Rob Behnke
July 18th, 2023
In our previous article, Understanding Tokenization Security, we addressed tokenization in the real world, the challenges involved in tokenizing real-world assets, and the security measures involved. We also addressed some important security considerations to make when tokenizing assets in that article.
Permissioned chains have emerged as a solution for implementing tokenization with enhanced security and controlled access. Unlike public blockchains, like Ethereum, permissioned chains restrict participation to authorized entities, enabling organizations to maintain confidentiality, regulate access, and establish governance frameworks.
In this article, Part 2 of our Understanding Tokenization series, we will see how this is achieved in permissioned chains.
Permissioned chains are blockchains that are not publicly accessible to everyone. A user has to be granted permission internally before they are able to come on and use the chain. Even more so, a user must also be granted permission before they are able to perform specific roles on the blockchain. Permissioned chains use digital certificates or other digital tools to identify themselves.
As a result, permissioned chains are heavily used for enterprise solutions. They are generally used for managing supply chains, creating smart contracts, verifying transactions between two parties, etc.
Some of the features provided by permissioned chains are:
One of the fundamental aspects of permissioned chains is identity and access management. These chains employ robust authentication mechanisms to verify the identity of participants and control their access to the network. By implementing identity verification processes, organizations can ensure that only authorized entities are granted permission to participate in the tokenization ecosystem. This level of control enhances security by reducing the risk of unauthorized activity or malicious behavior within the network.
Permissioned chains utilize consensus mechanisms that prioritize security and efficiency over decentralization. These mechanisms enable network participants to collectively validate transactions and reach an agreement on the state of the blockchain. By leveraging consensus algorithms designed for permissioned networks, such as Practical Byzantine Fault Tolerance (PBFT) or Raft, permissioned chains can achieve faster transaction processing and mitigate the risk of malicious actors compromising the network's integrity.
In terms of confidentiality and data privacy, encryption algorithms and privacy-enhancing technologies, such as zero-knowledge proofs or secure multi-party computation, can be employed to safeguard data within the network. These measures ensure that only authorized parties have access to sensitive information, mitigating the risk of data breaches or unauthorized disclosures.
Permissioned chains prioritize network security and data privacy by establishing robust network infrastructure and security protocols. Organizations can implement firewalls, intrusion detection systems, and other security measures to protect the network against external threats. Additionally, data encryption, secure communication channels, and secure storage mechanisms contribute to maintaining the privacy and integrity of tokenized asset data within the permissioned chain.
When it comes to tokenizing real-world assets, permissioned chains offer several advantages to permissioned chains. Some of them include the following:
Permissioned chains allow organizations to control who can participate in the network and transact with tokenized assets. This controlled access ensures that only authorized entities, such as asset owners, investors, and regulators, are involved in the tokenization process. Organizations can establish trusted networks and prevent unauthorized or malicious activities by maintaining control over participation.
Tokenization of real-world assets often involves complying with various legal and regulatory requirements, such as securities regulations and know-your-customer (KYC) procedures. Permissioned chains offer features that facilitate compliance by enabling organizations to implement robust identity verification processes and adhere to regulatory standards. These chains allow for the integration of compliance mechanisms, ensuring that tokenized assets meet the necessary legal requirements.
Organizations often have existing systems and infrastructure that need to seamlessly integrate with the tokenization process. Permissioned chains, such as R3's Corda or Digital Asset's DAML platform, provide compatibility and integration capabilities with existing enterprise systems. This compatibility simplifies the adoption of tokenization by leveraging familiar tools and processes, facilitating the transition from traditional asset management to a tokenized environment.
Tokenization requires well-defined governance frameworks and consensus mechanisms to ensure fair decision-making and prevent the concentration of power. Permissioned chains offer customizable governance models, allowing organizations to establish transparent and auditable asset management and decision-making processes. These chains also employ consensus mechanisms designed for efficient transaction validation and network integrity, ensuring the smooth functioning of the tokenized asset ecosystem.
When it comes to developing permissioned blockchains for tokenization purposes, several powerful tools and platforms are available to cater to an enterprise’s unique requirements. These development tools offer a range of features and functionalities that streamline the process of tokenizing real-world assets and ensure compatibility with existing systems. Let’s explore them.
R3's Corda platform is designed for enterprise-grade applications, including the tokenization of real-world assets. Corda's permissioned blockchain architecture focuses on privacy, scalability, and interoperability. It utilizes a unique "smart contracts" approach that enables direct agreement between parties, ensuring privacy by limiting data visibility to only involved participants. Corda's flexible design allows for seamless integration with existing systems and provides a wide range of tools and libraries for building tokenization solutions.
