Private blockchains prevent non identified parties to monitor the network. Find their differences with public blockchains.
There are many misconceptions between the meaning of a public network and a private network. These include whether everyone always sees transactions in an open network or whether a permissionless system is a synonym of a private blockchain.
This article defines both public and private blockchains and focuses on the several differences with permissionless and permissioned networks. Besides, the differences and similarities between public and private systems are analyzed to define what type of blockchains makes the most sense to cater to your needs.
A public blockchain is a network that allows users to operate full nodes on its network, without any restriction, nor requirement such as KYC.
In public blockchains, third parties can join the network and synchronize nodes to obtain the entire set of transactions from the network, without any pre-required approval. Bitcoin and Ethereum allow anyone in the world to run a full node on Bitcoin and synchronize the entire blockchain history.
In a public blockchain, while full nodes are not used to organize and validate transactions in a block (" mining"), they are useful to broadcast transactions to other nodes. Hence, the higher the number of full nodes, the more secure a distributed network becomes. In addition, running a full node also contributes to the decentralized property of a public blockchain.
Typically, most public blockchains are permissionless. Any individual can attempt to become a validator without any restriction except software and hardware (for PoW blockchains) and balance requirements (for PoS blockchains).
However, differences lie like their network, i.e., at the protocol level. A public network always allows anyone to access the complete history of the blockchain since its inception. Still, it does not necessarily enable individuals to become participants in consensus without having their identity verified (permissionless vs. permissioned environment).
A private blockchain is a network that does not allow users to operate full nodes on its network.
While an approved entity operating nodes on a private blockchain could display real-time activity on its network to third parties, no individual is allowed to run a node to synchronize in real-time the transactions from a private blockchain. This prevents third parties to validate independently the accuracy of the information running on the network.
An example could be a private blockchain serving to settle payments across clients from two financial institutions. Let's assume Alice (bank X) transacts to Bob (bank Y) to transfer 250 USD. Alice can rely on the figures provided by her bank about her account to make sure the transfer to Bob has been completed.
A permissioned system relates to who has the "right" to operate the network, i.e., whether only certified/approved parties can attempt to become a validator.
While most permissioned blockchains are private, some exceptions exist. For instance, the POA Network allows users to run a full node. Yet, it is a permissioned network running a Proof-of-Authority (" PoA") consensus algorithm, where each network validator is a certified notary in the US.
Some blockchains are public, yet with built-in privacy features. Designed as alternatives of Bitcoin for its function of being a "means of payment", these cryptocurrencies are referred to as privacy coins. The most notable of them are Monero ("XMR"), ZCoin ("XZC"), and ZCash ("ZEC").
Anyone can operate a node on the networks and participate in the consensus (e.g., "PoW", "PoS") for privacy coins. Their respective architecture is constructed so that third parties can't decrypt the relationship between the sender and the receiver, and information about balances for each participant.
Similarly, multiple layers exist for public blockchains to provide privacy. For instance, Tornado Cash on Ethereum allows users to break the links between addresses, and CoinJoin also allows obfuscating the transactions on the Bitcoin blockchain.
However, a private blockchain, despite requiring participant identities to be verified, can also offer privacy. For instance, Quorum is a permissioned network built as a fork of the Ethereum source code that features a privacy manager and on-chain private transactions. This allows breaking the links between the sender and the receiver from the perspective of third parties and encrypt the transaction output (e.g., additional sensitive information added to the transaction).
In this section, we broke down differences & similarities between permissionless and permissioned blockchains in regards to ten different points.
|Consensus||Proof of Work (”PoW”)/Proof of Stake (”PoS”)/Proof of Authority (”PoA”)||Proof of Authority (”PoA”)|
|Decentralization?||High to low||Low|
|Distributed?||High to low||Low|
|Scalable and fast||Fast to slow||Fast|
|Energy consumption||High (”PoW”) to low (”PoS”)||Low|
|Network governance||On-chain/distributed or with central operators||Central operators only|
|Needs a token?||Yes||No|
|Permission attributes?||Permissionless or Permissioned||Permissioned|
Blockchains were originally meant to be public and fully transparent for everyone, as illustrated by Bitcoin and Ethereum. However, privacy requirements have led to the growth of enterprise-focused distributed ledger solutions that were fully private. Initially, the primary rationale was that no enterprise would want to store sensitive information on a public network where anyone could access it.
However, in practical terms, private blockchains have a limited scope. For instance, any distributed ledger with at least two enterprises would require at least some privacy, leading to privacy requirements at the transaction level.
As an extension, private blockchains are always permissioned networks (while the reverse is not true) and allow higher transaction output while being often more scalable than permissionless networks.
For any enterprise use-case that would involve any other party that cannot be trusted, the use of privacy managers and confidential layers remain a central aspect that needs to be implemented (e.g., Quorum's privacy manager).
Recently, the growth of hybrid networks, the use of second-layer solutions on public permissionless systems, and other corporate solutions like the Baseline Protocol, seems to indicate an underlying trend toward leveraging the core properties of open networks (e.g., distributed & decentralized) as the base layer to create more specific applications on top of it.
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