Blockchain – the technology underpinning Bitcoin and Ethereum – is widely associated with decentralization. It is seen by many as means to eliminate banks (and other intermediaries) from transactions. And it’s believed to, one day, reshape completely the way our financial system works.
However, there’s much more to blockchains than one might think. The technology, famous for providing anonymity and protection for the common folk, can be of value for corporations as well. Although, in a slightly different fashion.
JPMorgan and Microsoft, have already thrown their multi-million dollar hats into the private blockchain ring.
Today, we are going to talk about private blockchains and how, when applied properly, they can streamline business processes and save money for companies in various industries.
Let’s get started.
As of now, all existing blockchains can be divided into three categories:
The key distinction between these networks lies in the way they are governed. Or rather, whom they are governed by.
Public blockchains (the likes of Bitcoin and Ethereum) are essentially everyone’s to control. They put out no entry restrictions. They permit everybody, save for those not connected to the web, to access and even manage the networks, provided that the validators deposit some internal or external resources into securing them.
What public chains prohibit, however, is one’s complete authority. No single entity can write to such a network’s history unless the nodes, who participate in the consensus process, decide the entry is valid.
The security, which public chains are most praised for, is achieved by clever application of crypto economics. They use algorithms such as Proof of Work and Proof of Stake to prevent malicious activities and offer financial incentives for miners (validators) willing to establish the protection.
They concern themselves above all with providing transparency and anonymity. They regard efficiency (and scalability) as features of secondary importance.
Consortium and private blockchains have a slightly different focus. They’re designed not to expose to the whole world the record of transactions which they store. And they are managed, much more effectively than their public counterparts, by a limited number of nodes.
Consortium and private blockchains are only different in one way. The former are governed by a group of corporations (say a consortium of banks), while the latter are maintained by a single firm. The purpose of these chains, unlike that of public ones, is not to reinvent the existing business processes, but to complement them.
Financial institutions and large-scale corporations alike can exchange assets using the blockchains technology, thus not having to pay an intermediary and having these transactions settled within seconds. They also might monitor the private peer-to-peer networks in real time, whenever they need to.
They are resilient. Blockchains are distributed record-keeping systems that have no single point of failure. The nodes of a private chain are not dependent on a central computer running it. Therefore, the chances of a system suddenly shutting down, due to an unforeseen error, are fairly negligible.
They are controlled. Those professing anonymity on public networks would rather tolerate chaos, which stems out of lack of regulation, than risk their privacy. Banks, on the other hand, will accept no shadiness. They need a clear governance model (not a rulership of some unknown miners) and an ability to change the protocol and revert transactions if that is ever necessary.
They are “members only” and thus efficient. As we’ve stated earlier, there’s no way to enforce who can transact on public blockchains; they are designed explicitly to let everyone in. But a large number of nodes, which are all far apart, hinder substantially the network’s agility. Private chains have a limited number of participants. Their capacity (i.e transaction throughput) is, therefore, much greater than that on public networks.
They have no native cryptocurrencies. Despite all the fanfare paid to cryptocoins over the last few years, they are still a shady asset. Their value is volatile, and banks, and other institutions that are subject to strict regulations want nothing to do with them. Corporations, too, won’t allow digital currencies to be listed on their balance sheets. And, fortunately, it’s not necessary to deal with them; not when a company is using a private chain. Instead, closed ledgers can be designed around issuance and movements of conventional assets. They can become an advanced tool – a way to modernize a firm’s existing business processes.
They are secure. Miners (or validators) aren’t anonymous on private blockchains. They are pre-selected by an organization(s) and, therefore, highly trusted. There’s little to no possibility of someone acting maliciously on a company-owned network and a 51% attack, which public blockchains dread the most, is completely out of the question.
They are cheaper. The transaction fees on Bitcoin are now at an all-time high (close to $20). And since there are way more transactions being submitted to the network than it can actually process, there are always long queues and, consequently, an overall slowness. Private blockchains have but a few nodes validating blocks. Their flow of transactions is controlled and steady. Such networks are therefore quicker and much cheaper to use than their public counterparts.
They abide by regulations. You may have heard from some reputable sources, such as the Daily Mail, that Bitcoin was repeatedly used for criminal purposes. Crooks laundered money through it or bought guns and all of that was possible due to the network being unregulated. Well, that isn’t the case with private blockchains. Those can be built in full compliance to AML (Anti-Money Laundering), KYC (Know Your Customer) and HIPAA (Health Insurance Portability and Accountability Act) laws.
Not to let down blockchain enthusiasts, but the technology, at least from a major bank’s perspective, isn’t all that revolutionary. They see it as an addition to their toolsets; as new and improved, more versatile databases.
Some might argue that private chains defeat the purpose of the decentralized ledger technology, as they all have a centralized entity controlling them. But we believe that both private and public blockchains can be a force for good. The former can benefit individuals, by protecting them granting anonymity, and the latter can save money for companies.
Thinking to launch a private blockchain of your own? Let’s see how we can help. Reach out to our expert for a free consultation.