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Nick Szabo on ‘Permissioned Blockchains’ and the Block Size

Op-ed - Nick Szabo on ‘Permissioned Blockchains’ and the Block Size

In many recent articles, Bitcoin Magazine reported the trend toward private, “permissioned” non-Bitcoin blockchains, supported by Accenture and Digital Asset Holdings CEO Blythe Masters, among others. Permissioned blockchain developments for banks and financial operators have been started by giant Swiss bank UBS, Bitcoin exchange itBit and more.

Permissioned blockchains would offer the advantages of digital currencies powered by public blockchains – fast and cheap transactions permanently recorded in a shared ledger – without the troublesome openness of the Bitcoin network where anyone can be a node on the network anonymously.

Instead of anonymous miners, only banks and vetted financial operators would be allowed to validate transactions in permissioned blockchains.

While Wall Street seems determined to go ahead with permissioned blockchains, it’s wise to bear in mind one simple fact: Bitcoin works. While closed, permissioned blockchains might theoretically work tomorrow, Bitcoin works in practice today, and perhaps the chaotic anarchy of the Bitcoin network is the very reason it works.

That’s the opinion of former Bitcoin Foundation director Jon Matonis, who is persuaded that private, permissioned blockchains might fall short of their objectives. “It could end up being very similar to centralized payments networks we have right now, without the benefit of the network effect of bitcoin,” he said.

Now, legendary cryptographer Nick Szabo has weighed in on current issues in the Bitcoin space, including permissioned blockchains, in an interview published in International Business Times titled “Nick Szabo: If banks want benefits of blockchains they must go permissionless.”

“[Bank] bureaucracies are so heavily invested in the expertise and importance of local regulations and standards that it’s extremely difficult for them to cut the Gordian knot and implement seamless global systems,” said Szabo. “So they keep trying to re-inject points of control, and thus points of vulnerability, into blockchains, e.g. through ‘permissioning’; but this nullifies their main benefits, which come from removing points of vulnerability.”

On the contrary, according to Szabo, the banks should embrace the crowd-sourced power and resiliency of permissionless blockchains like Bitcoin.

In his book “Digital Gold: Bitcoin and the inside story of the misfits and millionaires trying to reinvent money,” The New York Times technology and finance reporter Nathaniel Popper argued that Szabo is the most likely person behind the pseudonymous identity of Bitcoin’s inventor Satoshi Nakamoto. A recent interview with Adam Back – another legendary cryptographer – underlines the key contributions of Szabo in the developments that led to Bitcoin. Szabo’s positions are taken very seriously within the Bitcoin community.

In the International Business Times interview, Szabo also weighs in on another very hot topic: the block size. Szabo is against Gavin Andresen’s BIP 101 proposal to increase the maximum block size from the current 1 megabyte to 8 megabytes, and double it every two years after that until it reaches 8,192MB. Andresen didn’t just submit a proposal, but actually launched Bitcoin XT as an alternative to Bitcoin Core, which angered other Core developers and notable members of the Bitcoin community.

According to Szabo, a large increase in block size would sacrifice security for performance.

“If you reduce the redundancy of messages to allow for larger block sizes, beyond the growth of limiting-resource technology, that reduces the automated integrity that makes Bitcoin distinctive in financial IT,” he says.

Among the proposed block-size tweaks currently on the table for discussion, Szabo prefers Bitcoin Core developer Peter Wuille’s proposal, BIP 103, which would increase the block size limit by only 17.7 percent per year starting in 2017.

In 2001, Szabo spoke of smart contracts that solved the problem of trust by being self-executing, and having property embedded with information about who owns it. For example, the key to a car might operate only if the car has been paid for according to the terms of a contract.

Now, Szabo expects emerging “Bitcoin 2.0” smart contracts platforms like Ethereum to have a disruptive impact on financial and legal systems, comparable to that of Bitcoin itself. “[E]ventually more so, since Ethereum’s more flexible and general language can facilitate a much wider variety of commercial and other formal relationships.”