Recently we explored the fundamental concept of blockchain and how it’s revolutionizing record keeping in a wide swath of industries. We focused on the public blockchain, an “incorruptible record keeping system; transparent by being public and un-hackable due to its distributed nature.”
However, there is more to this globally distributed ledger system than being public and transparent. The advantages of blockchain technology transcend these characteristics, which have been made famous by applications like bitcoin. There are also private and permissioned blockchains that prioritize different elements of the technology in order to serve a variety of other applications.
Public, permissioned and private blockchains are defined by who can use the system and who hosts the blockchain in order to validate transactions. Anyone can be a user or a node (host) on a public blockchain, while permissioned blockchains are operated by a wide but defined group, such as the primary stakeholders of a specific industry. A private blockchain, as the name suggests, is run and used by one organization.
Each form of blockchain places a different level of importance on anonymity, immutability, efficiency, and transparency. The public blockchain, that has been made famous by bitcoin for example, prioritizes anonymity, immutability, and transparency over efficiency. Whereas permissioned blockchains value immutability and efficiency over anonymity and transparency.
The private blockchain can be confusing for those just getting to grips with complex systems like bitcoin. By prioritizing efficiency over the anonymity, immutability and transparency it foregoes the characteristics normally associated with the technology. The range of applications for private blockchains may be more limited but its power to improve processes are no less significant.
Computer programmer and writer, Vitalik Buterin, founded Ethereum, a decentralized web 3.0 publishing platform, for which he won the World Technology Award in 2014. In his Ethereum Blog he sets out the five most important advantages of a private blockchain over a public blockchain:
1) Rule Changing
The consortium or company running a private blockchain can easily, if desired, change the rules of a blockchain, revert transactions, modify balances, etc. In some cases, e.g., national land registries, this functionality is necessary; there is no way a system would be allowed to exist where Dread Pirate Roberts can have legal ownership rights over a plainly visible piece of land, and so an attempt to create a government-uncontrollable land registry would in practice quickly devolve into one that is not recognized by the government itself.
Of course, one can argue that one can do this on a public blockchain by giving the government a backdoor key to a contract; the counter-argument to that is that such an approach is essentially a Rube Goldbergian alternative to the more efficient route of having a private blockchain, although there is in turn a partial counter-argument to that that I will describe later.
2) Known Validators
The validators are known, so any risk of a 51% attack arising from some miner collusion in China does not apply.
3) Cheaper Transactions
Transactions are cheaper, since they only need to be verified by a few nodes that can be trusted to have very high processing power, and do not need to be verified by ten thousand laptops.
This is a hugely important concern right now, as public blockchains tend to have transaction fees exceeding $0.01 per tx, but it is important to note that it may change in the long term with scalable blockchain technology that promises to bring public-blockchain costs down to within one or two orders of magnitude of an optimally efficient private blockchain system.
4) Well-Connected Nodes
Nodes can be trusted to be very well-connected, and faults can quickly be fixed by manual intervention, allowing the use of consensus algorithms which offer finality after much shorter block times.
Improvements in public blockchain technology, such as Ethereum 1.0’s uncle concept and later proof of stake, can bring public blockchains much closer to the “instant confirmation” ideal (eg. offering total finality after 15 seconds, rather than 99.9999% finality after two hours as does Bitcoin), but even still private blockchains will always be faster and the latency difference will never disappear as unfortunately the speed of light does not increase by 2x every two years by Moore’s law.
If read permissions are restricted, private blockchains can provide a greater level of, well, privacy.
Given all of this, it may seem like private blockchains are unquestionably a better choice for institutions. However, even in an institutional context, public blockchains still have a lot of value, and in fact this value lies to a substantial degree in the philosophical virtues that advocates of public blockchains have been promoting all along, among the chief of which are freedom, neutrality and openness.
These types of blockchain are not as black and white as they may first appear. Elements of public, permissioned and private blockchain systems can be combined in a wide variety of ways in order to create custom ledgers for specific applications. So whatever your company’s or industry’s record keeping needs, priorities and problems are, a specific blockchain can be designed to best help serve those demands.
“By creating privately administered smart contracts on public blockchains, or cross-chain exchange layers between public and private blockchains, one can achieve many kinds of hybrid combinations of these properties,” Buterin explains.
“The solution that is optimal for a particular industry depends very heavily on what your exact industry is. In some cases, public is clearly better; in others, some degree of private control is simply necessary. As is often the case in the real world, it depends.”
Using blockchain functionality, based on the bitcoin model but in a private context, enables the use of a single, shared, distributed digital ledger of transactions. This means users can automatically update information regarding their operations, such as the transfer of products from a warehouse to a store, that authorized members of the supply chain can then access.
In fact, supply chain management is seen as a key application of more private blockchains. As outlined earlier in the article, private blockchains prioritize efficiency, the cornerstone of supply chain management. They also enable transparency, but only to authorized parties, and provide a unprecedented level of consistency in order to minimize errors throughout the complex and multifaceted supply chain organism.
Antony Abell, Managing Director of TrustMe, explains this in his recent article on IT Pro Portal:
A private blockchain arrangement that linked each of these disparate supply chain actors would allow them to see ‘one version of the truth.’ This is because information on the blockchain is both transparent and immutable. Each ‘block’ of information is cryptographically linked to those on either side, making them impossible to edit without authorisation consequently, blockchain enables trust between actors as their information is both visible and secure.
A supply chain that is ‘on the blockchain’ is very efficient, as we have seen demonstrated by a number of early Proof of Concepts in the industry. Suppliers, shipping firms and distributors are finding that the efficiencies of ‘smart contracts,’ which capitalise on the linkage of supply chain actors, result in substantial costs and profits efficiencies.
In addition, confidence is increased in their partner’s ability to keep data secure thanks to the encryption of these private blockchains. Access to information can also be ‘layered’ and protected so parties can only access the information they need and data protection can then apply to any other information contained in a record.
As a market leader in supply chain management solutions this is of particular interest to Mojix, and by enabling blockchain, using Mojix software, there is no centralized storage repository owned by a single legal entity. Therefore, not only is the stored data accessible, but it cannot be controlled or changed by unauthorized parties. “That provides tracking of inventory with real-time accountability,” says Tom Racette, Mojix’s global retail business-development VP. “Each transaction is built on the previous transaction,” he explains, and all parties “can have full confidence in the integrity of that transaction data.”
Earlier this year Mojix announced an alliance with Microsoft to offer a Blockchain-enhanced version of its solution. York Rhodes III, Microsoft’s Blockchain global business strategist, says that teaming up with Mojix on Blockchain “to explore the physical problem of inventory visibility across disparate legal entities is a game-changer for supply chain contracts.” He adds, “We have taken an early bet on Blockchain and distributed ledger technology seeking to explore, vet and accelerate adoption of this game-changing technology.”