In the last few years, private blockchains have massively grown popularity. This fact has hinted the need to shed light on what are the differences among all the ‘types’ of blockchains: is it possible to classify them into categories? How many different “types” of blockchain do actually exist?
These points bring the discussion to another level, introducing the concepts of private/public blockchains, permissioned/permissionless blockchains, and consortium blockchains.
Among all the above mentioned blockchain ‘types’ it is possible to find some points of intersection; there are lots of overlaps since it is hard to identify a clear-cut divide. Many confusing definitions about blockchains have raised – mainly in the effort to define a specific type of blockchain- especially after some financial institutions entered the blockchain world exploring business opportunities.
Therefore, we increasingly started to talk about Distributed Ledger Technology (DLT), to which financial institutions refer in order to distinguish that technology from blockchain technology (even though blockchain itself is a DLT). Blockchain sees its name inextricably linked to the concept of Bitcoin and therefore to the crypto-anarchist ideals of an economic independence that institutions do not fully accomplish.
Blockchain Technology Main Characteristics
Ruling out DTL topic and focusing on blockchain technology, it is possible to identify some key characteristics:
- Decentralization – Blockchain are decentralized distributed peer-to-peer systems; each computer composing the network has a copy of the ledger;
- Validation – All the transaction on the network must be validated from who is participating it. So, there must be an agreed state – consensus;
- Immutability – Once registered and validated on the ledger data are immutable, they cannot be modified or deleted.
To better distinguish a public blockchain from a private blockchain is it necessary to focus on reading permissions. On the other hand, mirror-like, writing permissions hint the notions of permissioned and permissionless.
Private and Public Blockchains
Even though combining “blockchain” and “private” terms could be a paradox to the purists, private blockchains are existing and they are becoming more and more popular; they are especially promoted by companies and governments which want to benefit from decentralized ledger advantages.
Basically, a private blockchain identifies a distributed ledger technology. Private blockchains are generated from public blockchains in an artificial way.
The main advantage of a private blockchain is related to the control over the participants of the network. This is achieved, for instance, by assigning different access levels to the information, or by restricting writing permissions to some selected-in-advance participants.
Another point to underline is the limited number of nodes needed to set up the network. This allows a) to make the network faster and more efficient in the validation of transactions, and b) to use other consensus mechanisms – more convenient in terms of time and energy consuming- that are preferred to the Proof-of-Work -PoW (Proof-of-Stake, Proof-of-Authority- Delegated Proof-of-Stake, among others).
Lastly, advantages from using private blockchains are also identified regarding the economic point of view. In fact, transactions in a private blockchain can be free charge and they are finalized quite instantaneously (this refers to the certainty about the fact that a transaction is effectively registered in a valid block).
A false belief – widely held – related to private blockchains is about privacy. It is commonly assumed that private blockchains ensure a high level of privacy by default. That is actually not true because transactions do not provide the privacy claimed, even though a) the strict control over the participants of the network and b) the chance to easily blur sensitive information and data, especially to whom do not have any permission to access the data.
To better understand the privacy issue mentioned it helps to think about a firm that produces bolts.
The company has two distributors, A and B. It arranged two different selling prices: A is paying 1 bolt = 1 euro, while B is paying 1 bolt= 2 euros. The company might not want to reveal these information. To do so, since private blockchains does not provide privacy by default, it is needed to deploy another privacy layer.
Privacy is not a default trait to any blockchain; even public blockchains do not ensure complete privacy.
In a private blockchain normally few nodes compose the network; this is both an advantage and a disadvantage:
- Few nodes guarantee a lower decentralization level – partially decentralized networks, as consortium blockchains are, entail potential collusion between who is participating the network; this issue is hard to control;
- Limited number of nodes makes the network more exposed to hacks (re-org or 51% attack).
From what has been said, it appears that private blockchains are missing some fundamental traits of blockchain technology, first and foremost the trustlessness (the trust between the participants of the network). A certain level of trust is reached only when the entire architecture (based on Game Theory principles) gives the trust needed. Moreover, the strict control over the participants – that could be obtained thanks to KYC procedures and managing the digital identities- makes emerge some issues related to GDPR complience and leads to an excessive centralization. The higher the number of nodes, the higher the complexity related to control procedures, becoming expensive in terms of work and time dedicated. This is to be take into account when occurs to talk about scalability.
