Satoshi Nakamoto’s Bitcoin protocol was the first to successfully apply the concept of a distributed public ledger to peer-to-peer transactions. In line with the decentralized nature of the technology, Nakamoto released the protocol as open source meaning anyone could take the protocol, modify it and their own p2p transaction network. As new ideas came to the space, users began to find applications for blockchain technology outside of the p2p money use case. This article will look at how these different applications fall into one of two categories, and what is the difference between them: Public Vs Private blockchain protocols.
Public protocols are open source and permissionless, allowing anyone to participate or benefit from the technology. Ethereum is one such public protocol that allows for users to build and run their own smart contracts without building their own ecosystem. Anyone can develop a decentralised application (Dapp) on Ethereum so long as the purchase some Ether to use as GAS, this is like the fuel needed to run their software programs.
Unlike public protocols, private blockchains require permissioned access and operate under the guises of a centralised organisation. The entry control procedures can vary from giving existing participants power to nominate future entrants to having a predetermined set of steps a user must complete for their access rights. Once an entity has joined the network, it will play a role in maintaining the blockchain in a decentralised manner. Since the system relies on internal participants to verify transactions there are not the same game theoretic incentive mechanisms in place to secure the network. Private blockchains are more efficient in terms of scalability and compliance with regulatory requirements but are vulnerable to network manipulation due to the centralised governance.
A subset of the private protocol are federated or consortium blockchains. The consensus mechanism is predefined by the leaders within the network. As an example, imagine a scenario where a group of financial institutions want to transact with each other, such as LIBOR. The consensus mechanism may state that 8 out of 12 banks must approve the transaction for it to be valid. Similar to private blockchain, consortiums are often faster, more scalable and offer greater transaction privacy then public blockchains.
Whilst private blockchains keep information from being seen by the general public, they also rely on their limited private networks to maintain the integrity of the blockchain protocol itself. Essentially this means that the blockchain is more vulnerable to being hacked or altered by those within the network. This is especially concerning for federated or consortium blockchains where colluding banks may alter information within their internal networks, such as debt obligations between them. Public blockchains on the other handcan be maintained by anyone with sufficient computing power to do so and allow for full transparency of the information they contain. Public blockchain protocols were the original concept that Satoshi Nakamoto created, decentralising information to limit the potential for nefarious acts.
Photo via Shutterstock