Private and public blockchains – competing or solving different problems?
What does the future of blockchain look like? There has been much discussion around the so-called “competition” between public and private blockchains. Public blockchains such as Bitcoin and Ethereum are transparent, open, distributed ledgers, in principle for anonymous or pseudonymous participants. Private blockchains such as Corda and Hyperledger integrate certain restrictions to allow for more control and privacy, which makes them valuable for industry-level businesses. However, what are the main differences and respective benefits between the two? Will they be used for different cases or are they actually directly competing? Here we provide our first insights and an outlook on future research and practical applications.
by Judith Schuermans & Sebastiaan van Herk (Bax & Company) and Roger Bons (FOM)
Blockchain as a foundational technology 1 became a topic soon after the Bitcoin protocol was released in 2008. Many more cryptocurrencies (Ethereum, LiteCoin, etc.) were developed with blockchain as its underlying technology. The emergence of “smart contracts” allowed for the development of other application areas beyond the “cryptocurrency” model. Soon after, actors in the financial world and beyond saw the revolutionary potential of blockchain applications, or more generally, of “distributed ledger technologies”.
Blockchain has since gone through many iterations to adapt the technology for different use cases. In this article, we focus on the difference between two fundamentally different models of blockchains: public (or permissionless) and private (or permissioned).
Open and transparent public blockchains are seen as the “original” blockchains. Anyone with an internet connection can join and has access to the network. No authorisation is needed to participate or view the blockchain’s data. Transactions submitted to the blockchain are accepted based on verification by other participants through one of several possible consensus algorithms. A consensus algorithm is used to reach agreement and reliability in a stakeholder network. Participants identify themselves using a cryptographic code which acts as a pseudonym. However, it is important to note that anonymity is not guaranteed – it may be possible to deduce the identity through the transactions they undertake.
Alternatively, private blockchains maintain an access control layer that determines who can participate and limits certain actions to be done by only certain (identifiable) participants. Special permission is needed to read, access and write information on the blockchain. Private blockchains or “enterprise blockchains” have been mainly adapted to build business applications on top of them that require more privacy and control, but also accountability by identified participants. In sectors such as supply chain and healthcare, organisations deal with sensitive information such as commercial contracts and records with personal information that require that extra level of privacy.
In an interview, Andreas Antonopoulos, a Bitcoin guru, put it this way:
The banks and the corporations say, “Oh, Bitcoin’s awesome. We want that. Only without the open, decentralized, peer-to-peer, borderless, permissionless part. Could we instead have a closed, controlled, tame, identity-laden permission version of that please?”
This illustrates the divide between the communities behind the perspective technologies. While the original public blockchain technology was indeed developed to avoid having to trust third parties such as banks and governments, the private blockchain technology targets the administrative burden associated with multi-party coordination. It focuses on reducing transaction costs and limits the operational involvement of intermediaries while maintaining their overview and accountability in case things do go wrong.
Both technologies share the characteristics of a ledger: once a transaction has been verified and stored, it cannot be altered and only a counter-transaction can undo it. A technical result of the divide is the difference in consensus mechanisms. Public solutions intentionally lack a trusted intermediary and need to replace this trust with a democratic technological principle, an algorithm. The best-known example is the “Proof of Work” algorithm, known from Bitcoin among others. Many participants try to solve a cryptographic puzzle and the winner gets to verify the next block (and a reward for the effort), so the required computing power is considerable. This limits scalability and leads to environmental concerns. Private blockchains do not have these specific challenges as they still rely on the intermediary to decide who can verify transactions and can, therefore, be more scalable and faster.
Different use cases
It seems that private blockchains are made for specific use cases with tailored tasks and functions, mainly to optimise and improve current processes and practices in and between businesses. The main difference with other technologies, such as cloud computing, is the resilience of the overall system and the removal of the need for individual parties to each “keep track of the status” – they can now rely on the blockchain that runs on a machine close to them. This might radically change the need for administrative back-office functions, whose task it was to keep track of changes as a result of actions by others. It might not revolutionise the value proposition of the business model, but it might revolutionise the cost base at which it can be achieved. Public blockchains can be used for broad applicability and they have the potential to revolutionise sectors and reshape current systems, by replacing trusted intermediaries with trusted technology.
Therefore, we believe that both types of models have their use cases, addressing fundamentally different challenges with different ambition levels. It isn’t a question of which model will prevail. When it comes to applying the blockchain technology, public or private, the discussion needs to centre around the value of involving banks or governments and the disadvantages of specific implementations in terms of environmental footprint.