What is a private blockchain and why do you need it?

Maria Kucharczyk

14 Jun 2021.7 minutes read

What is a private blockchain and why do you need it? webp image

Blockchain technology saw a huge rise and a significant fall in the past decade. While its relevance in the financial sector is undisputed, how does blockchain's importance look in other industries? How can you use blockchain for enterprise applications?

According to Deloitte's annual survey, 77% of executives agree they will lose their competitive advantage if they don’t adopt blockchain. But instead of asking “Will it work for us?”, they ask: “How will it work for us?”. The hype about blockchain is over because businesses understand the need to be rigorous enough in defining the problems they’re attempting to solve with this technology.

When would you need private blockhain?

What has recently changed in blockchain

The past few years brought new blockchain players into the conversation, technologies like Hyperledger Fabric and Corda that enable business decision-makers to move away from the cryptocurrency focus in blockchain adoption.

These technologies allow the implementation of the idea of private permissioned blockchain in the enterprise. Such a blockchain model gives CXOs a set of tools to pursue real business-ready solutions. Solutions that support multi-party collaboration in digitizing business processes.

Let’s find out more about blockchain and which certain blockchain models you can leverage for enterprise applications.

Public vs private, permissioned vs permissionless blockchain

Blockchain comes in different flavors. When you start exploring it, the first question that comes to your mind is “What type of blockchain do I need?”. For this purpose, let’s briefly compare different types of blockchains.

What is blockchain?

In simple terms, blockchain is a distributed append-only database. Not a regular database, but one where data is structured in a specific way. The information in the blockchain is stored in blocks and the blocks are chained together providing a transparent chain of blocks. The chain is secured by cryptography and nearly impossible to tamper with.

Blockchain technology comes in different forms — public vs private, permissioned vs permissionless — and the difference between various blockchain models is a consequence of these two perspectives.

  • How is the blockchain network built? From the implementation and accessibility perspective, we can distinguish between public and private blockchains, where public blockchain lets anyone join the system and in private blockchain, users have to be granted permission
  • How is the blockchain network configured? From the administrative perspective, we can divide blockchains into permissioned and permissionless networks depending on how the user rights are set up. In the permissionless type, there is no authority on a network level.

What is important to remember is that public blockchain does not equal permissionless blockchain, and private blockchain does not equal permissioned blockchain. In practice, the two most popular blockchains are:

  • Public permissionless blockchain
  • Private permissioned blockchain

    What is a public permissionless blockchain?

In a public blockchain, anyone can read, write, and audit the ongoing activities on the blockchain ledger. The network is secured by crypto economics and cryptocurrency mining.

In practice, everyone who downloads the needed software can take part in blockchain transactions according to the consensus set of rules.

Public blockchains are designed to operate democratically by eliminating middlemen and regulators. I wrote more about it here, in Blockchain beyond Bitcoin blogpost. The most popular public blockchains are Bitcoin, Ethereum, and Ripple.

What is a private permissioned blockchain?

Blockchain can still operate within closed parameters — the model that is suited more for enterprise use cases, as it can handle huge amounts of transactions and data that businesses usually process.

In a private permissioned blockchain, the whole network is shared by the consortium of organizations. The network operator can configure permissions and roles of users and nodes: who participates in the consensus process, who is able to read and write to the ledger, and how the blockchain nodes are allocated across the network.

How does a private blockchain network work?

  • Network users and their rights are not equal and are the consequence of their function in the consortium,
  • Different types of data are accessed only by the users with the granted permissions,
  • The mechanism of access depends on the rules set forth by the network participants.

Probably the most popular enterprise blockchain is Hyperledger Fabric. It guarantees strong consistency of the state and, at the same time, promises to perform hundreds of transactions per second. Here’s more about how Hyperledger Fabric works from the perspective of a blockchain developer, Jakub Dzikowski.

Fig 1. Blockchain types matrix after Deloitte report. There’s an ongoing discussion if private permissionless blockchains are possible, for more check out this Medium post.

When to consider private blockchain

The primary difference between public and private blockchain is that the former may be joined by everyone, while the latter may only be joined by authorized users. While startups seem to focus on leveraging the trustless concept of a public blockchain to create innovations, enterprises more often use a private blockchain to build multi-party business applications with high scalability within a trusted environment.

The goal of blockchain projects

Adopting blockchain is really the case of addressing the right problem with the right technology. It is also, as with each innovation, the matter of responding to the needs of changing customers' behaviors timely. Let’s focus on “how private blockchain can help me”.

Almost every business is required by contracts to interact with many different entities in order to deliver their goods and services. A private blockchain can help save time and money by automating these operations between different organizations.

This is possible mainly by two mechanisms imprinted in blockchain:

  • Transparency — the mechanism that provides better coordination and verification within the companies that are participating in the blockchain network.
  • The consensus mechanism — to maintain a consistent state across multiple parties with limited trust.

But really, can a private blockchain help your company in particular? Private Blockchains are designed for companies that want to have more control over data and more privacy with fine grained permission control. My colleague, Piotr Hejwowski, elaborates on crucial questions to ask when considering private blockchain adoption in: Do you need private blockchain?

Private blockchain use cases

What are the examples of blockchain adoption besides creating a digital currency? How is it possible to use blockchain for enterprise applications? Let’s look through some examples.

The second sector after finance that already benefits from blockchain the most is the supply chain. For the past decade, it has become more global, and after 2020, even more diversified. Naturally, here comes the use case for the private blockchain technology that can answer the need for greater resilience and multiparty business relationships that go beyond the wall of the enterprise.

But blockchain is a very versatile technology. Its native use case, recording financial transactions, is just the tip of the iceberg. Other use cases can include:

  • guaranteeing the integrity of sensitive data like medical records or personal credit records
  • tracking the flow of goods and providing authority in logistics
  • tracking the origin of artwork or precious goods, also identifying their path from the origin to the last owner or final destination
  • verifying payments or providing faster insurance claims
  • and much more.

Discover more private blockchain use cases, they go way beyond fintech world.

Check and verify your blockchain idea

Traditional methods of conducting businesses are being revisited. In the digital transformation movement, we want to reduce the need for human mediation in transactions and create communication channels between parties that don't necessarily trust each other. Blockchain facilitates a zero-trust environment. Can it be a game-changer of a successful consortium while automating many operations? It can, but...

  • Blockchain solutions are expensive.
  • Blockchain does not fit every business model.

Why do businesses turn to private blockchain?

  • to address scalability and security challenges,
  • to achieve better coordination and verification,
  • to achieve operational goals when cooperating with multiple business partners.

2020 saw a surge of companies moving to digital platforms for every aspect of their life. Companies often come together and need to cooperate to better answer the needs of digital transformation. You can also take advantage of cloud technologies and blockchain to develop your own blockchain Proof of Concept (PoC).

Before jumping fully on the blockchain wagon, it’s safer and more cost-efficient to start from an attempt to demonstrate the feasibility and practical potential of your idea. Test your use case in the process of PoC. It can either be a prototype without any supporting code or any MVP (Minimum Viable Product) with a bare feature set.

Want to find out more about how to proceed with your idea? Contact us!

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