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Public blockchains, like Bitcoin and Ethereum, have received a lot of the spotlight in the world of blockchain technology. Reaching these frontiers would have been impossible without the backing of these decentralized, permissionless networks enabling finance, governance, and data management.
However, there is another type of blockchain technology that is equally important but often overlooked: private blockchains. Alternatively, they are sometimes referred to as permissioned blockchains that take a different tack toward decentralization, trust, and privacy.
Public blockchains are open and anyone can join in the game, while private blockchains have limitations to a very closed set of players or organizations.
The biggest advantage they have over the others is this key difference, which makes them much better suited for several different enterprise use cases, from supply chain management to healthcare data sharing to banking and finance.
In this article, we will explain private blockchains- what they are, how they operate, their benefits, disadvantages, and some real-world usages.
What is a Private Blockchain?
A permissioned network is a private blockchain. Unlike public blockchains, where we can join the network, even prompt others to join, participate in validating transactions, and add to the ledger, private blockchains are controlled by an entity or group of entities.
You can only get access via an invitation, and the network’s admin(s) dictate who can participate, read, or write to the blockchain.
The use of many of the same principles by private blockchains-decentralization, immutability, cryptographic blockchains-decentralization – speaks to that. But they also blockchains-decentralization they are faster, more efficient, and provide much better control over data privacy and governance.
Key Characteristics of Private Blockchains:
1. Permissioned Access: In a private blockchain, the participants are known and need to be given admission by a central authority or group of organizations. In stark contrast to public blockchains which anyone can join.
2. Centralized Control: Although the blockchain itself is decentralized by design, perpendicular to this, the permissioned model implies that some aspects of governance (i.e, who can participate or make decisions) are centrally defined or agreed to by a trusted community.
3. Faster Transactions: Private blockchains can handle transactions quicker and with higher efficiency than public blockchains since the number of participants is smaller and is limited. For applications that have a high throughput, it is particularly beneficial.
4. Data Privacy: On private blockchains, participants will have more control over who can view which data. This is a very important level of privacy if your business or enterprise is dealing with sensitive information.
5. Customizable Consensus Mechanisms: Contrast this to public blockchains that have to use energy-expensive consensus algorithms like Proof of Work (PoW) whereas private blockchains have the capability to deploy lighter-weight consensus schemes like Practical Byzantine Fault Tolerance (PBFT) to get to consensus faster and on the cheap.
How Do Private Blockchains Work?
Much like a public blockchain, a private blockchain is a distributed ledger. But it’s much more tightly controlled in private blockchains. Here’s a step-by-step look at how private blockchains generally work:
1. Participants and Access Control: Private blockchains involve only authorized participants (organizations, individuals, or entities) in participating in the network. Parts of these participants could require them to pass through Know Your Customer (KYC) or anti-money laundering (AML) checks, based on the use case and industry.
2. Transaction Creation: Transactions are created on the network by participants, either transferring assets, recording information, or beginning a contract. They’re broadcast out to the network for validation.
3. Validation and Consensus: The consensus is obtained through Proof of Work or Proof of Stake in a public blockchain by things like miners or validators.
In a private blockchain, however, a predetermined set of validators will take care of the consensus process. Depending on the design of the blockchain, an algorithm such as PBFT, Raft, or some other lightweight consensus protocol. These consensus methods are generally more efficient and faster than public blockchain protocols.
4. Block Creation: Blocks are formed when a transaction is validated, and once a transaction is validated it is grouped with other transactions to create a block. Once this block is created, the validators append this block to the blockchain because it ensures that data is immutable.
5. Privacy and Data Control: Unlike public blockchains, a private blockchain gives more control over who can see or write data. Permissions can restrict sensitive information to specific parties for blockchains, making them perfect for enterprise use cases.
6. Governance: The network’s administrators or a consortium of stakeholders typically govern a private blockchain. The network also deploys them to decisions over network upgrades, rule changes, and other important governance issues so that the network is run as efficiently as possible and according to agreed-upon protocols.
Private Blockchains Advantages
Private blockchains are the preferred option for businesses, organizations, as well as enterprises that wish to utilize blockchain technology in a controlled and secure manner. Below are some of the main benefits:
1. Improved Efficiency and Speed
A private blockchain moves transactions faster than a public blockchain. Private blockchains also have a smaller group of participants, so the consensus mechanism typically involves less computation, and for this reason, they can handle a much higher volume of transactions at much lower latency.
For instance, Bitcoin can take up to 3-7 transactions per second (TPS), Ethereum does 15-30 TPS, but private blockchains can easily pummel up to 1000s of TPS, subject to the network configuration.
2. Enhanced Privacy and Data Control
Data access control is one of the most important features of private blockchains. Business information can be made sensitive and allowed to be shared with only those who need to see it.
Private blockchains offer a different level of privacy compared to other public blockchains; for example, you can control which information is visible or not, preventing confidential business data from getting into the hands of unauthorized parties.
Here, as an example, private blockchains serve the purpose of control and compliance as much as public blockchains in those industries where privacy laws like HIPAA and GDPR dominate, such as healthcare or finance.
