Private Blockchain: How Likely is a Firm to Leverage it in the Future

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Private Blockchain: How Likely is a Firm to Leverage it in the Future
Private Blockchain: How Likely is a Firm to Leverage it in the Future

Private blockchains are currently very popular with businesses. Anxious to ride the blockchain trend, many firms are deploying their own closed infrastructures. Despite undeniable advantages, these solutions suffer from several disadvantages compared to public networks like Bitcoin. Will private blockchains experience the same fate as the famous Minitel?

Two Distinct Categories of Blockchains

Blockchain, the information storage and transfer technology behind the Bitcoin (BTC) protocol, makes it possible to record information in an ultra-secure way in a decentralized ledger. Still too little known, the blockchain promises to disrupt a host of different sectors in the years to come, including online voting, the art market, insurance, finance and even the food industry.

Currently, there are basically two types of blockchains: private blockchains and public blockchains. They obviously share many points in common: peer-to-peer operation, better data traceability and data immutability. However, they are distinguished by their level of decentralization.

Public blockchains are indeed accessible to anyone. In concrete terms, anyone can take part in the network setup. This is particularly the case with Bitcoin, which is also the first public blockchain in history. Anyone with a computer is theoretically able to mine BTC.

This is not the case with private blockchains. These blockchains are reserved for a handful of users. Members with access to the register are sorted by a central authority. De facto, the mining of private blockchains is much more centralized than that of other blockchains. Each private blockchain is managed by an authority that concentrates most of the power on the network. In this case, the register is not accessible to the public.

Private Blockchains are Very Popular with Companies

Given their closed nature, private blockchains are mainly popular with companies and governments. Closed blockchains allow these entities to leverage the benefits of blockchain technology without putting their data privacy at risk. According to a study by Forrester Consulting published in November 2019, most companies still favour private blockchains over public solutions, such as Bitcoin, Ethereum or Litecoin.

“Two-thirds of the companies surveyed chose to create their own network rather than participate in networks that already exist,”  Forrester Consulting said.

Many groups are currently pushing blockchain-based technologies. This is particularly the case of the bank JP Morgan (which deploys a permissioned version of the Ethereum blockchain, Quorum), Accentur, R3 CEV (Corda), Microsoft, Alibaba and IBM.

Moreover, the interest of large groups has given rise to a real patent war related to the blockchain. By filing patents, companies are seeking to monopolize the ownership of blockchain technology, which is nevertheless open source in essence.

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Excerpt from a study by Forrester Consulting

The Advantages of a Private Blockchain

Private blockchains do not lack advantages over public solutions. First, private networks are more efficient and faster than publicly available iterations. These solutions make it possible to reach consensus faster because there are far fewer authorized members, explain Dimitri Nitchoun (Business Developer & Legal Counsel) and Bilal El Alamy (CEO of Equisafe, a Parisian fintech) in a post on Medium. Mathematically, a private blockchain always allows faster transactions.

“Implementing a private blockchain means that efficiency is your main goal, not decentralization,” said Brian Forde, senior lecturer on blockchain at MIT and former adviser on new technologies for the House. -Blanche during an interview in 2018.

Private solutions are thus better protected against the congestion problem that affects many public blockchains. This phenomenon occurs when the network is overloaded with transactions. Each transaction then takes longer and longer to confirm. This is currently happening on the Ethereum blockchain. As the price of Ether skyrockets, the Ethereum network becomes congested, leading to inflation in transaction fees.

The Disadvantages of Private Solutions

On the other hand, private networks suffer from poorer interoperability than solutions accessible to any Internet user. Concretely, the private solutions pushed by companies cannot necessarily work with each other, which makes collaborations complicated. According to Forrester Consulting, 53% of companies having or planning to push their own blockchain also perceive interoperability as a major problem.

“Given the preponderance of companies starting their own networks, companies are concerned about interoperability. […]  If everyone starts their own network, these disparate networks will eventually have to work together to do anything, which presents potential problems,”  details the Forrester Consulting report.

Second, private blockchains offer less security. A private solution has fewer members than a public blockchain. De facto, the network has fewer nodes. Theoretically, it is therefore easier to launch attacks at 51% (double spending) than in the case of a public blockchain. To carry out an attack of this ilk, a hacker must seize more than 50% of the power of the network. It is obviously easier if the network is only made up of a hundred members.

Unlike public ledgers, including Bitcoin or Ethereum, private solutions require you to place your trust in all actors who maintain the network. Ultimately, we are witnessing the return of the famous co-finance third parties, for which the blockchain was supposed to sound the death knell.

“We always see appearing at one time or another a kind of caste, or super users, who can validate the blocks or even promise to other users: “don’t worry if something is wrong on our blockchain, we can rewrite everything or erase the data” ”  underlines Frédéric Ocana.

Towards the End of Private Blockchains?

Under these conditions,  75% of companies should abandon private blockchains to join a public blockchain in the coming years, suggests Forrester Consulting. According to the study, the tide is about to turn for private blockchain networks, which have been hastily adopted by large groups concerned about the term ” blockchain”.

“Although private blockchains are currently popular, there is considerable interest in public blockchain networks. 41% of respondents are interested, and 35% are actively planning to implement their plan within the next two years,” explains Forrester Consulting after surveying hundreds of groups interested in blockchain.

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Graph taken from a study by Forrester Consulting

In addition, the OCC (Office of the Comptroller of the Currency), the institution responsible for regulating and supervising the national banks of the United States, recently authorized American banks to rely on public blockchains as a payment infrastructure. Concretely, banks will now be able to use public blockchains like Bitcoin to store, record, validate and settle payment transactions.

The OCC ensures that public blockchains have a status similar to that of other global financial networks, including SWIFT. The announcement may accelerate the transition of companies and consortia from private networks to public blockchains. Interviewed by us, Anis Haboubi, developer of decentralized financial infrastructure, believes that this decision should precipitate the end of private blockchains.