Private blockchains (also called permissioned blockchains) may be controversial, but they have their advantages. Here’s how they compare to public blockchains.
As explained in our What Is Blockchain? article, public blockchains are very open: anyone can join, become a node, or look at the transactions history. There’s no verification process before acceptance, and if you no longer wish to verify transactions, you can stop without penalty. If you change your mind, you can come back, start a node, and get a full record of everything that changed while you were gone.
Private blockchains apply several restrictions. These vary depending on the blockchain, but such restrictions include who can join, how much processing power you have to offer, or how much transaction information you can see.
The Benefits of a Private Blockchain
There are many different types of blockchain that come under the private umbrella. The restrictions may vary from blockchain to blockchain, but the important thing is that restrictions exist and said blockchains aren’t accessible to all.
By imposing restrictions, private blockchains have several benefits over public blockchains:
Trust. By verifying nodes, or only allowing trusted partners to run a node, there may not be a need for verifying transactions more than once. A single node could verify, and then all other nodes update their records.
Speed. If only specific users can run nodes, it’s possible to enforce stringent requirements on processing power and hardware specifications. No more long transaction times. Private blockchains also avoid peak demand during high-profile times. Private blockchain developers may often be able to plan for periods of high demand, and surprising spikes in traffic are unlikely to happen.
Security. While public blockchains provide some security, it is possible to trace transactions to accounts with a public model. By running a private blockchain, it’s possible to hide some of the data in each transaction. For example, the transaction amount or confidential contact details of account holders.
Cost. By controlling nodes, private blockchains may not need to pay miners. If businesses own the hardware, there’s no need to pay themselves to verify transactions. And while public blockchains need a lot of processing power, private blockchains can get away with far fewer verifications due to the lesser load.
Reliability. By regulating the network and running the nodes, private blockchains can reduce downtime. Sure, a public blockchain with thousands of nodes may be impossible to stop, but a spike in transactions or a loss of nodes can reduce the overall network power. Tight control of a private blockchain can help to maximize uptime.
The Drawbacks of a Private Blockchain
With all these benefits, private blockchains may sound like the best thing ever… but that’s not always the case.
Stunted growth. Without public nodes, a private blockchain won’t gain resources as public interest grows. When someone hears about Bitcoin for the first time, they can go and start a node if they want to—and with increasing users and nodes, public blockchains can scale fast. Private blockchains may involve significant time and money to get new nodes online.
Control and manipulation. If public users or paying customers are using a private blockchain, they are at the mercy of the developers or network owners. Without public visibility, developers are free to abuse the system. This could involve manipulating transactions, blocking users, or other dirty tactics.
For these reasons, many blockchain purists reject the idea of a private blockchain. If it’s possible to secure data on a public blockchain, why bother keeping everything locked away? I personally believe private blockchains can be useful and aren’t totally worthless.
Who Uses Public and Private Blockchains?
Bitcoin and Ethereum are the two highest-profile public blockchains, but there are hundreds of others. If you want a secure yet open network, or you’re concerned about malicious node interference, then a public blockchain is the way to go. While they are susceptible to 51 percent attacks (see our glossary of blockchain and cryptocurrency terms), you’re unlikely to see any major problems with a large network.
Private blockchains are often used by businesses and banks. There’s no way serious money-making organizations will store their data on a public blockchain where everything is visible by all. Even worse, a single entity wouldn’t have control over all the nodes, so a private blockchain is pretty much the only viable choice.
Private blockchain owners may often invite other users to start nodes. These users may store confidential business secrets or customer details on the network. For example, consider an international chain of video game shops. This company may use a private blockchain to store customer reward points and then invite competing stores to share the network. This blockchain could be very fast, and users would be able to spend their points at any video game store, no matter the brand.
In this example, none of the video game companies would want any other company to have complete control of the network, nor would they want any random company joining in as a node. By sharing a private blockchain, each business can verify transactions and ensure the other companies aren’t cheating or committing fraudulent actions.
Some permissioned blockchains, like Ripple, are semi-private. Anyone can use Ripple to send XRP tokens to anyone else, but not everyone can run a node. Instead, Ripple invites huge organizations and other financial institutions to run nodes. They have to agree to the rules and requirements, but then have control over a percentage of the network. For this reason, many people hate blockchains like Ripple.
That’s pretty much it for the fundamentals of public and private blockchains. Generally speaking, private blockchains are better for businesses while public blockchains are better for everyone else. What do you think?