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Public vs Private Enterprise Blockchains

There are so many options when it comes to Blockchain & Distributed Ledger platforms in 2019. It can be quite daunting and confusing for a business enterprise or consortium to delve into the world of blockchain and DLT, with so many platforms available to look into, all offering a range of different features. It’s no wonder why there is such a significant barrier to adoption from things like security, privacy, consensus mechanisms, access control, and economic models. These companies are used to selecting between 2 or 3 different items available (all of which have similar feature sets). So, understandably, they are hesitant to invest time and money in these new, highly technical, yet to be proven and often challenging to understand platforms.

One of the earliest and most important questions to ask is “public or private” blockchain, as it essentially halves your choice based on the answer. But what does that mean? In fact, instead of debating “public or private,” the question should be “permissioned or permissionless”. But why should a business or consortium take care of companies? What are the implications of choice to the companies going forward? And what is the best choice to make in case of an enterprise use?

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Definitions

Blockchain & Decentralization

A blockchain is cryptography-based, tamper-proof distributed ledger that stores data in a consensus-driven, peer to peer network.

Decentralization is how the network is distributed, both from an architectural and a political perspective. Architectural decentralization relates to how many physical computers a platform is made up of, where they are located, and how many computers the platform can tolerate breaking down at a point in time. Political decentralization is related to how many individuals or organizations ultimately control the computers that make up the platform. [1]

Permissioned ledger

A permissioned or private Ledger requires that participants be known to each other and that access to the network is restricted (i.e. invite only). Selected nodes usually process transactions on a permissioned ledger through quick and efficient consensus protocols such as Byzantine Fault Tolerance, which actually provides absolute transaction finality (i.e. one block confirmation, no possibility of a fork in the ledger), and usually there are various security and access protocols and features in place that can restrict the transactions of each part. Due to the many different processes that need to be defined, e.g. on-boarding and removing participants, allowed ledgers to have high levels of governance.

Hyperledger Fabric is an example of a popular Permissioned Blockchain platform

Permissionless Ledger

A permissionless or public ledger does not require participants to know each other, and access to the network is unrestricted, i.e. everyone can join or leave at will. Transactions on a public ledger are usually verified by all nodes on the network using highly secure but inefficient consensus protocols, such as Proof Of Work, which does not offer 100% transaction finality (i.e. multiple confirmations required, ledger can be split into various ‘forks’, with the fork containing the most effort ends up winning), and transactions are usually all public and visible to all participants in the network.

Ethereum is an example of a popular Permissionless blockchain platform

Why should companies care?

The most significant benefit of DLT for the company is the fact that businesses can interact trustless with each other on a single shared point of view ledger, removing the need for trusted third parties and unnecessary duplication of data. But businesses also have specific requirements with regard to security, privacy, data integrity, and they also need to ensure that the way they do business complies with regulations and legal frameworks. In many ways, Permissioned & Permissionless platforms often differ significantly, so enterprises that aspire to leverage DLT need to understand these nuances to avoid huge mistakes down the road. A blockchain is not like a traditional IT system or a combination of hardware and software. It can not be quickly converted or substantially modified when it is running, and it is for this very reason that Satoshi Nakamoto(not Craig Wright) put some basic scripting functionality into the Bitcoin protocol before it went live to handle future (yet to be implemented) transaction types such as escrow transactions, bonded contracts, third-party arbitration, multi-party signatures, etc.

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Implications

The technological world is moving towards a public, open, decentralized or distributed world, with the modern internet being a great example of this. However, company use cases are not always the same, so each blockchain nuance needs to be looked at in isolation before determining what the best fit is.

Identity

All participants are known from the beginning in a permissioned blockchain, which includes identities that transact on the network as well as identities that participate in maintaining the network by running a node or participating in consensus. In addition, there is a process required to embark on a new network participant with strict governance in place to say what they can and can’t do when they join.

In a business use case such as blockchain for supply value chains, because each individual is known to what organization they are associated with and what their role is, it can be assumed that they will act reasonably, because if not, the malicious actor(s) can be easily identified and appropriate action can be taken.

By default, the identity between parties is not known in the permissionless blockchain. That’s not to say that if required, you can’t build an identification solution on an unauthorized platform.

