Private chains vs public chains: Can the two coexist?

The term blockchain has recently reached a new level in the history of the financial industry. Not since the invention of double-entry bookkeeping in the 13th century has a term had the potential to change the world like blockchain.

Sharing a ledger among different participants and decentralized management to keep everyone honest are the spirits of blockchain that no one can deny. These ideas are unique and unprecedented, and they will soon shine in the international community. From Ms. Lagarde, the president of the International Monetary Fund, to Mr. Mark Walport, the chief scientific adviser of the United Kingdom, to Janet Yellen, the chairman of the Federal Reserve, the highest financial authorities on the planet are all eager to use this technology. Even people like Jamie Dimon, the CEO of JPMorgan Chase, who once sneered at Bitcoin, have begun to rethink and issued statements saying that new things can be learned from blockchain technology.

However, the biggest advancement in blockchain technology is the private blockchain (private chain) derived from the public open blockchain (public chain), and people in the financial professional field are looking forward to the latter.

Defining a blockchain

A blockchain, in simple terms, is a corruption-resistant ledger that is shared by all participants in the same network. Without going into further details, it is difficult to imagine the specific uses of a blockchain. Is there anything that a blockchain can do that a SQL database cannot? There are not many such things, and the execution speed of a blockchain is much slower than that of a SQL database. But in summary, blockchain has two unique advantages: corruption resistance and redundant reliability.

All blockchains have these advantages and disadvantages. These advantages and disadvantages depend on how people deploy the blockchain, and sometimes these advantages may be minimized. For example, if you deploy fewer nodes, your network will not be very redundant and reliable. These advantages and disadvantages take on different forms when you choose a public chain or a private chain.

Advantages of public chains

There are many examples of public blockchains, such as Bitcoin, Ethereum, Hyperledger, and most competing coins, which are accessible to anyone with a computer connected to the Internet.

Ripple is technically a public blockchain, but interestingly, although it is based on a public structure, it centrally controls the ownership of the currency in its network, and its software is not open source. The benefits of decentralization are completely lost due to its closed nature, and any changes to its owner, Ripple Labs Inc, will harm the network.

Like Bitcoin, although the participants' IDs are anonymous, the data on the blockchain is public by default. This openness and the advantages it brings are unprecedented, such as the ability to resist attacks and the ability to resist authoritarian capital control. It is open and transparent while ensuring security, and all participants' account balances and all transaction records can be seen by people. Until now, we still find it weird because this method of ensuring security is so new, but in the 7-year history of Bitcoin, no one has actually broken this security. However, the cost of gaining such advantages is huge. In order to deploy such a network, the bandwidth of participants is reduced, making data transmission between participants slower, because all participants have to back it up.

In contrast, private chains use an ancient model to protect user rights and security. This model has made people feel at ease since the invention of the world's first lock. Fewer people know your database, so this model is safer. If you don't want to share your data with others, this model is better. But throughout history, there are countless examples that prove that this model is likely to fail. Keys can be designed very smartly, but there are always smarter hackers (or internal thieves).

This is not just about the content on the blockchain, but also about the rules that govern it. The more private chains there are, the more the rules governing the blockchain will change.

Simple user permissions ensure the security of private databases, and the combination of cryptocurrency economy, cryptography and economic incentive mechanisms ensures the security of public chains. Since different organizations and different users have different needs for their networks, it is difficult to say that one method will win over another. They each have their own appropriate position, and they have misunderstandings about their respective definitions, so the controversy over their value continues.

Safety time tells everything

The key to this question is whether private chains can be secure in large-scale value applications. No hacker is interested in your blockchain for playing bingo in nursing homes. However, if you transfer millions of dollars on your blockchain, it is equivalent to launching a hackathon, and the winner can take the million-dollar grand prize.

Public chains have encountered more such tests than private chains, and the Bitcoin blockchain has been subjected to incredible tests. It is the only blockchain that has withstood such tests and still ensured security. In 7 years, the Bitcoin network currently has a potential value of $6.7 billion delivered every day, and hackers are helpless against this. Private chains obviously cannot guarantee such security.

This is why Paul Chou, Bitcoin consultant to the U.S. Commodity Futures Trading Commission (CFTC), has a lot of complaints about non-Bitcoin blockchains. "Many proposals use blockchains, but blockchains without Bitcoin are going the wrong way." Chou said in an interview with New York Business Weekly, "They are going further and further down the wrong path, and they are crossing the river by feeling the stones." Chou is a former quantitative trader at Goldman Sachs and is currently the CEO of LedgerX, a startup on Madison Avenue in New York. His goal is to establish "the first Bitcoin futures exchange and clearing house licensed by the U.S. federal regulator, which provides collateral clearing, physical delivery of Bitcoin options and other services to the institutional market." He uses the time when he is not in the city center to provide consulting services to the CFTC to work towards this goal.

