving transactions on the public blockchain for increased transparency and verifiability.
- Enterprises will not need node hosting for each stakeholder; hybrids only need a minimum viable deployment of a private blockchain network comprising only a few nodes, ensuring the cost of ownership is low.
- Not all transactions occurring on the private blockchain need to be recorded on the public blockchain. Stakeholders can agree to maintain aggregated proof and thus reduce the fees required to get the transaction validated.
- Enterprises can meet regulatory compliance requirements because no personal or confidential data will be maintained on the public blockchain.
- Private consortiums primarily cater to B2B transactions, so hybrid blockchains open the possibility of decentralized solutions involving B2C (business to customer) use cases, such as ecommerce.
- If all private consortiums integrate with the same public blockchain, a mechanism to form a “Network of Networks” is provided, where the public blockchain network becomes a global medium relaying transactions and assets between the private blockchain networks.
There are few vendors and open source initiatives that provide blockchain platforms that support both a permissioned setup and a public blockchain network. However, that should not be an obstacle for leveraging the hybrid blockchain pattern because disparate blockchain platforms can be used. Therefore, the true promise of blockchain technology being realized sooner rather than later via hybrid blockchains is a strong possibility.