Outlook_2020_Articles_007

Key Takeaways:

    • Public blockchains inherently provide more overall network security because the large number of network nodes preserves immutability.
    • Developments in encryption and privacy technologies diminish concerns about confidentiality on open blockchains.
    • Using public blockchains can save costs for compa nies by decentralizing the maintenance of the network.

What makes public blockchains more likely to succeed in the long run over their private counterparts? What are the benefits and disadvantages of both types of blockchain, and which is best suited for a given purpose? This piece defines both public and private blockchains and presents a short overview of their similarities, differences, and respective use cases.

 

What are public, and what are private blockchains?

The name says it all — public blockchains are entirely open to the public and accessible to anyone, which means that anyone with an internet connection is allowed to contribute to and interact with a given blockchain. Thus, any person can download a public blockchain’s software and run their own node, allowing them to verify its information and/or add new blocks to the blockchain.
Due to being open for anybody’s contribution, popular public blockchains such as Bitcoin, Ethereum, and Tezos are composed of thousands of nodes actively contributing to the maintenance of their blockchains. This forms a global and decentralized network of independent nodes where each node communicates with and verifies the work of other nodes instead of a single entity, or a small group of entities, controlling the system.

On the contrary, running nodes in a private blockchain (e.g. Hyperledger and/or R3 Corda) is only possible for parties which have been granted access beforehand. Restricting access to a private blockchain can be achieved via different methods such as authentication through identity management systems or operating a blockchain in an isolated network.

An analogy for public vs. private blockchains is the internet vs. intranets. When commercial computer-use started to gain traction in the 1980s, many enterprises used intranets. Like the internet, an intranet is a network, however, only authorized users are allowed to access it, whereas anyone may access the internet. Over time, far greater innovation took place on the internet and intranet-use fizzled out.

While the terminology in the blockchain industry is still evolving and not widely agreed, a synonym for private blockchains is “permissioned blockchains”, whereas public blockchains are often called “permissionless blockchains”. Private / permissioned blockchains are operated by pre-selected participants such as members of a consortium. This means, the participants in private / permissioned blockchains are known and on- or off-chain controls (such as a regulatory or audit body) are established to validate whether these participants act in good faith. Because all participants are known, misbehaviour, such as including a counterfeit transaction in a block, can be punished (e.g. punishment may be in the form of a previously defined and agreed upon fine).

Since everybody is able to join a public / permissionless blockchain, its participants may be anonymous and incentivized by the chance to earn that blockchain’s native currency as a reward when correctly behaving according to the blockchain’s protocol and rules. In Proof-of-Stake based blockchains (see box below for a short definition) such as Tezos, participants also can lose part of their stake if they do not follow protocol rules and are accused by another blockchain participant called an “accuser”. The accuser then earns this stake for its performed verification work. Each blockchain, whether private or public, needs a control system to ensure participants behave in the correct way according to a blockchain’s protocol and rules.

Proof-of-Work vs. Proof-of-Stake:

Proof-of-Work (PoW) and Proof-of-Stake (PoS) are two possible methods (“consensus algorithms”) to determine which blockchain participant is allowed to add and validate blocks in a blockchain. Participants are financially rewarded for adding and validating blocks to a blockchain. Such rewards typically include a “block reward” plus transaction fees from a block.

For example, PoW is used in Bitcoin and Ethereum and participants have to solve a mathematical “puzzle”. Solving this puzzle requires a lot of computational power (hardware and electricity) and the first able to solve the puzzle is allowed to add a new block to the blockchain (a process called “mining”). The difficulty to solve the puzzle is proportional to the total amount of computational power attempting to solve a given puzzle. Since a lot of computational power goes into trying to solve a given puzzle, the Bitcoin blockchain, for instance, was in July 2019 consuming an amount of energy equal to that of Switzerland.

PoS based blockchains do not consume such a massive amount of energy, since the party allowed to add (in Tezos this process is called “baking”) or validate a block is determined beforehand. All participants have an opportunity to validate blocks proportional to their tokens (“stake”) to bake or validate the next block.

 

What are open and closed blockchains?

In addition to the definition of public and private, “open” and “closed” are also commonly used terms to describe who can read (i.e. collect and analyze) data on a blockchain. Data stored in an open blockchain can be read by any blockchain participant, whereas in a closed blockchain only a few participants are capable to read data.

Given these two word pairs ‘public / private’ and ‘open / closed’, there are four basic characteristics possible to describe a blockchain. Each of these characteristics serves different use cases:

      • Public and Open: This actually characterizes the type of blockchain people are typically referring to when they speak about public blockchains. Public and open blockchains are available for everybody and written data is accessible and readable by everybody as well. Thus, public and open blockchains support use cases such as public/transparent ledgers where everybody can read and verify data (e.g. account balances of currencies or other assets like in-game assets/trophies or which kind of sport bets have been placed by the blockchain’s participants).

 

 

      • Public and Closed:A use case for this kind of blockchain for example is voting or polling. Everybody can write his/her vote or opinion to the blockchain, but only the creators of the ballot box are allowed to read the voting results. Public and closed blockchains are often used for medical, legal or financial use cases where customers or prospects can store confidential and / or personal information for restricted access by the corresponding entities.

 

 

      • Private and Open:This type of private blockchain is commonly used in supply chains, where only suppliers are able to write the supply status to the chain, but every private blockchain’s participant can track the status and see the information.