Bitcoin’s Unificationism

This philosophy is based on a long-term bullish vision for Bitcoin, and is prevalent among early Bitcoin users and those attracted to the economic promise of Bitcoin. It is called "Bitcoin Unificationism," a term coined by Ethereum founder Vitalik Buterin, which means that Bitcoin will eventually dominate, and secure blockchains will crush other blockchains and ultimately other currencies.

This concept exists in both computer science and economics, and is known as the "network effect". A network or protocol pioneer has a strong power to exclude its competitors, and it has never failed. Whether the concept of Bitcoin's grand unification is applicable to Bitcoin, or whether it is just too silly and naive, remains to be proven by time. However, one thing is clear, that is, there are some unique advantages of public chains that private chains cannot provide.

Unique advantages of public chains

For example, the public chain is a transparent engine. Vitalik Buterin published a blog post in August last year, "Private Chain and Public Chain", in which he pointed out: "The public chain protects the users of the application from the developers of the application. There are some things that even the developers of the application have no authority to implement." A good example is that social networks or other membership websites will lose their users when their owners change the rules. Fortunately, Facebook notifies users when making changes, and only some users are affected. Otherwise, if they do not honestly announce the changes to the rules, then users need a public chain based on their rules.

Buterin also mentioned that different organizations using the same blockchain will increase this network effect, not only can it increase the popularity of this blockchain through the promotion of different organizations, but it can also effectively reduce operating costs. Buterin said: "If we integrate the domain name resolution system into the blockchain and integrate a currency into this blockchain, then we can reduce the operating costs to nearly zero through smart contracts."

Public blockchains have other advantages, which are still controversial compared to private blockchains. Bitcoin spokesperson Andreas Antonopoulos gave a popular demonstration, comparing private blockchains to company intranets. The name of the video is "Bubble Boy and House Mouse" (http://www.youtube.com/watch?v=810aKcfM__Q House Mouse represents Bitcoin, not a derogatory term.) Antonopouloss said that in fact, businesses are already using private blockchains, but they have the same limitations as company intranets, including some security issues.

The problem with private chains is that they create an environment where malware is dominant, so security becomes an inherent problem, and it can sometimes completely take over your network. Antonopoulos strongly agrees with the point made by Chou that transferring value between different entities still requires a public chain, and currently, this public chain is the Bitcoin blockchain.

Advantages of private chains

Of course, private chains still have advantages in some cases. First, the transaction speed of private chains is faster than other blockchain solutions, and even close to non-blockchain traditional databases. This is because there are fewer nodes and the trust level of each node is high. It is not necessary for each node to verify each transaction. In fact, because almost every node of them is trustworthy, some sophisticated procedures are not necessary.

Secondly, the privacy protection on the private chain is obvious. The data privacy protection strategy on this private chain is very similar to that of traditional databases; there is no need to deal with access rights, and it can be managed using traditional methods. At least this data is not accessible to anyone who has access to the Internet.

Third, private blockchains can achieve completely free or very low transaction fees. If there is one entity that controls all of the processing of transactions, then they have no reason to charge fees in this way. Even if transactions are controlled by multiple entities, such as competing banks, they have the same reason to keep transaction fees low. Complete consensus between nodes is not necessary, so only a few nodes are needed to process each transaction.

Finally, and perhaps the most important reason why banks are happy to embrace private blockchains is that choosing private blockchains can prevent their current service products from being destroyed. Banks and governments have a vested interest in their products, especially that the national fiat currencies they trade in retain their value. Since the best application of public blockchains is secure non-national currencies such as Bitcoin, this is of course a threat to their core interests, and they will avoid this at all costs.

Customized private chain

In fact, there are already many private chains deployed, far more than you can track. Companies like Deloitte's Rubix, Eris Industries and AlphaPoint's Streamcore are all providing holistic blockchain solutions to commercial companies, and enterprises like Microsoft have begun "Blockchain as a Service (BaaS)" business, and it has also packaged private chain nodes into "quick start paradigms" stored in the Azure cloud service. Whether it is deploying a private chain or a public chain node, it is very simple for Azure members. It is now possible to test a blockchain and discard it after an hour. Finally, there is desktop routing, which can deploy a private chain on your desktop computer. In the Windows environment, you can use the Multichain tool to achieve this function. Use it to quickly design, develop, and operate a private chain to customize it to your specifications.

Moreover, larger scale organized projects like the consortium blockchain to be launched by R3 CEV, or SWIFT’s own solution, are still getting all the media attention and glory despite being in the development stage. If Bitcoin monopolists are wrong in their expectations of Bitcoin becoming the global monetary standard, then one of these private blockchains used by a consortium of top banks will dominate the future of mainstream finance.