Many of the basic concepts of blockchain technology are shared by public and private blockchains. Both use decentralized peer-to-peer networks, rely on transaction authentication consensus protocols, and provide guarantees of ledger immutability. We'll get to the bottom of what the difference is between public and private blockchains in this post.
Private blockchains limit access to only those that have invites, unlike public blockchains where anyone can participate in the network. For businesses looking to conduct business without releasing confidential data for all to see, this more restricted blockchain architecture might be more appealing.
The differences between private blockchains and crypto-currencies of privacy are also important to remember. Privacy coins such as Monero safeguard your public address and history of transactions but still operate on a public network. On a radically different level, private blockchains function where involvement and visibility are both minimal. Think of public blockchains as the Internet, and intranets as private blockchains.
Public blockchains
Public blockchains are often referred to as permissionless blockchains and allow anyone to participate in the network. This involves not only transaction sending and receiving, but also hosting a node and accessing the history of transactions. The most famous instance of a decentralized blockchain is Bitcoin.
While most individuals on the Bitcoin network would never host a node, there is theoretically nothing to stop you from doing so. Public blockchains are available to anyone, and with applications looking to address vast numbers of users, these features have made them highly popular.
Hosting a node means that, for authentication of transactions with other nodes, you can keep a copy of the blockchain. Agreement between nodes is known as consensus, and mathematical algorithms that prove that transactions are not fraudulent are assured by Proof-of-Work.
What helps the network to run without a centralized authority is the consensus algorithm. If the network is joined by more nodes, the stronger it becomes. This also implies, however, that the network is inherently sluggish, as robust consensus processes are needed to ensure that nodes agree.
To control the network, public blockchains must also have a native currency. It rewards node hosts for handling transactions with the native token. Some government blockchains also support tokenized services, which can represent something that holds value. To run the entire network, Ethereum, which supports countless numbers of ERC-20 tokens, relies on the native Ether coin. Without a native currency to compensate nodes for their work, assets on public blockchains are useless.
Private blockchain
Private blockchains, also known as permitted blockchains, are primarily used internally to minimize costs by companies trying to use blockchain technology. Private blockchains may exist or be shared between any number of selected entities exclusively within one company. There are several reasons why private blockchains for business are generally preferred.
Firstly, many of the same basic tasks as public ones are performed by private blockchains. However, the greatest distinction is who has access to the network. With restricted access and participation in mind, private blockchains are built. As a consequence, others on the network know and trust the identities of all participants.
This gives companies a huge advantage since they will know with whom they are doing business. Participants typically have restricted access to data that is exchanged on the blockchain, even after entering a private network. Any data can be protected such that only the appropriate parties have the keys on the blockchain to access any confidential data, while the transaction information can not be accessed by all those in the network.
The existence of private blockchains makes it possible for members to have more faith in each other, as only trustworthy parties are allowed to join the network. There's less need for such a strong consensus system as seen in public blockchains with the establishment of trust. Instead, voting or a multi-party consensus algorithm that can work far faster than that of a stable public blockchain can achieve consensus.
Lastly, a native token is not always relied on by private blockchains. On the other hand, all public blockchains are based around a single cryptocurrency of their own. Private blockchains are more adaptable and focus on all digital assets representing physical goods instead.
In this system, a compensation system is optional for nodes. To retain a distributed ledger, private and trusted networks can have more important business interests and would rather be free from a native coin. Of course, to reward nodes, it is possible to create a native cryptocurrency. But the key point is that native coins are optional with private blockchains.
Conclusion
While there are several basic values shared by private and public blockchains, their use and application are somewhat different. Private blockchains need authorization to enter the network and through encryption can restrict the accessibility of data on the blockchain. There are public blockchains open for anyone to access and view the history of transactions.
Although privacy coins can shield your public address and transactions, the transaction data associated with the shadow addresses is still visible on the public blockchain. There is also no native currency needed by private blockchains, which may not be the case for their public counterparts.
Private blockchains function differently and provide more power to who can enter and what is available to others, making them even more enticing for businesses to do business with each other.