Digital Asset's DAML platform offers a comprehensive suite of tools and services for creating and managing digital assets on a permissioned blockchain. DAML's key features include fine-grained access control, robust privacy controls, and a flexible data model that allows for complex asset representations. The platform prioritizes interoperability, enabling seamless integration with existing systems and ensuring compatibility with different blockchain networks. DAML's focus on enterprise use cases and its emphasis on regulatory compliance make it suitable for tokenizing real-world assets. DAML applications run on the Canton network. For more info on DAML, check out our DAML blog series.
Both R3 Corda and Digital Asset's DAML aim to facilitate enterprise blockchain adoption by providing specialized tools and frameworks tailored to the unique requirements of businesses. These platforms offer advanced features and capabilities to address the specific challenges faced by enterprises in leveraging blockchain technology for their operations.
There is another important consideration for developing permissioned blockchains: integration with Ethereum.
Using permissioned chains on Ethereum involves leveraging the robust infrastructure and extensive ecosystem of Ethereum while maintaining control and privacy through permissioned functionalities. Ethereum, originally designed as a permissionless blockchain, has seen advancements and initiatives that enable organizations to implement permissioned solutions, as mentioned in the official documentation.
One of the primary frameworks for enabling permissioned functionality on Ethereum is the Enterprise Ethereum Alliance (EEA). The EEA brings together enterprises, startups, and technology providers to define standards and develop enterprise-grade applications on the Ethereum platform. Through the EEA, organizations can establish permissioned networks with controlled access and governance, ensuring that only authorized participants can interact with the blockchain.
By implementing permissioned functionalities on Ethereum, organizations can leverage the network's scalability, robustness, and extensive developer community. They can utilize Ethereum's smart contract capabilities to create and manage tokenized assets with customizable rules and logic. Ethereum's established tooling, libraries, and infrastructure make it easier for organizations to build and deploy their permissioned blockchain solutions.
Using permissioned chains on Ethereum offers several advantages for tokenizing real-world assets. Firstly, organizations can benefit from the security and decentralization provided by Ethereum's underlying blockchain infrastructure. This would allow organizations to tap into the extensive ecosystem of Ethereum. They can leverage existing decentralized applications (dApps), decentralized finance (DeFi) protocols, and other infrastructure components to enhance the functionality and utility of their tokenized assets. This interoperability enables seamless integration with various Ethereum-based services and opens up opportunities for liquidity, trading, and broader adoption.
However, it is crucial to carefully assess the specific needs and requirements of the tokenization project when considering using permissioned chains on Ethereum. Factors such as scalability, privacy, regulatory compliance, integration capabilities, and existing technology infrastructure should be taken into account. By selecting the appropriate combination of permissioned functionalities and Ethereum's infrastructure, organizations can create a secure and efficient environment for tokenizing real-world assets while benefiting from the strengths of the Ethereum ecosystem.
As mentioned earlier, ensuring the security and integrity of tokenized assets is very important. In the previous article of our Tokenization series, we saw some of the security measures you can follow when tokenizing real-world assets. Now, we’ll provide an overview of some of the advanced security measures to adhere to.
Establishing a secure node infrastructure is paramount to protect the underlying blockchain network. Nodes, which serve as validators and maintainers of the blockchain, should be configured with strict access controls, firewall protection, and regular security updates. Employing secure hardware components and adhering to best practices for server hardening can further enhance the resilience of the node infrastructure.
Protecting sensitive data and communications is crucial within permissioned chains. Encryption mechanisms, such as secure transport layer protocols and data encryption at rest, should be employed to safeguard the confidentiality and integrity of data. Implementing strong encryption algorithms and securely managing cryptographic keys are essential components of a robust data protection strategy.
Smart contracts play a pivotal role in the tokenization process within permissioned chains. Developers should adhere to secure coding practices, conduct comprehensive code reviews, and implement standardized auditing processes to ensure their security. Employing techniques such as formal verification can help identify and mitigate vulnerabilities or programming errors that could lead to unauthorized access or unintended actions.
Continuous monitoring and incident response mechanisms are critical to detect and respond to security threats in real-time. Security monitoring tools and protocols should be implemented to monitor the network for suspicious activities, unauthorized access attempts, or potential vulnerabilities. Incident response plans should be developed and regularly tested to ensure a swift and effective response, including procedures for identifying, containing, and mitigating security incidents.
Permissioned chains typically employ specific consensus mechanisms tailored to their requirements. Ensuring the security of the chosen consensus mechanism is vital to prevent attacks or manipulation of the blockchain network. Robust mechanisms such as Practical Byzantine Fault Tolerance (PBFT), Proof of Authority (PoA), or other consensus algorithms should be implemented and regularly evaluated for their security characteristics.
Please note that this list is not exhaustive, as the space continues to evolve with time.
This article explored the benefits of permissioned chains for tokenization, focusing on identity and access management, secure consensus mechanisms, confidentiality, and network security. We also discussed the integration of permissioned chains with Ethereum and highlighted the importance of robust security measures. The next article in our Tokenization series will delve deeper into secure tokenization on inter-bank permissioned chains. Stay tuned for more.