When the term blockchain is used, people are usually referencing public or open blockchains. These permissionless chains allows use by any participant. While the users are not explicitly identified in a public blockchain transaction, the information associated with each transaction is displayed transparently.
Private blockchains do exactly the opposite. The parties are known, but the information in the transaction is never recorded to a public ledger. Businesses do not want their information displayed publicly, so they are likely to deploy and use a private chain where the business maintains control over all of the data they’ve obtained. To put it simply, public blockchains are open to anyone. By contrast, private blockchains intend to restrict either participant or validator access.
Private blockchains have significant differences than their public counterparts. Private or permissioned blockchains are an ecosystem comprised of known participants, but the information that is being transferred can only be sent or viewed by an approved party. Additionally, the consensus mechanisms used for private blockchains are quite different than the public blockchain methods we have previously discussed. Some private blockchains utilize consensus mechanisms that allow a central party the ability to singularly confirm or deny transactions. Others use input from multiple parties to reach consensus.
SO WHY IS THERE A NEED FOR PRIVATE BLOCKCHAINS?
Many private companies, including JP Morgan, have shown an interest in the potential of blockchain technology, but require greater control than that provided by public blockchains. Companies are looking to incorporate blockchain technology into the way they conduct business, ranging from accounting to supply chain management. Private entities don’t want their proprietary information to be shared publicly, but they also see the advantages of moving towards blockchain technology. This middle ground has led to the creation of private blockchains, allowing companies to benefit from the technology without giving up their autonomy or compromising consumer data.
Blockchains were created to coordinate data between parties that don’t necessarily trust each other. This is useful when you’re in a situation where you want to exchange data or agree on the validity of data with untrusted parties. Blockchains are great for agreeing on public data; this is what they were created for. There are a few situations where it makes sense to use a private blockchain. For example, some businesses in a specific industry might want to exchange data between themselves, but no individual business wants the responsibility of maintaining that data. Utilizing a shared ledger might make sense in this siutation.
It’s tough to go into specifics about distributed ledgers because these private systems can vary greatly as they are designed to meet the needs of a particular organization. Distributed ledgers are a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. Even the permissioned distributed ledger software project Hyperledger is designed to be configurable in many different ways to meet a wide variety of needs.
It’s important to remember that blockchains are essentially slow, inefficient databases. If you are considering using blockchain or distributed ledger technology, you’ll have to assess certain questions:
- Do I need to share this ledger with people that I don’t fully trust?
- Will multiple users be writing to this database and will their entries interact or be dependent upon each other?
- Who will be the “validators” of this data? And how will this distributed system reach a consensus?
If these questions cannot be answered, it is probably wiser to use a traditional SQL database. When coordinating data between untrusted parties, a private blockchain could provide transparency into certain transactions that could increase trust between both parties.
CONSORTIUM BLOCKCHAINS
Many companies are choosing to incorporate blockchain technology into their existing business models. As blockchains are a new invention, these companies are forming working groups, or consortia, to determine industry standards around blockchain technology.
Distributed ledgers are business-to-business workflow tools, which requires that blockchain increases and enhances collaboration. Therefore, it is important to set recognized standards, develop infrastructure, and execute transactions in a standardized manner. These consortia are the mechanisms through which companies that are interested in blockchain technology are collaborating. Any company seeking to capitalize on blockchain’s potential to increase operational efficiency may consider joining or forming a blockchain consortium. However, it would be wise to heed the lessons from the first generation of consortia. In particular, adequate funding, robust governance, and commitment from key companies are critical. Without these key supports, a consortium may have trouble reaching its goals.
One of the biggest blockchain consortia is the Enterprise Ethereum Alliance. The EEA is made up of several projects and organizations with the aim of standardizing business practices that surround the Ethereum ecosystem. The goal is interoperability for both businesses and consumers alike by developing an open, decentralized web.
EVERY BUSINESS IS UNIQUE
Each organization or network has its own specific set of needs, which is why there is no correct answer on which blockchains are better. Public and private blockchains contain different characteristics, and the selection should be made based on what the organization is trying to achieve. Each organization has specific goals and should assess their needs independently. For this reason, private blockchain platforms like Hyperledger allow organizations a certain level of customization when creating their private chain.
Now that we’ve addressed a modification to make blockchains more business applicable, let’s explore how blockchain protocols can be altered to handle any governance changes or disputes.
