How Does the Blockchain Work? Pt. 4
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What’s the difference between a private, public, and consortium blockchain? Understanding this is important.
As financial institutions begin to explore the possibilities of blockchain technology, they are coming up with systems that complement their existing business models. A private or a consortium blockchain platform, as opposed to the public platform that Bitcoin uses, will allow them to retain control and privacy while still cutting down their costs and transaction speeds.
In fact, this private system will have lower costs and faster speeds than a public blockchain platform can offer.
Blockchain purists aren't impressed. A private platform effectively kills their favorite part of this nascent technology: decentralization.
They see the advent of private blockchain systems as little more than a sneaky attempt by big banks to retain their control of financial markets.
In a way, they're correct.
Though the evil plot narrative is a bit much. If big banks can utilize a form of blockchain technology that revolutionizes finance, and if they are willing and able to pass these benefits onto their customers, then it is hardly an evil plot.
It is just good business.
Vitalik Buterin said it best:
The idea that there is “one true way” to be blockchaining is completely wrong headed, and both categories have their own advantages and disadvantages. 
Let’s take a deeper look at what these might be.
A blockchain was designed to securely cut out the middleman in any exchange of asset scenario. It does this by setting up a block of peer-to-peer transactions. Each transaction is verified and synced with every node affiliated with the blockchain before it is written to the system.
Until this has occurred, the next transaction cannot move forward. Anyone with a computer and internet connection can set up as a node that is then synced with the entire blockchain history.
While this redundancy makes public blockchain extremely secure, it also makes it slow and wasteful.
The electricity needed to run each transaction is astronomical and increases with every additional node. The benefit is every transaction is public and users can maintain anonymity.
A public blockchain is most appropriate when a network needs to be decentralized.
It is also great if full transparency of the ledger or individual anonymity are desired benefits. Costs are higher and speeds are slower than on a private chain, but still faster and less expensive than the accounting systems and methods used today.
This is a good trade-off for a cryptocurrency like Bitcoin.
Security is key to their users, a decentralized network is at the heart of the project and their competitors in the finance industry are still significantly more expensive and slower than a public blockchain network despite its slowness when compared to a private blockchain.
Private blockchain lets the middleman back in, to a certain extent. I believe the saying goes: better the devil you know, than the devil you don’t know.
The company writes and verifies each transaction. This allows for much greater efficiency and transactions on a private blockchain will be completed significantly faster. Though it does not offer the same decentralized security as its public counterpart, trusting a business to run a blockchain is no more dangerous than trusting it to run a company without blockchain.
The company can also choose who has read access to their blockchain's transactions, allowing for greater privacy than a public blockchain.
A private blockchain is appropriate to more traditional business and governance models, but that isn't a bad thing. Just because it is unlikely to revolutionize our world, doesn't mean it can't play a role in making the world better.
Competition is key to developing the most useful products. Traditional financial institutions have long held a monopoly — technically, an oligopoly — over the industry.
Their outdated products and services are a direct result of this power.
Using a privately run version of blockchain technology can bring these organization into the 21st century.
A number of our governance institutions are old and outdated as well.
Like finance, our government is not subject to competition. Adoption and integration will likely be slower in this sector, but if and when blockchain technologies are adopted they will cut billions of dollars of behind the scenes spending.
Imagine a truly secure online voting system. No more poll workers, voting booths, paper ballots, paid counters or organizers with cushy salaries. What's more, the barriers to voting will be greatly reduced and we will likely see an increase in turnout.
This could be accomplished with a public design, but most governments are unlikely to decentralize control and security, so a vetted private system greatly increases the chance of adoption.
Consortium blockchain is partly private. There has been some confusion about how this differs from a fully private system. Vitalik Buterin provides a pretty straightforward definition:
So far there has been little emphasis on the distinction between consortium blockchains and fully private blockchains, although it is important: the former provides a hybrid between the “low-trust” provided by public blockchains and the “single highly-trusted entity” model of private blockchains, whereas the latter can be more accurately described as a traditional centralized system with a degree of cryptographic auditability attached. 
Instead of allowing any person with an internet connection to participate in the verification of transactions process or allowing only one company to have full control, a few selected nodes are predetermined.
A consortium platform provides many of the same benefits affiliated with private blockchain — efficiency and transaction privacy, for example — without consolidating power with only one company.
You can think of it as trusting a council of elders. The council members are generally known entities and they can decide who has read access to the blockchain ledger.
Consortium blockchain platforms have many of the same advantages of a private blockchain, but operate under the leadership of a group instead of a single entity.
This platform would be great for organizational collaboration.
Imagine central banks coordinating their activities based on international rules of finance. Or the United Nations outsourcing their transactional ledger and voting system to blockchain, allowing each country to represent a verifying node.
The possibilities are endless.
Blockchain Use Cases Moving Forward
Outside of finance and governance, we are only just beginning to explore the uses of private and consortium blockchain technologies. If blockchain's main use is to cut out the middle man and allow for peer-to-peer transactions, it is invariably going to be disliked by those middlemen.
This is where we are now.
Companies scrambling to make their business models safe from this disruptive technology.
But this isn't the most exciting use of blockchains.
Ideas that do unprecedented things with this technology, instead of just applying it to existing models, will be where this technology shines.
If I could list exactly how and where these breakthroughs will take place, I would be out making them a reality myself. Rest assured, they do exist.
Let's not forget that the pieces of technology that built Bitcoin were around long before the cryptocurrency was designed.
It took a little imagination and a lot of hard work to turn existing technology into a viable product.
As access to technological tools increase, I'm excited to see where the next wave of innovation takes us.
Let's hope we can all keep up.
If you want to learn more about the blockchain in a simple and easy to understand way check out our other posts in the series:
- How Does the Blockchain Work? Part 1
- How does the Blockchain Work? Part 2 – the top 5 things you need to know.
- How does the Blockchain Work? Part 3 – what is consensus and why does it matter?
I’m always interested in meeting blockchain founders, academic researchers, and technologists who are working on challenging projects, so please feel free to contact me on LinkedIn, or by email at email@example.com.