Private and public blockchains: Is there room for a win-win situation for both parties?

The term “blockchain” has reached new heights in financial history, and double-entry accounting, the computational method that keeps our world moving at breakneck speed, has not been seen since it was invented in the 13th century.

Few would deny that the core of blockchain; the concept of decentralized shared databases shared by multiple parties, where everyone is confirmed, is revolutionary and will soon become more useful in our global society. Most of the world's top financial institutions paid little more than lip service to blockchain last year, from IMF Director Lagarde to UK Chief Scientific Advisor Mark Walpert and US Federal Reserve Chair Jenny Yellen. Even some who were staunch opponents of anything to do with Bitcoin, such as JPMorgan Chase CEO Jamie Dimon, have now reiterated that there is much to learn from blockchain technology.

However, the biggest advances in blockchain technology have been built on the strengths of public; “open” blockchains, while many in the sophisticated financial world seek private, “permissioned” blockchains.

Definition of blockchain

At the simplest level, a blockchain is just a corruption-proof ledger entry that can be shared by multiple parties on a network. Without further definition, it is difficult to imagine what the specific use of blockchain is. What can blockchain technology do that we cannot do with database technologies such as SQL? In fact, it can't do much, and it may even be slower than SQL databases. All the advantages derived from the basic blockchain technology can be summarized into two points:防腐败and信息冗余.

All blockchains have their pros and cons, but depending on how they are implemented, the pros can be easily minimized. For example, if you configure too few nodes, the network will not be very redundant. The pros and cons start to increase when you choose to deploy a private or public chain.

Advantages of public blockchains

Public blockchains, including Bitcoin, Ethereum, Hyperledger, and most altcoins, are accessible to anyone with sufficient technical skills, that is, anyone with a computer and an internet connection.

Ripple is technically a public blockchain, but is unique because it is built on a public architecture but has private ownership of its underlying currency and closed-source software. Whatever it gains through decentralization, it will eventually lose due to its closed nature. This could hurt Ripple Labs as it makes changes.

All data on public blockchains is public by default, although it is common for all participants to hide their true identities, such as in Bitcoin. They generate their own security through their public nature, where every participant can see all account balances and all their transaction activity. This approach still strikes us as strange because we are new to this way of constructing security, but in the seven years of Bitcoin's existence, no one has found a feasible way to surpass this security. Unfortunately, the cost is not always equal to the benefit. Arranging the network in this way can reduce the bandwidth of all parties involved. Small amounts of data will move slower in the network because it must be replicated by all parties involved.

Meanwhile, private blockchains are protected by user rights and privacy through an ancient model that we have become very comfortable with since the first lock was created. The fewer people who know your data, the more secure your model will be. This mechanism works very well if you don't plan to share it with others, but throughout history, we can find countless examples of how this mechanism did not guarantee security. The key can be designed very well, but there will always be a hacker who is smarter than you. (Or someone is acting as an insider in the mechanism)

This is not only for the content of the blockchain, but also for the rules that govern it. The more private a blockchain operates, the more likely it is that the rules that govern it will be modified.

(While ordinary users manage the power of encryption for private data, cryptoeconomics, a discipline that mixes cryptography and economic incentives, has emerged as a way to secure public blockchains. Because different institutions and users have different goals when using the network, it is unlikely that one approach will prevail over the other. Both encryption methods have their place, although misunderstanding of their respective roles is common, so the question of their respective value is still a subject of debate.

Time will tell about safety

The crux of the matter is whether private blockchains can ever be secure enough to be exploited by systems that hold enormous value. No hacker is going to attack your blockchain if you are just using it for fun. However, if someone in the world now finds out that there are millions of dollars worth of rewards flowing through your blockchain, you can simply launch the latest hackathon event with millions of dollars in prize money, and the winner takes all.

It seems that public blockchains need to prove themselves more useful than private blockchains, but the Bitcoin blockchain has been tested under tremendous pressure. Only one that has been well tested and kept secret from hackers has become too powerful for all hackers to break in seven years, and "permissioned" blockchains do not need to be so heavily encrypted.

