Public and private blockchains share many of the core principles of blockchain technology. Both use decentralized peer-to-peer networks, rely on consensus protocols to verify transactions, and provide guarantees on ledger immutability. In this article, we'll get to the bottom of what is the difference between public and private blockchains.
Unlike public blockchains where anyone can participate in the network, private blockchains restrict access to only those who have invitations. This more restricted blockchain architecture can be more attractive to companies looking to conduct business without publishing sensitive data for everyone to see.
It’s also important to note the differences between private blockchains and privacy cryptocurrencies. Privacy coins such as Monero protect your public address and transaction history but still operate on a public network. Private blockchains work on a fundamentally different level where participation and visibility are both limited. Think of public blockchains as the Internet, and private blockchains as intranets.
Sometimes referred to as permissionless blockchains, public blockchains allow anyone to participate in the network. This includes not only sending and receiving transactions, but also hosting a node and viewing transaction history. Bitcoin is the most prominent example of a public blockchain.
Although most people will never host a node on the Bitcoin network, there is technically nothing stopping you from doing so. Public blockchains are open to everyone, and these characteristics have made them extremely popular with applications looking to address large numbers of people.
Hosting a node means that you will be maintaining a copy of the blockchain for verification of transactions with other nodes. Agreement between nodes is known as consensus and it is ensured through Proof-of-Work by mathematical algorithms that confirm that transactions are not fraudulent.
The consensus algorithm is what allows the network to operate without a centralized authority. As more nodes join the network, the stronger it becomes. However, this also means that the network is inherently slow, as robust consensus mechanisms are required to assure nodes are in agreement.
Public blockchains must also have a native currency to power the network. It rewards node hosts with the native token for processing transactions. Some public blockchains also support tokenized assets, which can represent anything that holds value. Ethereum, which supports countless numbers of ERC-20 tokens, relies on the native Ether coin to power the entire network. Assets on public blockchains are useless without a native currency to reward nodes for their work.
Private blockchains, also known as permissioned blockchains, are mainly used internally by organizations looking to utilize blockchain technology to reduce costs. Private blockchains can exist exclusively within one company or be shared between any number of selected entities. There are many reasons why private blockchains are typically preferred for business.
Firstly, private blockchains fulfill many of the same basic functions as public ones. The biggest difference, however, is who has access to the network. Private blockchains are designed with limited access and participation in mind. As a result, the identities of all participants are known and trusted by others on the network.
This provides a big advantage for businesses since they can know whom they are doing business with. Even after joining a private network, participants usually have limited access to data that is shared on the blockchain. Any data can be encrypted so that only the relevant parties have the keys to view any sensitive data on the blockchain, while all others in the network cannot view the transaction details.
The nature of private blockchains allows members to have more trust in one another since only trusted parties would be invited to join the network. With the establishment of trust, there is less need for such a robust consensus mechanism as seen in public blockchains. Instead, consensus can be reached by voting or a multi-party consensus algorithm that can perform much faster than that of a secure public blockchain.
Lastly, private blockchains don’t always rely on a native token. On the other hand, all public blockchains are based around their own specific cryptocurrency. Private blockchains are more adaptable and instead rely on any digital assets that represent physical goods.
A reward system for nodes is optional in this system. Private and trusted networks may have more relevant business interests to maintain a distributed ledger and would rather be free from a native coin. Of course, it is possible to establish a native cryptocurrency to reward nodes. But the main point is that with private blockchains, native coins are optional.
Use cases for private blockchains
Banks are the most obvious use cases for private blockchain technology. Every bank maintains its own ledger of transactions it conducts with other organizations. Typically, these are transactions generated by customers sending money to accounts in other banks. Today, however, these bank-to-bank transfers are rather slow and costly, especially for international transfers. Several banks around the world could work together to create a private blockchain network.
This would allow smoother transfers between the partners with the use of digital assets and the high-speed performance of private blockchains while still shielding transaction data from the general public. A private blockchain developed by R3 has already entered a pilot phase joining 100 financial institutions with trading platforms and leading global banks such as Commerzbank and Standard Chartered.