Permissioned and Permissionless Blockchains
Writing permissions on the ledger define the concepts of permissioned and permissionless. If public blockchains could be permissioned or permissioned, private blockchains are always permissioned. The best known public blockchains are Bitcoin and Ethereum; both are using the PoW, however Ethereum is planning to turn into a public permissioned blockchain with Ethereum 2.0, named Serenity, introducing Proof-of-Stake (PoS). Other public permissioned blockchains are using consensus protocols like PoS and its variants or Byzantine Fault Tolerance (BFT) consensus and its variants such as Ripple, EOS, and NEO. It must be also mentioned blockchains with restricted accesses to few selected participants using BFT and its variants consensus protocols, like Hyperledger Fabric, R3, Corda, or Quorum by JP Morgan (a private Ethereum’s version).
Consortium blockchain is defined as a permissioned blockchain, showing a certain level of decentralization, in which reading permissions could be private or public. This means that nodes composing the network should not necessarly trust in each other. Governance is not centralized, but it is distributed among the companies participating the consortium.
To better understand, let’s think about a blockchain where 20 Italian hospitals are representing the nodes. On this blockchain, data will be private, but they could be questioned by a doctor external from the network a limited number of times returning the strictly necessary information requested.
In many cases, consortium blockchain could be preferred to an intra-net private blockchain since it offers a greater decentralization level preventing an undue centralization and providing also trust and security.
Advantages and Disadvantages
Public permissionless blockchains are for sure the most reliable blockchains in terms of security since there are little chances of collusion promoted by ‘bad actors’ with malicious intents; those potential events are softened by the high number of nodes composing the network.
Another advantage to underline is related to the transaction’s transparency: anyone can access the ledger and check about the correctness of a transaction or that data entered on the ledger are consistent. Public permissionless blockchains is widely-open, everyone can use it without creating any additional infrastructure.
On the other hand, permissionless blockchains are quite slow; they can validate a few numbers of transactions per second. Talking about costs, they must below a certain level because the economic incentives underlying the protocols -according to the consensus protocols- must be in the given the means to work properly. Furthermore, these blockchains entail a high amount of energy consuption; this issue sparked a global debate. Developers from many projects are involved in finding a solution to these issues.
With regard to blockchains like Bitcoin and Ethereum is being worked on different solutions; for instance, Lightning Network (Bitcoin), Plasma and Sharding (Ethereum).
Energy consumption, on the other hand, is faced with the deploy of a more efficient and less expensive hardware structure, even though PoW still a highly energy-consuming structure, as a result of the game theory that supports the blockchain. To overcome the problem of energy consumption, Ethereum has opted for a progressive adoption of the PoS.
One of the biggest threats of permissionless blockchains is the 51% attack risk. A small number of nodes makes the network more vulnerable to collusion and to hack risk – the chance to rent power from specialized websites like Nicehash make this situation harder. Lot of permissionless blockchains have been hacked because of this. Even major blockchains like Bitcoin and Ethereum are not impervious to that issue, even if attack them means a greater economic expense.
WizKey and Ethereum: our choice
Privacy is a crucial topic when it comes to talk about public blockchains.
If companies and firm increasingly choice private blockchains because they would appear to guarantee a higher level of privacy, privacy in itself is not a default trait of any blockchain.
It would be more appropriate to talk about layers of privacy. Once applied, they address many issues. So, on equal terms, it would be preferable to use a public permissionless blockchain when trust and security are being brought up.
– privacy among the participants of the network: guaranteeing anonymity to whom are participating the network throught cryptographic mechanisms triggered on-chain such as ring signatures promoted by Monero or Stealth addresses.
– data privacy: guaranteeing privacy on transactions, smart contracts and other data encrypting them on-chain or off-chain using encrypting tools like Zero-knowledge proof, ZK- Snarks or Pedersen Commitments.
– contract privacy: guaranteeing privacy regarding the terms of the contract through a range proofs or Pedersen commitments.
Thus, WizKey has chosen Ethereum because all the advantages related to this platform. Ethereum is the second largest blockchain concerning security and decentralization (trust). If compared to Bitcoin, Ethereum is more dev-friendly, especially regarding the creation and the deployment of smart contracts.