That’s why Paul Chow, Bitcoin Advisor to the CFTC, said he has very little interest in non-Bitcoin blockchains.

“Many of the proposals for using blockchains other than bitcoin are very misleading,” Zhou told the New York Business Journal. “Perhaps incredibly misleading, and also unproven.”

Zhou, a former quantitative trader at Goldman Sachs and now CEO of LedgerX, a blockchain startup based on Madison Avenue in New York, is spending his time building what he considers to be “the first federally regulated bitcoin options exchange and clearinghouse to list and clear fully collateralized, physically settled bitcoin options” for the institutional market when he’s not advising the CFTC on bitcoin in its offices downtown.

Bitcoin Maximalism

This view, especially in the long term, is common among early adopters of Bitcoin and those attracted to the economics of Bitcoin. This is known as "Bitcoin maximalism," a term coined by Ethereum founder Vitalik Buterin. The idea is that the Bitcoin blockchain will eventually become the only dominant one, ultimately protecting it and crowding out other blockchains and other currencies.

This idea is based in computer science and economics. In various ways, this concept is called network effects, and it is extremely powerful for the first movers in a new network or protocol. It never has all the competition. Whether or not Bitcoin maximalists are correct in their use of Bitcoin or their naivety is exposed in time, it is clear that public blockchains offer unique advantages that private blockchains cannot easily achieve.

The unique advantages of blockchain

For example, a public blockchain is an engine of transparency. In his blog post “On Public and Private Blockchains” last August, Vitalik Buterin pointed out that “public blockchains establish certain rules to protect the privacy of application users, which even application developers do not have the power to manipulate.” Here is a good example of how users of a social network or other website members may suffer losses if the website owner changes their rules. Thankfully, every time Facebook makes a policy change within a few days, they notify the public and only those affected will be removed from the service. If they do not announce their changes openly and honestly, users will demand that the public blockchain be used as their base rule.

Buterin also mentioned that when multiple organizations use the same blockchain, such growth will benefit from network effects. Not only will it make the blockchain more popular, but multiple organizations will promote its usefulness, and it can also reduce operating costs.

“If we have a domain name system on a blockchain and a currency on the same blockchain,” he explained, “then we can use smart contracts to cut the cost down to almost zero.”

There are other minor advantages to Bitcoin, but there are strong arguments against the use of private blockchains. In his promotional presentation, Andreas Antonopoulos, the speaker at Bitcoin in Demand, drew a comparison between private Bitcoin and company intranets. In the video below, thoughtfully titled “Bubble Boy and Sewer Rats,” (hint: Bitcoin is a rat, but that’s a good thing). Antonopoulos argues that private blockchains are, in fact, being used in the business world today, but that with their emergence come the same limitations within companies, including security issues that should be considered.

Advantages of Private Blockchain

At the same time, there is no doubt that the advantages of private blockchains in certain situations cannot be ignored. First, a private blockchain can process transactions faster than any other blockchain, even approaching the speed of a regular database that is not a blockchain. This is because even a small number of nodes are highly trusted, and it is not necessary for each node to verify a transaction. In fact, they are all the most trustworthy, so there is no need to do all the tedious work.

Obviously private blockchains also give better privacy. This allows the data on that blockchain to have exactly the same privacy policy as it would on another database; no need to deal with access rights and all the old tricks, but at least the data is not publicly available to anyone with an internet connection.

Private blockchains allow for completely free, or at least very cheap, transactions to take place. If one entity controls and processes all transactions, then they do not need to charge fees for their work. However, even if the processing of transactions is done by multiple entities, such as competing banks, for example, fees can still be very small because they can process transactions so quickly for the same reason; full agreement between nodes is not required, so few nodes need to work on any one transaction.

Finally, and perhaps most importantly, banks can embrace private blockchains in the current environment. Choosing to use blockchains helps protect their fundamental products from being compromised. Banks and governments have a vested interest in guarding their products, and national fiat currencies used for international trade remain valuable. Since public blockchains are best used to protect new non-state currencies like Bitcoin, these entities should avoid damage at all costs if they pose a disruptive threat to core profit streams or organizations.