A look at how Polymesh and its public permissioned architecture, security, and compliance mechanisms provide a secure and compliance-capable environment for tokenization.
As the name suggests, a permissioned blockchain is a blockchain network where access is granted by permission.
In this blog post, we’ll take a deep dive into Polymesh and understand how its public permissioned architecture, security, and compliance mechanisms provide a secure and compliance-capable environment for tokenization.
Permissioned blockchains combine the decentralized benefits of blockchain with the control and security benefits of more centralized databases.
Unlike public blockchains – where anyone can join, participate, or view transactions – permissioned blockchains restrict access to a select group of participants who have been vetted and authorized to engage in the network.
By controlling who can read and write data on the blockchain, permissioned blockchains can ensure privacy and security while maintaining auditability.
There are two types of permissioned blockchain: private permissioned and public permissioned. A private permissioned blockchain is one where access to the network and its data is completely gated except to authorized users. In contrast, a public permissioned network uses permissioning to restrict access only to certain roles in the network.
Polymesh is a public permissioned network because anyone can access the chain’s data, but participants must have a verified identity to use the network and only certain entities can write new blocks to the chain.
Permissioned blockchains offer unique features that differentiate them from public permissionless counterparts. One of these features is control over network participation. In a permissioned blockchain, network participants are vetted and approved for certain roles by a central authority (or group of authorities). This allows the network to maintain a higher level of trust among participants compared to public blockchains, where anyone can join and participate.
Another standout feature of permissioned blockchains is enterprise-level scalability. Due to their controlled environment, these blockchains process and validate transactions quickly, making them more scalable than public blockchains.
These features make permissioned blockchains a preferred choice for industries that require secure, scalable solutions where compliance is paramount, such as the financial sector.
Permissioned blockchains bring advantages such as greater privacy and security due to more controlled access. They’re also more scalable because they can process transactions more quickly, with a higher level of trust among participants as all participants are verified.
For some, the privacy offered by permissioned blockchains comes at an unwanted cost to transparency. For instance, in public blockchains, anyone can view all transactions. Public permissioned blockchains like Polymesh provide the best of both worlds, letting anyone view transactions while permitting only verified individuals or entities to engage in certain network roles.
Permissioned blockchains are less decentralized than public permissionless networks because they require a central authority – or group of authorities – to manage access and restrict who can validate transactions. While this can make them more susceptible to attacks or failures associated with more centralized architecture, the advantages around trust and compliance that permissioned blockchains bring makes them highly useful for regulated industries.
As a public permissioned blockchain, Polymesh relies on a small number of nodes to provide participants with the benefits of decentralization balanced with governance and compliance.
Polymesh’s public permissioned architecture sets it apart from other blockchains by balancing decentralization and security and providing features for governance and compliance. This makes it highly suitable for regulated industries such as capital markets.
Polymesh’s architecture gives each node a unique role in the network. Operator nodes (known as validator nodes on other blockchains) are responsible for block production and validation and are run by Node Operators, who are licensed financial entities. Regular nodes store the entire transaction history. This division of responsibilities promotes efficiency and reliability.
Polymesh employs a consensus mechanism called nominated proof of stake that allows the blockchain to balance speed, security, and decentralization. Relying on a select number of known Node Operators, the network uses economic incentives from staking and reputation risk from known identity to incentivize adherence to protocol rules. Even if some Operator nodes fail technologically or act maliciously, the network can reach a consensus and continue its proper operations.
Sophisticated compliance components are integrated into the base layer of the protocol, automatically ensuring every transaction on the network adheres to rules set by token issuers as per compliance with global regulations. Similarly, a protocol-layer settlement engine ensures instant settlement with deterministic finality while a requirement to affirm instructions before tokens appear in wallets prevents unwanted transfers.
Security of digital assets is a critical concern, especially as blockchain networks are routinely prone to hacks. Polymesh has integrated features to ensure a high level of security, including the customer due diligence (CDD) process that comprises its permissioning layer. This integration enforces identity verification for all participants, boosting the chain’s security and working in combination with a sophisticated compliance engine to enable participants to fulfill obligations for Know-Your-Customer, or KYC.
Polymesh’s permissioning structure for Operator Nodes also maintains network security and integrity by ensuring only known, licensed financial entities can validate transactions and create new blocks.
Lastly, the blockchain uses a compliance engine that automatically prevent transactions that fail to meet criteria specified in the rules set by token issuers. Compliance on Polymesh enables participants to set rules as per global financial regulations that are executed with automatic enforcement, providing a secure environment for the management of tokenized assets.
Polymesh’s distinctive features find utility in various financial applications, particularly those managing regulated real world assets such as stocks, bonds, and real estate. Tokenizing these assets makes them more accessible and liquid while bringing operational benefits and greater transparency to asset management.
Purpose-built for tokenized real world assets, Polymesh addresses many challenges faced by integrating blockchain into capital markets, including regulatory compliance, the trade-off between decentralization and control, enterprise-level scalability, and privacy.
For example, financial institutions can use Polymesh to tokenize real estate. REtokens is one notable case of a company that created an environment on Polymesh for the issuance and trading of tokenized real estate. With Polymesh’s built-in compliance mechanism, REtokens is able to ensure only accredited investors can trade certain tokens, adhering to regulatory requirements.
In the creative arts, Polymesh can provide the base infrastructure for tokenizing creator assets such as music royalties, fan tokens, and intellectual property to provide better transparency and traceability. TokenTraxx, for example, is using Polymesh to issue immutable royalties and ensure artists receive equal and fair compensation while opening the door to new models of music ownership and rights that include fans.
Interoperability can be a challenge for permissioned blockchains whose gated architecture prevents them from tapping into broader decentralized ecosystems.
As a public permissioned blockchain, Polymesh is poised to become a pivotal player in the wider blockchain ecosystem. Its unique architecture and emphasis on compliance and governance enable the chain to become an efficient, effective bridge between private permissioned and permissionless networks.
Through chain interoperability, Polymesh can facilitate the transfer of assets across multiple networks, enhancing its potential use cases. For instance, existing tokenized assets on the Ethereum network could be moved to Polymesh using a bridge to benefit from Polymesh’s enhanced security and compliance features.
Polymesh’s interactions with other blockchains aren’t just limited to permissionless blockchains like Ethereum. It can also interact with private permissioned blockchains, allowing efficient and secure asset transfers across multiple environments.
By facilitating interoperability with each type of blockchain networks, Polymesh will play a crucial role in the evolution of blockchain technology as it gains traction in capital markets.
Looking ahead, as more industries explore the potential of blockchain and asset tokenization, Polymesh’s role is likely to expand. By providing a secure, compliant, and interoperable platform, Polymesh is well-positioned to usher in the next transformative era and tokenization of regulated assets.