Governments can also benefit from private blockchains by utilizing them to enhance data security against hackers and to reduce corruption. The distributed ledger architecture of blockchains makes hacking into the system more difficult than it is for current centralized systems.
A hacker would need to fake an invitation from all relevant parties to gain access to the network instead of convincing only one centralized system. Additionally, a hacker would again need to find a way to view any encrypted data that exists on the private blockchain that is only viewable between the relevant parties.
Corruption is an issue in many governments around the world. Some individuals consistently misuse funds for personal gain. Using a private blockchain within a government can record where payments are being made. The immutability of the distributed ledger assures that a record of where these funds are being used cannot be altered.
Furthermore, funds can only be shared between those who are members of the private blockchain network. This makes it impossible for money to be sent to anyone other than the agencies and people who are approved by the government without converting that money into fiat currency.
Examples of private blockchains
Some private blockchains are being developed as business solutions by companies listed below:
Hyperledger Fabric is an open source private blockchain solution for enterprises. It is developed by Intel, IBM and 26 other organizations. Hyperledger Fabric can be adapted to industries such as banking, government, healthcare and media. It’s a highly scalable solution, which also makes it suitable for supply chain applications.
R3 has been developing the Corda blockchain platform for finance and commerce since 2016. It exists in both open source and enterprise versions, depending on which better suits the needs of businesses. R3 works with over 200 companies and regulators across six continents. HSBC and ING banks have already executed a live financial transaction on the Corda blockchain back in May 2018.
BankChain was created by the State Bank of India in February 2017. It has formed a consortium of banks to explore and implement blockchain in the banking industry. There are currently 37 members, including partners such as Deutsche Bank and Citibank, N.A. Members are pursuing projects in cross-border remittance as well as document authentication and verification, with a total of 8 active projects under development.
Connecting public and private blockchains
There are several blockchain companies developing solutions to connect public and private blockchains to create an Internet of blockchains. Currently, cryptocurrencies must pass through exchanges for value to transfer between blockchains. But data stored on a blockchain cannot be shared with another, even with the use of exchanges.
By making blockchains interoperable, data would no longer be isolated on individual chains. Instead, it would flow as freely as any data we see on the Internet today. Below are some companies developing interoperable solutions for public and private blockchains:
ICON is working to create a network of communities and organizations that can connect to one another regardless of the blockchains used in each community. ICONLOOP is the private blockchain at the core of the ICON network. It is a highly flexible enterprise solution that can support the needs of different industries and also link with other distributed ledger networks.
This allows organizations to create their own blockchains with governance criteria that suit their needs. This platform has secured partnerships with companies across multiple industries. Notably, ICONLOOP has partnered with the Korean Customs Service and LINE, while their product, ChainID, will be used by Samsung.
NEM is a blockchain protocol focused on providing flexible services to businesses with Smart Assets. NEM is a public blockchain. But there is also a private blockchain equivalent known as Mijin, which is able to provide businesses with more privacy and efficiency.
The private Mijin blockchains, however, can be connected together through the NEM public blockchain to create a unified digital economy. It should also be noted that NEM only links its private and public blockchains together but cannot support links with other blockchains.
XinFin is a hybrid of both public and private blockchains. The network consists of two layers. The public layer allows anyone to join the network. It is where users can purchase goods from retailers.
The private layer is reserved for business-to-business transactions. A private blockchain can be established with the relevant businesses to conduct transactions on their own blockchain while all parties are still connected to the public layer.
Although private and public blockchains share many core principles, their use and application are very different. Private blockchains require permission to join the network and can limit the visibility of data on the blockchain through encryption. Public blockchains are open for anyone to join and view transaction history.
While your public address and transactions can be shielded with privacy coins, the transaction data associated with the shadow addresses is still visible on the public blockchain. Private blockchains also do not require any native currency, which cannot be the case for their public counterparts.
Private blockchains work differently and offer more control over who can join and what is visible to others, making them much more attractive for companies to conduct business with one another.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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