Blockchain is a revolutionary fintech system that is automated and does not need centralized or manual supervision. Blockchains have been around for more than a decade with the introduction of Bitcoin in 2009.
However, despite the recent rise in popularity of cryptocurrencies in the world, the distinction between public and private blockchains has remained predominantly unknown. By understanding their underlying differences and their advantages, investors who are interested in cryptocurrency trading can make better decisions.
What is a Public Blockchain?
To know the key differences between private and public blockchains, it is first crucial to develop an in-depth understanding of each as a separate entity. Starting with public blockchains like the Bitcoin network that are open-sourced and wholly community-owned. The public blockchain networks do not have any centralized supervisory authority to manage them.
Public blockchains are accessible to everyone. Interestingly, the first-ever blockchain known as Bitcoin has been a public network from the very start. In this manner, it is not wrong to say that blockchains gained popularity among fintech and investment enthusiasts on account of their public nature. It is not wrong to say that public blockchains are predominantly decentralized and require a consensus model to conduct peer-to-peer transactions.
Advantages of Public Blockchains
The main reason for the massive adoption and credibility of public blockchain in the cryptocurrency sector is its visible advantages. It is worth noting that Bitcoin, the first-ever public blockchain network, has remained the top cryptocurrency by market cap and dominance since its introduction. This is a testament to its demand and positive sentiment in the market. Here are some of the most important advantages of public blockchains:
- Comprehensive Security
For every online program and entity, hack attempts and attacks are routine. Therefore, the public blockchain networks that are planning to keep their construction open-sourced need to create a technical main-frame that is fool-proof. Any developer who is interested in exploiting a public network can source its programming.
Furthermore, they can also become part of the network since everyone is welcomed on a public network. Therefore, the developers who are planning to introduce public networks must ensure that their network is secure from such attacks and that networks such as Bitcoin, which has been operating for more than a decade without any reported hacking incidents, have impenetrable security protocols.
- Open Networks
Public blockchains are all-inclusive and non-discriminatory networks where anyone hailing from any part of the world can participate in making a transaction. To be able to use a fiat currency, a person needs to be present in a particular jurisdiction. On the other hand, anyone can purchase, sell, or trade on public networks regardless of their geological location.
- Privacy Protection
Public networks allow digital currency investors to conduct transactions anonymously. When a person is conducting any type of online transaction, their purchase history can be traced by law enforcement agencies or hackers without their permission. However, using the right technique, it is possible to make digital transactions anonymous. Furthermore, not a lot of information is required to register on a public network.
- Freedom from Regulations
Public blockchains are automated, and they do not need any centralized supervisory authority to overlook them. Therefore, they are also free from the application of regulations. The traditional stock markets are under the control and management of federal financial regulators. These government agencies can bend the rules at their discretion. However, on a public blockchain, the investors are free from the hassle of worrying about unfair or limiting regulatory implementation.
The operating principle of a public blockchain is that every participant has a copy of all the transactions on the network. In this manner, it is impossible to create false records or manipulate the digital ledger. In this manner, the public blockchains are fully automated, and they do not require any supervision from a private or government regulatory agency. The verification and conduction of transactions on the public network are completely managed by nodes.
The public networks are trustless and fully transparent to remain operational. When every participant has a copy of all the transactions conducted on the network, regardless of how big or small their contribution is, they can cross-check any transaction at any given time. In this manner, there is no room left for errors or fraudulent listings. The hackers who want to manipulate the entries on a public network would have to do the same for millions of copies across the globe at the same time, which is next to impossible.
Immutability is the feature of the public blockchains that allows them to remain the same. When a new block is added to the network, there is no way for an external entity to change, edit, reverse, or delete it. Even the biggest financial firms in the world have to deal with mistakes, error margins, and manipulation in their bookkeeping records. Companies pay billions of dollars every year to conduct audits and reconciliation. However, with public blockchains, rechecking filtering is completely eradicated.
- Financial Autonomy
On traditional financial platforms, the rules are written to favour the rich and the powerful. However, on a public blockchain, the same principles apply to all investors. Therefore, it can be said that public blockchain removes the barrier of discrimination and offer equal opportunities for growth for all traders regardless of their contributions to the network.
- Alternative to Fiat
Public blockchains are an alternative to fiat currencies that allow people to have more options for conducting financial transactions and preserving their savings. In case of a massive monetary devaluation, people can convert their savings using the help of public network currencies like Bitcoin and prevent making losses. Likewise, in case of emergencies, people like journalists or state outlaws can use public network currencies to continue their work and survive.
