By Jonas Lundqvist, CEO of Haidrun, takes a look at the pros and cons of public, hybrid and private blockchains and provides some practical advice
The first blockchain appeared in 2008 as a special type of distributed database or ledger technology, differentiated by the way it stores and manages files of information into groups of data. These so-called blocks are then cryptographically signed and linked together to form a chain. As well as the data itself, each block contains a record of exactly when it was created, producing a complete timeline history rather than the snapshot offered by traditional databases. This detailed system of record cannot be corrupted, lost or changed.
The distributed nature of blockchain technology means it is duplicated across all computers running a blockchain node that makes up a Peer-to-Peer (P2P) network and any one of them can view the entire blockchain. Transactions or records are processed by nodes in the P2P network, which verify the data and achieve an agreement – or consensus – on their validity. This is where the different types of blockchain start to diverge and in simple terms, blockchains come in three flavours – private, public and hybrid.
A private blockchain is a type of database where a single authority or organisation ultimately retains control and no one can enter this type of network without proper authentication. Private blockchains are, by definition, ‘permissioned’ and are more suited to enterprises for reasons of performance, accountability and cost. The private blockchain platform can be run and operated by the enterprise itself or as a service called Blockchain as a Service (BaaS). They are usually set up for reasons of privacy, where it does not suit an enterprise to allow every participant full access to the entire contents of the database. Private blockchain platforms focus on companies and institutions where the blockchain empowers and supports the business rather than the individual users.
Public blockchains can be described as fully decentralised where in addition to the distributed database there is also no single entity in overall control. They typically involve their own cryptocurrency and anyone can download the software, view the ledger and interact with the blockchain. Public blockchains try to preserve an individual user’s anonymity and treat all users equally.
Hybrid blockchains, as the name suggests, are a mixture, with one foot in each of the public and private camps. This type of blockchain can be very effective for consortiums where the members or designated authority can determine which transactions and data remain public and which are confined to a closed group within it. A hybrid or consortium network can be configured from either a private blockchain or a public platform. However, it will depend on the type of inclusivity and privacy required by business-to-business (B2B) and enterprise organisations as to which platform to adopt to safely conduct their business.
Private blockchains – keeping the faith?
Are private blockchains really aligned to the original core concepts of the technology? Fundamentally, blockchain technology delivers a distributed database that provides a single time-stamped version of the truth. It then uses mathematics and cryptography to provide trust and security – rather than through third parties – and relies on an accessible and open user structure to confirm all is well.
So, private blockchains adhere to the principles but some use cases can look more like centralised, controlled networks. The reality is that they offer all the distributed benefits, whilst retaining some overall control to improve privacy and eliminate many of the illicit activities often associated with public blockchains and cryptocurrencies. For many enterprises, using private blockchains is the preferred option to safeguard a company’s sensitive information. Enterprises also need to demonstrate full accountability, often via external audits, on the running and operation of their systems. Private blockchains can provide a much higher degree of regulation, determined and set by the administrators in line with their industry’s regulatory codes.
Performance and costs
The latest generation of blockchains use more efficient consensus algorithms and protocols; but public blockchain platforms still need many participants to provide the computing power and resources for transactions to be validated. This massive number of nodes imposes performance limitations and comes at a variable cost. As the performance fluctuates due to network latency and scalability, this is far from ideal when you need stable and predictable business parameters to efficiently run an enterprise. Private blockchains solve this issue by specifying pre-determined resource criteria defining the number of nodes to participate, making overall performance faster. In this way, private platforms are also more scalable, where nodes and services can be added on demand to provide more flexibility for the enterprise.
Importantly, private blockchains do not need to use cryptocurrencies or native tokens for the network and any association with cryptocurrencies, good or bad, is not part of the private solution. So, less energy, fewer resources and less participants are required to run the private blockchain, which equals less cost on a far more predictable scale.
The question of blockchain security
Arguably, a private blockchain with a centralised authority could be more prone to data breaches and operating at a smaller scale can make it easier for any bad actors to manipulate the entire network. However, identity management and pre-determined access to the data and transactions, enable private blockchain administrators to control who sees what type of information and under what circumstances. Many enterprise networks already have robust security structures, like datacentres or secure services and are designed to expect attacks and yet remain secure. Adding blockchain technology provides a different type of security, making it ideal for many enterprise operations such as supply chain management.
The software industry and more importantly, its customers, hate siloed systems and interoperability has always been the missing link in distributed ledger technology. Overcoming this hurdle, faced by both private and public platforms, to seamlessly interact and exchange information is the key to mass adoption for blockchains. Next generation platforms will create innovative new solutions to join different blockchains. It has started with retro connections to Bitcoin and Ethereum – generation 1 and 2 – but it will soon enable cross-chain exchange for coins and a greater compatibility between all capable chains and other enterprise systems. This holds great promise for both individual and corporate users.
What is the future for permissioned blockchains?
For now, public platforms drive most of the news headlines due to frenzied cryptocurrency activity and high-profile industrial consortiums. However, private blockchains look set to become the main contributor to blockchain market growth and will no doubt retain the largest market size in 2021, according to Gartner. Private blockchains provide more opportunities to utilise the technology for B2B use cases and they deliver higher efficiency, privacy, reliability, and transparency. Security is enhanced through Public Key Infrastructure (PKI) encryption and Key Management solutions, allowing the private keys only to be accessed by their owners in the organisation. Large enterprise blockchain solutions will be custom developed according to their specific business needs and SMEs will take advantage of cost-effective pre-packaged solutions.
Blockchain is here to stay and is rapidly moving mainstream across sectors from financial services, supply chain and telecoms to health and insurance. Gartner forecasts that the business value generated by blockchain will grow rapidly, reaching $176 billion by 2025 and $3.1 trillion by 2030.
The question is whether enterprises will be happy to adopt the traditional public model or chose to embrace the private or hybrid approach.