3. Customization and Flexibility
Because private blockchains provide more freedom in governance, consensus process, and network design than public blockchains, they are often more flexible with the use cases that are possible.
The blockchain’s rules can be customized to organizations’ needs, for example, by adopting a faster consensus algorithm or a different way to deal with transaction fees.
4. Lower Costs
As private blockchains don’t need the expensive energy-consuming procedures of public blockchains (such as Proof of Work mining), they usually require lower operational costs. Private blockchains tend to be less expensive for businesses since they use fewer actors and have a lighter-weight consensus mechanism.
5. Regulatory Compliance
A more suitable industry for private blockchains is when regulators may be requiring compliance. As accessible and participants are known, these blockchains can be better designed to fulfill the necessities of KYC (Know Your Customer), AML (Anti-Money Laundering), and GDPR (General Data Protection Regulation).
Private blockchains are therefore a more attractive option when their financial institution, healthcare provider, or any other regulated industry has to manage sensitive information.
Private Blockchains in Real-world Use Cases
Across industries where trust, efficiency, and privacy are key, private blockchains are being adopted. But let’s look at some real-world examples of how private blockchains are used.
1. Supply Chain Management
Supply chain management is well suited for private blockchains, as tracking goods’ provenance and product authenticity, as well as being more transparent, are all required.
Companies like IBM and Walmart have created a private blockchain network called Food Trust, which traces food products from farm to table. This assures product safety and authenticity, curbs fraud, and expedites the process of fast product recalls when and where due.
A private blockchain enables supply chain participants (farmers, suppliers, distributors, and retailers) to share securely the origin, status, and movement of goods data. This helps accountability and decreases the risk of fake products entering the product market.
2. Banking and Financial Services.
Banks, financial institutions, and ‘big players’ are starting to use private blockchains to speed things up, including payments, cross-border transfers, and securities trades.
For instance, the private blockchain built on Ethereum, JP Morgan’s Quorum, was created to serve as a secure and high-speed method of facilitating financial transactions between banks.
It is important to note that through the use of private blockchains, such financial institutions can execute their transactions in a more secure manner and at cheaper costs as compared to existing systems. Besides, it offers clients more protection since only the involved parties in the transaction have access to the information.
3. Healthcare Data Management
Taking into consideration that the healthcare industry operates with patients’ information, they need privacy. The data on the patient’s record or individual’s medical history is stored on private blockchains, whereby only the name doctor, healthcare provider, or patient alone can access the data.
This is not only more efficient than the traditional systems, but it also enables healthcare providers to meet data protection laws such as HIPAA.
For instance, Medicalchain is a private blockchain application that can be used by doctors to store patient records, and at the same time, the patient is the owner of their records. It means that the medical records of patients can be shared from one healthcare system to the next without a lot of fuss.
4. Voting Systems
Ultramodern variants of the conventional blockchains, known as the private blockchain, are being considered in reference to safe and reliable voting systems. In countries where the problem of election fraud is acute, the use of a blockchain-based voting system allows eliminating this problem.
Voatz is a private blockchain-based mobile voting application through which any citizen can vote in an election while the safety of their vote is assured. Because the blockchain stores each vote and enables users to vote right from the blockchain, it is almost impossible to manipulate the results.
5. Intellectual Property Protection
Protection of an artist’s work or any other creator–that has become one of the central questions of the modern world, especially focusing on the internet era-deservedly can be called an essential topic of the given field of studies.
Private blockchains can be employed to securely manage the registration, tracking, and protection of people’s IPR. This can have a view to guarantee rational remuneration to the artists and avoid illegitimate copying or distribution.
Challenges of Private Blockchains
While private blockchains do have many advantages, they aren’t without their limitations. Some of the key issues include:
1. Centralization Concerns
Although private blockchains are structured and decentralized, they remain centralized as the control of access, governance, and decision-making reside with a small group of participants. If that happens, it can undermine some of the decentralization benefits at the heart of blockchain technology’s ethos.
2. Lack of True Trustlessness
Due to the fact that private blockchains rely on trusted participants and administrators to validate transactions, private blockchains are lacking the kind of trustlessness that public blockchains have. That means the participants have to trust that the entities are running the network.
3. Interoperability
Private blockchains are often purpose-built for certain use cases and are not so easily interoperable with other blockchains. This degree of interoperability also limits their ability to communicate with other blockchain networks or traditional systems.
4. Security Risks
Private blockchains tend to be more secure than public ones in part because there are fewer participants but they are still vulnerable to insider threats, insider attacks on the central entities of the network, or a central breakdown. However, such risks can be mitigated with proper security protocols and governance frameworks.
Conclusion
Private blockchains are an attractive alternative to public blockchains for businesses and industries where privacy, control, and efficiency are important.
They certainly have their own concerns, but their capacity to simplify processes, secure data, and provide regulatory support makes enterprises love their use cases. The uses for private blockchains go from supply chain management to banking to healthcare.
However, as blockchain technology matures, we can expect to see more organizations exploring the option of private blockchains because they offer the exact requirements needed within their space while keeping the benefits of having distributed ledger technology.
Private blockchains are a useful tool for businesses that want to strike the balance between the decentralization benefits on the one hand and control, on the other.