This is your high level guide to creating a private payment network. You create these because you want instant trade settlement with full allocation clarity, and you do it to avoid other more costly traditional event based solutions, like Swift.
Private payment networks are taking the world by storm, because we’ve now left the innovation lab, and business benefits are being realised with production ready software. Included in the stack we typically find Hyperledger Besu, an Ethereum node implementation I’ve blogged about previously.
First, let’s talk about what we typically don’t find in such private blockchain networks: Native cryptocurrency. These tokens, like bitcoin or ethers, exist to enable transactions to take place on public permissionless blockchains, like the Ethereum mainnet. They also serve as the incentive mechanism for node operators.
While they can be used for other things, like collateral in DeFi applications, private networks don’t tend to have such a native token. And if they exist, they are often otherwise without value, functioning only as a transaction spam prevention mechanism. This is a bit like how native cryptocurrencies on testnets operate, where we need them to perform actions, but they are otherwise given away for free or in exchange for managing the network.
Instead of managing private networks through native token incentives, private networks are managed through governance structures.
3 Steps to creating a private payment network
Step 1: Private blockchain network governance
Running a private network means agreeing on the rules. The rules would likely state the criteria required for being allowed to join the network, and then follow this up with further rules around the responsibilities thereafter.
One such responsibility would be to run one or more instances of the Hyperledger Besu node across servers managed by the participating member. They’d need to commit to a certain amount of availability and keeping up with mandatory updates. They’d also need to agree on the configuration, so that the right protocol parameters are set.
Not having members run their own node means it will compromise on the decentralisation of the network, in the worst case scenario turning it into a centralised database that can be manipulated or shut down by the operator.
As an enterprise ready Ethereum node implementation, this is where Hyperledger Besu shines. It is flexible enough to allow for customisations, through plugins, enabling unique features within the private network. It also comes out of the box with support for private transactions and consensus mechanisms that are well suited for such networks.
The governance framework then helps define the approach to this, among other things.
Step 2: Securing monetary value
Creating a private network and then issuing tokens on it is relatively speaking easy. Just as easy as on a public network. But how do you secure the value of these tokens? We likely don’t want these tokens to be priced based on just supply and demand. Instead, we want them to represent some underlying asset or currency.
On public blockchain networks we have stablecoins. These are tokens usually pegged to the US dollar, making 1 token equal to 1 USD. And they often maintain this value by having some entity hold the corresponding currency as collateral in one or more banks.
That works, but it’s at the mercy of the safety of the banks holding the assets, something we’ve recently seen cause concern with the collapse of Silicon Valley Bank causing USDC to temporarily depeg. This is likely a risk not tolerated within a private network, so the gold standard (no pun intended) is for the collateral to be held by the relevant central bank. An example would be if we wanted to have a token representing GBP. Within this framework we’d then need to work with the Bank of England, and have them hold the collateral, with the owners of that collateral receiving tokens in return. They are then free to exchange these tokens with other network members, and if need be, redeem the tokens for the underlying cash.
This minimises risk, as we know the central bank can deliver the underlying. But it’s also a very involved structure. While a solid framework, it takes time to establish, and only really apply directly between banks.
Some might call these CBDCs, short for Central Bank Digital Currency. But the definition of CBDCs often also include central banks directly exposing this to retail, which isn’t the case for such private networks.
Step 3: Enabling better money
While the above talks about banks and central banks, it doesn’t always need to be just that. You can also use Hyperledger Besu to create private networks between well established customer relationships. Imagine a logistics chain with many companies, each needing to pay the other and getting paid by the next as the products and inventory passes through the various steps.
Throughout that process, the various companies involved have various levels of exposure to the other companies. While we often talk about just in time delivery of products, something we do to reduce inventory and hence costs, private blockchain networks can allow for the same with monetary value.
Private blockchain networks can give us a better and more up to date view on financial transactions, and we can leverage features of smart money. Smart money, or programmable money, can reduce risk and delays by automating transactions, helping us maintain counterparty risk within defined parameters.
Through this, and the shared ledger represented by the private blockchain network, we can enable just-in-time value transfer that reduces capital lock-ups and speeds up settlement time.
Business partners, customers and suppliers, with products and services exchanged between these, benefit from private blockchain networks because they enable a better and more efficient flow of transactions and value.
It can remove ambiguity around settlement and allocation, reduce capital lock-up and help move money into a just-in-time mindset. Programmability of money allows for smart money, which in turn is integrated with risk parameters and boundaries that help automate flows and reduce errors.
These private blockchain networks are supported by enterprise grade Hyperledger Besu blockchain node software, and at Web3 Labs we’re experts at running and maintaining these.
Web3 Labs provide SLA-backed production support for Ethereum networks running Quorum and Hyperledger Besu. We offer multiple tiers of support designed to meet your unique needs from development to production. Get in touch to find out more.