A Primer on Public vs Private Blockchains
One of the highest virtues extolled by blockchain enthusiasts is transparency. Although different groups highlight different characteristics of blockchains, almost all definitions include the word ‘decentralized’ at some point, pointing towards a more open and collaborative future.
As with many technologies, however, corporations stand to benefit from putting a fence around it for private use.
An Open and Closed Comparison
The difference between public and private blockchains is permission; permission to use or see — write or read — the blockchain.
Public blockchains like Bitcoin and Ethereum allow anyone with an internet connection to write and read. These network participants may also perform verification and maintenance: checking peers’ work and not relying on a third party’s seal of approval.
The network is held together by strangers in a trustless state of aligned economic incentives and the cryptographic equivalent of proof and hard work. Essentially, agreement is in everyone’s best interest, and malicious participants would incur great costs if they were to cheat.
This transparency is the foundation for heralding a new era of decentralization, where middlemen are bypassed, as are the fees they extract. This way, people don’t need to trust third parties at all, whom, Nick Szabo, creator of a bitcoin predecessor, says are security holes.
Private blockchains, on the other hand, restrict permission to a single organization, allowing only internal, pre-approved parties to write on the blockchain.
The benefits of using blockchains within private organizations are, broadly, increased efficiency and cost reduction. These benefits are the result of faster and more secure data verification among internal parties.
Read permissions may be private or public, depending on the use-case: internal databases would have no reason to be public facing, but applications that interact with outsiders, such as customers, may want readability.
Read permissions can also take a hybrid approach, with only some outsiders able to read; for example, the customers that bought a product from them.
Private blockchains have a speed and cost advantage because only a handful of powerful nodes need to speak and verify with each other, whereas a public chain has to speak to thousands of nodes to reach a decision. Private chains are able to process more transactions per second, since they don’t need to wait as long for ‘confirmation’ times.
Private blockchains can, in some cases, be more secure than public chains, since all participants are known to the system. Privacy is strengthened as well, because if readability is not granted to the public, it simply cannot be read (much like a private company choosing to not disclose financial information).
Of course, the same security and privacy concerns we deal with today still plague the private blockchain if data is centralized by a third party — namely, if they can be trusted and the how strong their defences are against breaches.
In this sense, private blockchains may be similar to a massive updating of legacy systems to improve business processes. This leads to a less revolutionary outcome, in which trusted third parties still exist to provide a service, and charge fees for their service.
Consortium blockchains are a third, hybrid type of blockchain that is governed by a group of participants across organizations.
In the above table, consortium falls into the private category. Write permission is restricted to a certain set of users, and a protocol for consensus is pre-established (agreeing how to agree).
For example, a consortium of 12 banks, each operating a node, bringing to bear their economic or computing power. Consensus on a block can be carried out by a simple majority of nodes, or ⅔, or any arrangement that the consortium chooses.
Consortium blockchains have gained acceptance among financial institutions. Participants band together to streamline payments, settlement, and compliance by removing redundant data, and relying instead on authentic proof.
Other industries applying the technology are airlines and their suppliers: keeping track of parts, usage rates, and maintenance across different counterparties. Similarly, Wal Mart and its food suppliers use the technology to keep detailed tabs on individual food items, allowing them to pinpoint contamination sources, minimizing search costs, and providing assurance.
Public Private Partnership…
By some measure, blockchains have utility in any circumstance where there are a multitude of moving parts, be they physical or digital.
Utility is derived from the chain’s properties of being highly auditable and tamper-proof, offering organization and coordination to any inputs thrown at it. Whether that coordination is decentralized or not, tamper-proof data sharing has a clear advantage in real world applications.
The ability to authenticate that something is what it claims to be, quickly and cryptographically, is valuable. The difference is ultimately, whom do you want to trust, or if you want to trust at all. Indeed, decentralized protocols eschew gatekeepers and middlemen, so the distaste for privatization may be natural, if misplaced.
Erik Voorhees, CEO of ShapeShift, sums it up nicely when he wrote, “On a high level, it seems odd to me that an industry built on the principle of decentralization should be so afraid of the existence of a constellation of blockchains.”