Blockchains of data have existed for quite some time now, and their main purpose was to record data on an open, decentralized ledger that is resistant to modification. The creation of Bitcoin in 2009 was the first time we saw a distributed public ledger applied to internet-based peer-to-peer transactions. Nakamoto’s Bitcoin protocol was released as open source, which meant that anyone could take this protocol and create a similar, blockchain based p2p transaction network. Naturally as the capabilities and qualities that came with the blockchain became more apparent, more developers started picking up the technology and applying it to various walks of life. As the blockchain technology started finding application outside of the p2p money transactions, more and more people became exposed and accustomed to it. Ultimately, if we take a closer look at these different applications, we can group every available technological solution into one of two possible groups. Those groups are public and private blockchain protocols.
Public protocols are open source and permissionless, allowing anyone to participate or benefit from the technology. Anyone can download the code and start running public nodes on their local computers, thus helping out the network with its transaction validation and becoming a part of the consensus process. The consensus is an important element of every blockchain, as it requires that each member of the network agrees on the contents that are being added to the blockchain. This ensures the validity of the data and prevents malicious players from adding fake transactions.
At the same time, a public blockchain protocol is fully open to anyone to conduct transactions on the network it supports. If the transactions are valid and confirmed by the consensus network, they will be added to the blockchain.
Anyone can use a block explorer to survey the blockchain and read the transactions on it. While the transactions are transparent, those who made them are still anonymous. Only way to identify one person’s transactions on the blockchain is to know their actual address, which is impossible to find out without direct access to their wallet.
A key condition that comes with a public protocol is that the system is permissionless, as no one needs a permission to participate in it. The system is totally decentralized; everyone can become a part of it and abandon the currently active centralized business models. The infrastructure and manpower costs that come with centralized models are radically reduced and are distributed across the entire network.
Currently there are several modern, public, Proof of Work based protocols that are open source and permissionless. As noted before, Bitcoin was the first permissionless blockchain protocol which was created to enforce an open, peer-to-peer system of exchanging value whose rules aren’t dictated by a centralized intermediary like a bank, but are decided on by a general consensus of the entire network. Ethereum is another public protocol that is enforced with a virtual machine which allows its users to build and run their own decentralized applications based on smart contracts (besides using Ethereum as a currency for payment). Anyone can develop a decentralized application (Dapp) on Ethereum; all they need to do is own some Ethereum which will be used as their network gas, or the fuel for running their software programs. While both of these are public protocols, if compared to real life machines Bitcoin would be comparable to an adding machine while Ethereum would be comparable to a computer.
For all their qualities, public protocols aren’t exactly flawless. Their main issue is that they are slow. As each transaction needs to be verified a certain amount of times before becoming a part of the blockchain, increases in number of transactions can bring down the memory pools used to store the unverified ones. Bitcoin’s blockchain, for example, has a 10 minute block creation and 1mb block size rules which force the protocol to limit the amount of transactions that can be verified through a single block addition cycle. Due to this, some transactions get stuck in non-verified limbo for a while, limiting the user liquidity and satisfaction. The block creation process itself is Proof of Work based and comes with large computation and electricity expenses. These protocols can also run into memory issues. After a while, the blockchain will become quite large and will require multiple gigabytes of storage space.
Unlike their public counterparts, private blockchains are identified by the fact that they utilize a permissioned access system and are controlled by centralized organizations. Think of a private blockchain as lacking the characteristics which defined public blockchains. Private blockchains enable the companies behind them to keep the blockchain write permissions, while allowing for various degrees of availability for the read permissions. In the words of the creator of Ethereum, Vitalik Buterin: “Essentially, instead of having a fully public and uncontrolled network and state machine secured by cryptoeconomics (eg. proof of work, proof of stake), it is also possible to create a system where access permissions are more tightly controlled, with rights to modify or even read the blockchain state restricted to a few users, while still maintaining many kinds of partial guarantees of authenticity and decentralization that blockchains provide.”
The ways to become a part of this protocol are various, from existing participants nominating future entrants to having a predetermined set of steps a user must complete for their access rights. Once an entrant satisfies the rules in place he will become a part of the network and will play a role in maintaining the blockchain in a decentralized manner.
The security risks that come with these centralized protocols are far greater than with public ones. A breach in the centralized network, a single malicious player joining could disrupt the validity of the blockchain and endanger the functionality of the entire network. There is a clear lack of the game theory-based incentive mechanisms which secure decentralized networks.
Private blockchains have some advantages over public ones, namely in terms of scalability and compliance with regulatory requirements. They come with reduced transaction costs, lower chance of having “double transaction” issues, simplified data-handling and better automation. They are faster and are basis for creating decentralized support networks for centralized corporate entities. Private blockchains are mainly applied in database management auditing, voting etc., meaning that they are suitable for processes which are internal for the company and shouldn’t be accessible to the general public. Examples of private blockchains include Monax, Multichain, Corda or Hyperledger Fabric.
Sometimes we see people mention (and companies utilize) a subset of these private blockchains called federated or consortium blockchains. These networks function by having the consensus mechanism predefined by the leaders within the network. A good example of a federated blockchain based network would be a scenario where a group of financial institutions want to transact with each other, such as LIBOR. The consensus mechanism is defined so that 8 out of 12 banks are required to approve the transaction for it to become valid. These types of blockchains are similar to private ones, but are simply working with on a larger scale. This also makes their vulnerabilities pop out more, as a federated blockchain where banks decide to collude on malicious activity (for example wiping out eachothers debt data) could expose the centralized protocol’s security vulnerabilities and affect many more people than in the case of a single company doing something similar.
Throughout the previous writing we pointed out some key differences and similarities between the main types of blockchain out there. Whilst private blockchains are more private, they are also extremely centralized which limits their ability to maintain the integrity of their blockchain protocols. They are very vulnerable to being hacked or altered by malicious players within the network. They are faster, their upkeep is dealt with centrally and are easier to comply with regulation. Public blockchains on the other hand re maintained by a fully decentralized network of people with sufficient computing power. They are fully transparent and offer anyone a chance to explore their contents. They are at the same time slower and harder to place under the governments regulatory arm. Even though public blockchains were what Satoshi Nakamoto originally envisioned when he created Bitcoin, decentralizing the information to the extent public blockchains do can potentially lead to criminals and malicious actors taking notice and exploiting the system for unfair gains.
No matter what kind of blockchain we use, we can be certain that every blockchain will always be a decentralized peer-to-peer network that stores its data on a ledger. Every blockchain will always have a consensus protocol and will provide guarantees that its data is permanent and immune to external deletion or change. Finally, it’s safe to say that blockchain will be the an important part of our future and will soon, directly or indirectly, influence every part of human enterprise.