Private vs public blockchains: what are the differences?
When blockchain technology first started out, the distinction between public and private versions didn’t exist. Everything was public. Today, things are different. Various kinds of private blockchain technology are eclipsing the public kind. This is a good opportunity to explain the differences between the two, and why they matter.
When bitcoin first came along, Satoshi Nakamoto intended it to be an egalitarian tool, open to everyone and allowing them all to trade digital currency with each other. As interest in crypto currency grew, people began to understand that they could decouple the digital currency from the decentralized ledger technology underneath it. They saw the value of blockchain technology as a technical tool in its own right, that they could use for a variety of applications.
The first organizations to latch onto this were financial. They saw opportunities for blockchain technology in everything from syndicated loans to stock trading settlements. Others caught on, and now we see blockchain use cases in everything from supply chain management to land title registration.
Whereas the bitcoin community enabled people to transact without knowing each other, these commercial groups wanted to use it in more rarefied environments. If your blockchain focuses on settling equity trades between stockbrokers and clearing banks, then these are the only people you want involved. This is what turned blockchains private: They still enabled multiple parties to transact with each other while keeping everyone honest, but they didn’t allow the world at large to play.
Aside from Bitcoin, other public blockchain projects include the Ethereum public blockchain, NEO, and Nxt. Many decentralized apps built on other platforms are also implementations of public blockchains. Prediction marketplace Augur is a good example.
Different kinds of private
Not all private blockchains are equal. A single company could theoretically use its own blockchain to manage its business, which would be the most private blockchain of all. This kind of blockchain would be little more than a distributed version of a single-company database, though. It might prevent a rogue database administrator from fraudulently altering a conventional database table, but it would lose many of the benefits of blockchains used in an inter-organizational environment.
Our discussion focuses on consortium blockchains, where different organizations participate in a members-only community to help reduce transactional friction and keep each other honest.
What are the differences?
With that in mind, let’s examine some of the key differences between private and public blockchains. One of the first involves permissions. Whereas anyone can write a transaction to a public blockchain, participants in a private one must have permission to do so.
The permission necessary for a private blockchain also means that participants must prove their identity, typically using a digital certificate. Conversely, public blockchains such as Bitcoin require no such permission, and no such trust.
Private blockchains often require permission for more than just writing a transaction to the ledger. In many cases, they require permission to read those transactions, too.
Because private blockchain participants are often involved in sensitive transactions such as the settlement of stock or the tracking of shipments, they don’t want anyone outside the community reading their data. Consequently, parties must be authorized to explore transactions and may only be able to see certain subsets of the ledger based on their privileges.
Conversely, on most public blockchains anyone can see the transactions using a publicly available block explorer.
The authorisation of participants in a private blockchain also leads to one of the biggest differences between the two blockchain types: the consensus mechanism. All blockchains rely on each copy of the distributed ledger being the same, because when transaction records don’t match between different parties, it leads to disputes, and ultimately forks the chain.
Public blockchains deal with this by brute force. To ensure that everyone has the same record, they rely on large communities of miners to verify transactions by using them to solve computationally difficult problems. This concept, known as proof of work, creates an energy problem for public blockchains such as Bitcoin and the public Ethereum blockchain, each of which uses more electricity than a small country.
Conversely, by relying on a smaller number of trusted participants, private blockchains can dispense with proof of work and instead rely on other mechanisms. Imagine twelve people in a group, all voting on whether a transaction is ok. Some private blockchains may only need a subset of those participants to verify the transaction before it is written to the ledger.
The point is that they don’t need to rely on complex math to manage the opinion of a hundred thousand strangers. Instead, they can effectively say “if it’s ok with Bob, Jackie, Vera, Andy, Fred and Joan, then it’s passed.”
More efficient transactions
One often-cited advantage of a private blockchain is the efficiency of its transactions. Because it doesn’t require proof of work’s huge computational load, transactions can be verified and written to the blockchain more quickly, increasing the system’s overall throughput. This can also reduce or even eliminate transaction fees, because participants aren’t expending their computer power and electricity bill to verify them.
Susceptibility to attacks
Neither do private blockchain infrastructures face the 51% attack threat often seen by public blockchains. In this scenario, a bad actor gains control of more than half of the anonymous, untrusted miners, which gives them majority control and enables them to tamper with existing transactions on the network.
This attack would be possible on a public blockchain if mining pools gain too much collective control. While mining pools don’t exist in private blockchains, a different risk arises: collusion between parties in the community based on divided interests. It might be possible for several participants to each tamper with the software that they are each running, or to collude with each other on verification decisions, say.
Software security and governance are therefore key factors in these private blockchains, but they are issues that communities are happily tackling as they create platforms on which to build private blockchain applications.
Blockchain platforms abound
Private blockchain platforms such as J.P Morgan’s Quorum are based on versions of the Ethereum code used to create the public Ethereum blockchain. Others may be based on HyperLedger, which is the Linux Foundation’s attempt to create a reference implementation for private blockchain technology.
So, who gets to control these blockchains? On the public side, they’ll often be governed in a similar way to open source projects, with people making proposals for changes to the way that the blockchain works, which normally involve changes to the software.
On the private side, each private blockchain built on underlying blockchain platforms will have their own governance structures that will vary according to the needs of the community that they serve. They should take into account issues such as membership, how changes to the technical infrastructure are proposed and evaluated, a code of conduct for participants, and how disputes in all these areas are arbitrated.
Private blockchains are likely to flower as commercial communities build more applications on these increasingly feature-rich blockchain application platforms. Public blockchains will also flourish as more people launch decentralized apps that require only the appropriate tokens to participate. There is room for both parties in this exciting and innovative space.