Public and private blockchains differ more in how they’re used than how they’re built. The underlying similarity is that they’re blockchains: distributed, encrypted ledgers, monitored and verified by their users. In other words, they’re both networks that share an immutable record of transactions.
The real difference on a technical level is who has access to them.
How open blockchains work
Open blockchains, or public blockchains, can be accessed by all their users, and those users can be anyone. These are the blockchains we’re most familiar with, because they’re the big names that underpin digital currencies. BitCoin is an open blockchain, and so is Litecoin, Ethereum and BitShares.
Remember that a public blockchain doesn’t forbid anyone from becoming a user or participating in verification or block creation. But that doesn’t mean that everyone, or even very many people, will be able to do it. Consider BitCoin mining: by the rules of the BitCoin blockchain, anyone can mine. But in practice, a small number of corporate entities control virtually all mining because of the expense in time, computing power and electricity it requires.
For example, when a blockchain requires major commitments of equipment, time, finances or computer cycles in order to engage with it, many would-be participants might be locked out in practical terms even though there is nothing in the blockchain’s rules preventing them from participating.
The confidentiality problem
Blockchains come with an inbuilt confidentiality problem. The audit log of transactions is available to all users. Solutions to this problem that make blockchain suitable for businesses (which don’t want uninvited users to have access to all their business data) include hybrid, private and consortium blockchains as well as various methods of building decentralized applications with inbuilt permissioning on public chains.
Why would you choose a public blockchain?
Public blockchains are the default choice. They deliver two key benefits over private blockchains:
A public blockchain exists separately from the entities that use it and participate in its governance. This means that, for instance, there’s no-one who can change the rules of the blockchain, alter or reverse transactions, or otherwise interfere.
Thus, a public blockchain can be truly ‘trustless’: users don’t have to trust other participants, because they interact in a manner mediated by the rules of the blockchain; and they don’t have to trust the blockchain’s administrators, because in a traditional sense, there are none.
Public blockchains are accessible to anyone with a computer and an internet connection. Some general purpose blockchains allow the implementation of smart contracts on the pre-existing blockchain, meaning users can achieve business goals on an extant network. And the newest generation of blockchains for general computing are deliberately designed to permit the construction of smart contracts and ‘Decentralized applications’ or Dapps directly on the blockchain.
The blockchain applications market is unravelling along a segmentation of activity that is spread along two sets of variables: private vs. public blockchains, and new vs. existing business models.William Mougayar
Why would you choose a private blockchain?
Private blockchains are usually built to order for business or organizational use. For their users, they deliver:
Private blockchains are controlled by a consortium of privileged users who can issue or deny permissions, alter rules, revert transactions and modify balances.
Obviously, this is totally opposite to what a public blockchain gives its users. But it allows a centralized organization to replicate its organizational structure on the blockchain, which is vital in cases where the organization will be held responsible for the validity of that information. For instance, a government land registry could benefit from the security and auditability of a blockchain, but it can’t relinquish its ultimate authority over the records.
2. Trusted known validators
In some public blockchain structures, the validators aren’t known, and in PoW blockchains dependent on mining, 51% attacks are a constant danger.
51% attacks occur when over half of a blockchain’s validators collude, outside the blockchain, to sign blocks they know contain false information. They represent the main known security threat to PoW blockchains, because miners could theoretically collude in this way.
While there has never been a 51% attack on the BitCoin blockchain, there have been 51% attacks on other PoW blockchains. In one, hackers made off with $18 million after an attack on the BitCoin Gold blockchain, in which they altered the blockchain’s own records so that they could spend the same money twice, known as a ‘double spend.’
In a private blockchain the validators are known. As long as they’re accountable using structures outside the blockchain, this makes the blockchain more secure against these types of attacks.
3. Lower operational costs
Transactions are cheaper in terms of computing and electrical power. They only need to be validated by a few nodes, which can be configured to do this efficiently. By comparison public blockchains have many more nodes, requiring far greater computational redundancy: every node is basically doing the same work, which is the key to blockchain’s security but also the reason why blockchains can be expensive to run.
Public blockchains tend to express their relatively higher operational costs as relatively high transaction fees for their users. BitCoin’s hit an average $52 per transaction at their highest, and while that’s an outlier, average transaction fees for public blockchains can be a problem: Ethereum’s transaction fees have actually been higher than BitCoin’s in the past.
But these transaction fees reflect the higher costs of operating these high-redundancy, high-node-count blockchains. Even if what you’re sending is a file, a message or an action that triggers a smart contract, rather than currency, you’ll find operational costs are higher on a standard PoW public blockchain.
On a private blockchain transaction fees and electrical costs can be kept to a minimum, though it should be noted that some public blockchains built on other consensus algorithms can also be considerably cheaper to run.
4. Predictable technical performance
Nodes are the entities in a blockchain that take part in creating a new block. On a private blockchain, nodes can be very well-connected and it’s possible to ensure all of them are running as intended, something that can’t be done on a public blockchain.
Partly this is because private blockchains typically operate nodes on dedicated hardware, whereas a public blockchain involves many consumer-level laptops and desktop computers. This is another advantage of private blockchains: hardware requirements can be known in advance because user numbers are pre-determined, so high performance can be baked in.
If anything goes wrong, it’s also possible to step in via an administrator account and fix a private blockchain manually.
Private blockchains that limit user access, and manage user privileges centrally, offer better privacy. This should be of limited concern to most users, since blockchain already offers massively improved security and privacy.
However, a private blockchain eliminates identity privacy concerns. On a public blockchain, usernames are visible to other users. On a private blockchain, the same is true but users are permissioned, meaning user names can be real names and reflect organizational roles without any privacy issues.
HyperLedger is an example of a private blockchain.
Private vs public blockchain: which choice is right?
Businesses need to select the right blockchain for their needs, based on the operations they actually want to carry out on it. But the choice doesn’t have to be either-or. There’s a third option, the consortium blockchain, which provides a hybrid solution somewhere between the trustless or low-trust environment of a public blockchain, and the reliance on a single trusted entity that comes with a private blockchain.
Alternatively, we can look at blockchain implementations like Elements, describing itself as ‘a high-liquidity digital asset marketplace, affiliated to a registered custodian.’ Here we can see a trusted entity off the blockchain, linked with a public blockchain trustless environment based on Ethereum.
Finally, the latest generation of public blockchains contain provisions to give their users many of the advantages of a private blockchain, while keeping the advantages of a public blockchain too. For example, EOS.io, a development environment for decentralized applications, allows users to build business Dapps on public chains, using smart contracts to achieve many of the same benefits as a private chain while retaining the ability to deliver services over the blockchain.
Privately-owned, custom-built Dapps based on interlocking smart contracts can deliver the privacy and control that businesses and institutions want, while still claiming the benefits of the public blockchain.
As the space develops, there will be a place for private, public, consortium and hybrid blockchains.
In most cases, businesses that want to perform internal operations on the blockchain, like accounting or in-house supply chain management, will opt for private blockchains, while those wishing to actually deliver services on the blockchain will necessarily use public chains, which are evolving to better facilitate this.
The result is likely to be that public and private blockchains become more similar in terms of the features they offer, while retaining their distinct underlying structure; a broadly similar feature set will likely be available on public and private chains, and via chain-agnostic platforms, in the near future.