Blockchain technology has gained traction as a revolutionary and disruptive technology across several industry sectors. According to a report by Insight Partners, blockchain is projected to grow to be a $228 billion industry by 2028. While the technology was popularized by cryptocurrencies, specifically with the inception of Bitcoin in 2008, the utility of the technology renovates the way individuals and businesses store, manage, and transfer information in a trusted system. Recognizing the potential of the technology, businesses globally are starting to adopt blockchain to streamline processes and increase efficiency.
Contrary to popular belief, not all forms of blockchain technology are the same. In other words, there are types of blockchain networks, such as private and public blockchains. Both have their similarities, but they fundamentally differ in terms of accessibility, governance, scalability, and functionality.
Types of Blockchain Networks
Blockchain technology represents an innovative approach to information exchange. The technology is a distributed database or ledger shared among computer networks. Information is recorded on a series of blocks that are chained together chronologically.
Since the database is the only source of truth and is managed by a number of parties rather than a single centralized custodian, the blockchain safeguards data integrity. In a blockchain network, fraud and data tampering are prevented because data cannot be changed without the consent or approval of the blockchain networks’ nodes. This effectively ensures that every information exchange is entirely valid and trustworthy.
As blockchain is a distributed ledger that records information between participants, this technology has different uses that extend beyond financial applications, as seen with cryptocurrencies, to various industries. The technology democratizes procedures in every sector, from banking and real estate to supply chain management and healthcare, among many others, by placing transparency, inclusivity, security, and efficiency front and center.
However, how individuals and businesses use blockchain changes from context to the situation. For example, cryptocurrencies use a form of blockchain technology called public blockchains that is designed to be fully decentralized and transparent, allowing anyone to participate and view the transactions. On the other hand, the use of public blockchains could be considered impractical in situations where sensitive information such as health records ought to be stored in a confidential database of select users. In such circumstances, private blockchains are used among a specific group of participants who want to share information and collaborate without disclosing the data to the public.
Therefore, types of blockchain networks refer to different versions of blockchain technology, each with unique characteristics.
Public blockchains are the types of blockchains many in the web3 space have become familiar with. It is the popular distributed ledger structure brought to the limelight by its application in cryptocurrencies. Bitcoin and Ethereum represent the largest public blockchains.
A Public blockchain, as the name suggests, is a database accessible to anyone with an internet connection. In other words, data or information can be sent or received from anyone worldwide, anyone can execute consensus protocols, and anyone using the system can view and audit the data or information.
Public blockchain networks do not rely on central intermediaries or authorities to validate and verify transactions with the added functionality of no restrictions on who can participate in the network. This makes public blockchains decentralized and entirely distributed, offering an all-inclusive system for information sharing. Furthermore, public blockchains are frequently referred to as permissionless networks because they do not require consent from a centralized authority to participate in the network.
Security in a public blockchain is ensured through a amalgamation of cryptographic techniques (hashing and digital signatures ), consensus mechanisms, and economic incentives.
Users of a public blockchain can validate and verify transactions and add new blocks to the chain by participating in consensus protocols, such as Proof of work (PoW) or Proof of Stake. As long as specific requirements are satisfied, such as having the required hardware in the case of PoW or a certain amount of crypto assets in the case of PoS, anyone can take part in the consensus protocol as a miner or validator. Read this article for a deep dive into understanding consensus mechanisms.
Moreover, public blockchains economically incentivize individuals to participate in the consensus protocol to authenticate transactions. This not only adds security to the network but also encourages further decentralization.
In contrast to public blockchains, private blockchains are not available for anyone to access or participate in. Instead, these networks are permissioned, which means that only a particular group of users whom a central authority has given permission are allowed access to the network. In other words, users of a private blockchain require approval by the network administrator or owner.
Rather than placing complete inclusivity at the forefront, private blockchains prioritize confidentiality in a closed network. Therefore, businesses that need to collaborate with other entities securely and share data frequently use private blockchains. A supply chain business, for instance, might use a private blockchain to monitor the flow of goods and confirm their legitimacy while limiting access to only authorized parties in the process.
Private blockchains share certain similarities with their public counterparts. For instance, private blockchains use cryptographic methods and consensus mechanisms to offer network users similar transparency and immutability of information. Additionally, smart contracts can be used on private and public blockchains to automate procedures and facilitate transactions without the need for intermediaries.
However, the network’s governance model impacts the degree of decentralization in a private blockchain. For example, some private blockchains may employ a governance model in which a select few participants make decisions. In contrast, others may use a more distributed governance model in which all or most of the network’s participants engage in a consensus process. The introduction of Central Bank Digital Currencies (CBDC), a subject that has drawn much criticism, is an example of a highly centralized application of private blockchain technology.
Central Bank Digital Currencies will be marketed as better for the environment and the solution to all your financial problems. The truth is a CBDC will steal your freedom, your privacy and financial independence. It’s the nail in the coffin.— Marzell (@MarzellTrading) February 21, 2023
Buy and use #Bitcoin
Despite having features of a distributed ledger among authorized personnel, private blockchains are frequently perceived as being heavily centralized. This is because they go against the fundamental ethos of blockchain as an open and inclusive database of information for all.
Key Differences Between Private and Public Blockchain Networks
|Public Blockchain||Private Blockchain|
|Accessibility and Transparency||There are no restrictions on participation and viewability of the database on public blockchains. The network is open to the public.||Limited access and viewability is restricted to authorized personnel.|
|Governance||Permissionless governance. Completely decentralized and controlled by a community of users.||Permissioned governance. Controlled by a single authority or a group of authorized users.|
|Consensus||Typically use decentralized consensus mechanisms such as Proof of Work (PoW) or Proof of Stake (PoS).||Often use centralized consensus protocols such as Proof of Authority (PoA).|
|Scalability||Scalability challenges like slow transaction confirmation times and energy consumption can arise as the network grows and transaction volumes increase.||Highly scalable due to a restricted, smaller network and lower transaction volume.|
When we look at private blockchains through the prism of blockchain’s fundamental ideals of true decentralization, complete transparency, and censorship resistance, it is difficult to see permissioned blockchains as the promise of a disruptive technology that fosters trustless information exchange. From voting systems to charitable donations, transparency and trust are critical for a myriad of real-world applications in the digital age.
That said, private blockchains bring much-needed confidentiality for storing sensitive data, as seen in the healthcare industry. With their privacy, scalability, and speed, private blockchains have become a popular alternative to the well-known public blockchain and are viewed as solutions for businesses to streamline and safeguard processes. Therefore, both versions of the technology as they exist today provide practical solutions depending on their intended application.
With the development of new scalability solutions such as sharding, layer 2’s, and zero-knowledge proofs, public blockchains are poised for wider adoption. Only time will tell how the landscape of blockchain technology will emerge and be embraced.