 

 

      • Private and Closed:Private and closed blockchains enable use cases where only trusted and known members are able to write and read the data in the blockchain (e.g. an interbank blockchain where banks exchange assets).

public private blockchains

 

Why use a private / permissioned blockchain?

Companies often choose private blockchains over public ones because they:

      • Are required to implement very specific use cases (e.g. enabling them with a customized private blockchain to execute transactions faster),
      • Have concerns about data privacy and confidentiality, or
      • Operate in regulated areas requiring the use of a private blockchain.

A private blockchain provides more control over the blockchain for these companies or consortiums, since they decide who is able to write data and participate.

A private blockchain is only operated by authorized members or sometimes even only by a subset or one of these members. Thus, a private blockchain is more centralized than a public blockchain consisting of thousands of nodes.

Having consent within this group of permissioned members would even allow them removing blocks and reverting to an older state. To get such a consent or agreement between a small group of permissioned blockchain participants is easier than in a global, decentralized blockchain with thousands, or tens of thousands, of participants with different backgrounds and goals.

Moreover, operating a private blockchain means as well that the company or consortium requires people with appropriate expertise and experience to run the private blockchain. In addition to required human resources, costs for infrastructure and licences have to be considered as well. Private blockchain technology and services are often offered by startups and the private blockchains are developed and / or strongly customized for a specific use case by these startups. This exposes the company to additional counterparty risks resulting in potential scenarios where the startup is no longer available (e.g. due to bankruptcy).

 

Is a private blockchain more secure due to its private nature?

A private blockchain seems at first glance to be more secure, since one might ask: how can you hack a private blockchain which is “locked away” and only accessible for authorized participants?
However, this assumption does not take into considerations that employees including suppliers, consultants and contractors are the top source of security incidents and also that hackers have already demonstrated the capability to successfully intrude networks (e.g. see for instance the “Cloud Hopper Attacks” ).

Would it not be better to rely on a public blockchain and its globally distributed community, where different parties with different backgrounds, experiences, and expertise are using and testing the public blockchain on a day-to-day basis and announcing and fixing security weaknesses in case they detect one?

In addition, the source code of most public blockchains is publicly available and can be reviewed by anybody. This concept of open source software is popular and widely adopted by a vast amount of applications but as well as by operating systems (e.g. Linux or Android). A main advantage of open source is that everybody is invited to inspect the code for understanding and verification of functionality and security. Thereby, no faith is required in a company or sub contractor that they correctly and timely implement or fix security critical functionality. To compare it to the previously mentioned analogy of the internet vs. intranets, more innovation can take place on public blockchains as they are open and accessible for anyone to tinker with.

 

What type of blockchain will most likely be used in the long run?

With recent developments in encryption and privacy technologies (e.g. zero knowledge proof techniques), public blockchains are able to overcome some of the concerns many companies often have, especially when it comes to privacy and confidentiality. In addition, so-called layer 2 scaling technologies for blockchains, such as Plasma (Marigold on Tezos) or Lightning foster faster and more scalable public blockchains. As a result, common reasons to implement a private blockchain are vanishing as recent tech developments make them irrelevant.

Using a public blockchain instead of a private blockchain can also help companies to save costs since they are not responsible for running and maintaining the entire blockchain network and can instead focus on the integration of their use cases into the blockchain and further innovation. Also, the difference of blockchain types between open and closed will disappear due to some of the technological improvements mentioned above, but this type definition will be still valid to characterize use cases.

Furthermore, we predict that public blockchains and their usage will go through a similar development cycle like the Internet. In the past, at a very early stage of the Internet, companies were running their own networks (Intranets) with dozens of servers hosting their required applications. Today, a lot of companies obtain their applications directly from the Internet (“cloud”) and thus costs for running and maintaining internal networks and application systems are replaced by paying the access to the Internet via a local Internet provider.

Finally, blockchains will only succeed if they create value. Much like the internet, value from blockchains relies on connectivity and network effects, which accrue on public chains and are fragmented on private ones. For example, tokenized assets such as digital stocks or bonds cannot pass between private chains, meaning that to own a digital security tokenized on a private chain, one would have to be a member of the consortium governing the private chain – given the size and scale of private and public capital markets, it would be virtually impossible to bring all participants onto one private chain network, and value would be destroyed because of fragmentation rather than created. With public chains, more market participants can engage, enabling greater connectivity and exchange of value, thereby providing additional value to all participants. As public chain technology continues to advance, the fundamentally superior economics of public chains will inevitably lead to an obsolescence of private chains and a robust digital economy based on public blockchains.

 

Conclusion

Public blockchains are a very good alternative to traditional solutions especially where different parties want to digitally ensure and record accountability, transparency, and immutability of states such as ownership of goods, balances of assets, proof of origin, proof of possession, etc. Thus, public blockchains are rapidly becoming a technology with which any business sector can find applicable use cases.

Reasons to use a private blockchain become more and more obsolete with ongoing implementation of newly developed encryption and privacy techniques by public blockchains such as Tezos. Using a public blockchain like Tezos provides access to a global, decentralized blockchain with an immense community behind it. This allows companies to focus on their use cases and innovation, and leave the costs of operating the blockchain itself to the community and its validators. Much like the Internet, a bright future for public blockchains in this space is ahead.