Blockchain with token vs blockchain without token: Big challenge before politicians
Blockchains are essentially databases that allow connected computers to agree on shared data. All blockchains have three components:
- Connected computers.
- Decision rules.
- Shared data.
One can think of blockchains as a network of computers sharing a Google spreadsheet where transaction data is stored. But unlike a shared Google Doc that offers the privilege of editing, this “digital ledger” has degrees of immutability. Blockchains are further divided into permissioned and permissionless blockchains. Think of a permissioned blockchain as a club – its ‘membership’ is not open to everyone, its facilities are only accessible by showing some kind of ID, its decisions (such as validating data stored on it) depend on how members of the club vote.
A permissionless blockchain is an open loop system. Membership is open to everyone. The data it stores is validated through rewards instead of votes. Tokens are the reward mechanism to keep the system honest. (Tokens can also serve other purposes, as they can be transferred across their native blockchain instantly.)
So, to return to the policy question, removing tokens from the picture essentially reduces blockchains to databases with centripetal (if not entirely centralized) authentication and controls. And since decentralization is a key driver of innovation in terms of structural robustness and the applications that blockchains can power, policymakers cannot remove tokens from the blockchain equation without also sacrificing many of the innovation drivers that public blockchains bring to the table.
Obviously, there are trade-offs in choosing tokenless blockchains over tokenized blockchains. Politicians must carefully consider the pros and cons of each choice.
Open decentralized blockchains are centrifugal in that the data is stored at the edges, not the center of the network. As such, they offer greater security than tokenless blockchains in that they are resistant to “single point of failure” (SPOF) risks and are tamper-proof. Because the level of centralization in permissioned blockchains is higher, they are vulnerable to SPOF risks.
Open decentralized blockchains are highly transparent. Any user, including regulatory agencies, can access all the information in them. This is not the case with permissioned blockchains. Because tokens can be used to transfer value across open decentralized blockchains, they can be leveraged to serve economic use cases such as cross-border payments. The token, in this context, essentially acts as a means of settlement on the blockchain.
On the other hand, in an identical context of use, permissioned blockchains will only be able to share information across multiple participants in the network. But minus the ability to transfer value through the token, they will have to perform the settlement part of the transaction off the blockchain.
So how can a politician solve the “blockchain with token vs blockchain without token dilemma”? She can best address it by being agnostic about what type of blockchain public policy should support and facilitate. Fortunately, this policy approach is also consistent with the long-held public principle of technology neutrality.
Seen from this lens, both types of blockchains can be leveraged for their most appropriate uses. Permissioned blockchains that prioritize speed and efficiency in sharing information across members are ideal for use cases such as fraud detection, supply chain tracking, and identity verification. Open decentralized blockchains (those with tokens) are best suited for payments and settlements (e.g. in a cross-border context), securities transactions (where delivery for payment can be made almost instantaneously thanks to the token) and self-executing contracts that may have new applications in commercial law .
As Peter Thiel and Blake Masters argue in their 2014 book, Zero to One: Notes on Startups, or How to Build the Future, unless a new technology is 10 times better than the existing one, it may not be adopted on a large scale. Such innovation drivers in the context of blockchain technology are placed in their open, decentralized and tokenized variant. Blockchains with tokens are the “10x factor” that will drive newer use cases and mitigate friction in a consequential way.
The challenge for India’s policy makers is to enact appropriate laws and policies that promote innovation, and also put up regulatory guardrails against abuse.