Governance

Blockchain and DLT can change the way a business works as much as the internet did when it first came in the 90s. And when it comes to governance, it’s quite different when you compare permissionless and permissioned blockchains. Governance in the permissioned world is mostly decided and agreed by the members of the blockchain network. Economic incentives, code quality, code changes, and peer-to-peer processes are based on the business dynamics and the common purpose for which the network was designed and built. This allows businesses to move quickly and in ways that best suit their business needs. Public or permissionless ledgers essentially do not support many of the processes and systems used to facilitate the decision-making that a permissioned ledger offers, so governance is not as strongly defined and is mostly contained within the network protocol (i.e. code is law).

But what is the best use case from a governance perspective? Some might argue that a permissionless ledger’s strong governance is more beneficial, but we’re all slowly coming to realize that a permissionless network is better from a governance perspective. The concept of a select group of entities or businesses controlling the governance of a blockchain network makes it inherently centralized, and this need for centralized parties to establish and maintain control over the decentralized systems is actually detrimental to the adoption of enterprise blockchain. They decide who is allowed to join the network, control the IP, and could potentially create back doors to benefit themselves. It’s obvious to see why companies want to avoid their competitors joining a private permissioned blockchain network, as is the case with the IBM & Maersk joint venture, which is struggling to get other shipping carriers to join the network. A permissionless network gives businesses confidence that in a truly decentralized and trustless way they can join and participate in a network.

Economic models

Both permissioned and permissionless ledgers offer different network economic models. In permissionless or public ledgers, there are usually financial incentives to maintain and secure the network through the consensus mechanism, with a form of the digital asset being rewarded or used as a’ gas’ to power transactions. Permitted or private ledgers do not usually have economic incentives to maintain consensus, nor do they typically have transaction fees. So what’s better?

One might argue that an economic model or digital asset adds an unnecessary complication and that the network should focus purely on doing what it needs to do without transaction fees or incentives to secure the system. This is the approach taken by permissioned ledgers. Permissionless networks usually have an economic model, with at least one digital asset being used to power transactions (transaction fees), as well as economic rewards for participants securing and maintaining the ledger. While this adds a new aspect to the blockchain platform, it can be argued that having an economic model with all the incentives and fees associated with it helps maintain the network’s stability, security and integrity. A digital asset used in transaction fees and incentives discourages participants from spamming the network or acting maliciously and encourages consensus nodes to participate in honestly maintaining the ledger. In a permissioned ledger, participants do not have the costs associated with transaction fees, but they have high costs in other things that do not apply to a permissionless platform such as setting up and maintaining the network.

Privacy

Data Privacy is vital for businesses. Public or permissionless ledgers usually do not support hiding or masking transactions, so this would need to be built on top of it. Permissioned ledgers generally offer multiple forms of data privacy in the form of private ledger channels, zero-knowledge proofs and private data sets. For any platform to gain widespread enterprise adoption, it will need to ensure that enterprises’ data privacy and confidentiality needs are met. This is currently being addressed in many permissionless platforms, such as Ernst & Young recently unveiling Nightfall, an Ethereum permissionless platform protocol that allows private transactions through the use of Zero-Knowledge Proofs.

Example of Zero-Knowledge Proof

Performance & Transaction Finality

Permissioned blockchains use consensus mechanisms that are computationally inexpensive (as compared to most public ledger consensus mechanisms such as work proof). Therefore, they enjoy substantially better scalability and performance than their permissionless counterparts. Blockchains such as Hyperledger Fabric offer additional innovations regarding node roles, including peers (who maintain state/ledger) and orderers (who consent to the order of transactions included in the accounting).

Transactions are processed in the blockchain by selected nodes. From a performance perspective, this is where having only a few node process transactions vs thousands of nodes in a public permissionless ledger can create a performance gain around latency and transaction speed.

In addition, many business use cases want transaction finality, i.e. once a block is proposed, there can be no chance that another block will take its place. This is something that usually permissioned platforms can offer; they can deploy Byzantine Fault Tolerant consensus mechanisms that provide this feature, and perform and scale much better than mechanisms of public consensus such as Proof Of Work. However, take note that some permissionless platforms make use of these mechanisms of consensus tolerant fast byzantine failure. They choose to prioritize speed and transaction finality over having a more secure and architecturally decentralized network, making them a strong candidate for fork adoption where companies are looking for a permissionless platform with high performance and transaction finality / zero chance of forks. An excellent example of this is the NEO platform.

NEOs Delegated Byzantine Fault Tolerance consensus mechanism

Decentralization & Security

In a permissioned ledger using a Byzantine Fault Tolerant (BFT) consensus mechanism, participants are confident that at most one-third of the consensus participants will not be malicious at any given time so that at most 33% of the network may be malicious and the network will still be malicious. With Proof of Work on a public ledger, network participants assume that at least 51 percent of the network participating in consensus does not act maliciously, so at most 49 percent of network participants may act maliciously at a given time and the network would still be able to maintain its security without being compromised. Based on this, it becomes apparent that a permissionless ledger running a consensus algorithm such as Proof Of Work is generally more secure and tamper-proof than a platform running a consensus mechanism of type BFT.

Some may argue that permissioned platforms are still politically and architecturally decentralized, but when viewed from the outside in, this is not true decentralization. Take an example of a supply chain where a permissioned consortium is formed between several suppliers, ports and retailers. Then say one of the biggest competitors in retailers wants to join the consortium. They may not like the fact that their biggest competitor needs to grant them access to the private permissioned network and have a say in the governance of how they join and participate in the network. They may also not like the fact that their biggest competitors may be validating their transactions.

A genuinely trustless and decentralized blockchain platform does not enforce rules and governance on who may or may not be involved in transactions. It ensures that no collusion between individuals or entities is possible and that participants in the network validating transactions and adding to the ledger have no affiliation or relationship (political, adversarial, etc.) with the transaction or its participants. Only a permissionless platform can meet this set of criteria.

Also, if you look at the majority of implementations and proof of concepts, you will see that almost all of them use some cloud hosting for nodes. But what if there’s an outage on the cloud provider? Or if a number of the node running cloud accounts are compromised? Just because each consortium participant runs a node under separate accounts on Amazon Web Services, it doesn’t mean it’s politically decentralized, and it’s definitely not architecturally decentralized.

Companies are now moving away from owning and running physical servers, which is fair enough. Using cloud infrastructure means that they can meet their IT needs at a lower cost rather than buying, running and maintaining these expensive servers that depreciate in value and become obsolete over time. The best and’ lowest-cost approach’ goes one step further when it comes to blockchain. Instead of paying for a cloud provider to run your node (and essentially the entire blockchain), the best approach is to let a highly distributed and decentralized international platform run your nodes and manage the blockchain for you. So instead of paying monthly hosting, storage & data fees, all you need to do is pay transaction fees.

Security and trust are the most significant selling points to use a blockchain over existing centralized solutions. A decentralized public blockchain secured by thousands of nodes around the world provides maximum immutability and is more secure than a permissioned platform.

Conclusion

At the moment, it is clear that most business use cases are focused on permissioned blockchain platforms. The technology is still in its early stages, scaling has not yet been appropriately addressed, and transaction privacy is not fully matured in popular permissionless platforms. Allowed solutions ensure data privacy, strong identity management and governance, higher performance and scalability, but provide this at the cost of decentralization and security, which are blockchains of major selling features and reasons to migrate away from today’s systems. By using permissioned platforms, companies can form consortia and’ dip their toe’ into this new technology and new radical way of doing business, but they will not really realize the potential of DLT & blockchain until they move to a permissionless platform.

As time goes on, the technology will improve, and solutions to existing problems will continue to emerge. Eventually, permissionless platforms will have the performance, scalability, and privacy features that a permissioned platform offers, all without sacrificing security and decentralization.

Distributed Ledger Technology & blockchain promises to fundamentally change the way companies do business in a trustless manner while reducing costs and increasing data security and integrity. All the features and benefits that blockchain offers need to be implemented correctly in the solution; otherwise you’re left with a’ half-baked’ platform that’s no better than what’s used today.

“By 2020, the concept of public-private blockchain networks will be relegated to a historical footnote. We won’t pit public networks against private networks. Instead, there will be public transactions and private transactions, confidential contracts and open contracts, and they will coordinate their scope across bilateral, multilateral and public environments depending on user needs — just as messages today pass between private and public environments using common Internet protocols.” [2]

References

1 – https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274

2 – https://media.consensys.net/the-value-of-being-stupid-about-blockchain-c46ba3c99cd6?sk=0c3987d0559fee4f1348205b24d14673

3- https://medium.com/@pappas999/public-vs-private-blockchains-for-the-enterprise-18dfc03d852d

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