Disadvantages of Public Blockchains
Public blockchains are not ideal for businesses that do not want to share all their data. Furthermore, the public blockchains depend on the confidence of the investors in the market and experience higher price volatility. There is a hypothetical scenario called the 51% Attack, where the miners can form a cartel and gain the ability to duplicate the Distributed Digital Ledger or DDL.
On the other hand, public blockchain can be subjected to the changes in the regulations made by the government that can ban its trading and usage under their jurisdiction, like the Chinese government’s Bitcoin embargo. While every public network does not require mining but the ones that do can face criticism on account of massive power intake and putative environmental concerns.
What is a Private Blockchain?
In contrast to a public blockchain, private Blockchains are managed under the supervision of a centralized authority. Rather than government entities, the private blockchains are owned and operated by a single organization. While the private blockchains also use the Distributed Digital Ledger framework but they can get regular updates and input from core developers.
Are Databases Good Alternatives for Private Blockchains?
A database is a collection of data related to a company or a project that has been stored on a server or a centralized computer network that can be accessed using authentication passes. Before the introduction of blockchains, most companies relied on privatized databases to remain operational. However, private blockchains have the upper hand on a database on account for the following reasons:
Unlike a database, businesses can integrate and communicate necessary information using private blockchain networks. Rather than using outsourced expensive software to reconcile appropriate information available on two databases, companies can make the exchange using a single private blockchain network.
- Joint Ventures
Many companies have switched to private blockchains to validate the inter-organization transaction that grants them greater privacy in comparison to databases.
Databases are great for storing information; however, private blockchains allow companies to trace data in regards to its input, checking, and reusing history.
Advantages of Private Blockchains
- Transaction Speed
Private blockchain verifies transactions with the help of automated nodes and smart contracts; therefore, they are ideal for businesses that often conduct large-scale and international transactions.
- Gas Fees
Most private blockchains use smart contracts that require the processing power of a few computing machines. Therefore, the transaction fees on private networks are often cheaper than on public networks and traditional financial channels.
- Environmental Friendly
Private blockchains do not depend on PoW like their public counterparts. With the help of PoS or the Proof-of-Stake mechanism, private blockchains do not require a lot of electricity or power input for mining. Also, they cut down the need for paper-based documentation and record-keeping that is necessary for traditional financial systems.
- Power Input
The power input requirement for private blockchains is minor on account of their dependence on the PoS consensus model, which saves a lot of cost for the operators.
An average database or a traditional financial network is not as compactly secure as a private blockchain network. By design, it is quite an expensive and laborious task to hack into a private blockchain network.
With the availability of private blockchains, the enterprises that are using them for conducting financial transactions can be free from the pressure exerted by the government agencies. They have greater independence over their transaction history and can introduce protocols that are profitable for the organization that is using that network.
Companies are updating their databases into private blockchains to enjoy better management features. It is possible to maintain the privacy of data, to draw back details about viewership, input, time, etc. Furthermore, it is also possible to upgrade the network from time to time to improve its functionality and enhance performance.
Disadvantages of Private Blockchains
Despite offering a considerable amount of advantages, the private blockchains also suffer from some setbacks mentioned as following:
For small and medium enterprises, upgrading to a private blockchain network can be costly. They might also not be able to enjoy the full advantages of a private blockchain network on account of the smaller-scale operations. On the other hand, it can also add more cost to the balance sheets for the small enterprises to maintain and manage private blockchains in the long run.
- Network Manipulation
Since private blockchains are operated by a centralized authority, it can be risky for a third-party enterprise without big enough stakes to use or invest in that network. The private entities that control and operate the private blockchain can change or introduce policies that favour them at the expense of other investors. The owners of a private network can also hoard a massive amount of currency issued by that network which will be unfair to the rest of the investors.
Private networks are not decentralized by any means; it means that everyone who is using these private blockchains to conduct transactions is ready to share their data and transaction history. On a private network, the consumers do not have any financial autonomy or control over their data. In some cases, private blockchain may force its users to make purchases or set a minimum percentage to maintain a user account.
Key Differences Between Private and Public Blockchains
Now that it has the underlying properties, functionalities, and drawbacks for both public and private networks have been established; it is possible to conduct a comparative analysis between them. Here are the main key differences that set private blockchains apart from public blockchains
Private blockchains operate on a smaller scale in comparison to public networks. Public blockchains like Bitcoin intend to provide financial services to consumers hailing from all parts of the world. At any given time, a public network can host millions of active users. Therefore, they often suffer from lags and backlogs.
During peak seasons, when online traffic increases on the public networks, they tend to become slower. The users of a public network may have to wait for days to complete a single transaction. On the other hand, private blockchains are often operating on a smaller scale. Hence, they can handle a predetermined amount of nodes on the network and maintain their efficiency around the clock.
It is next to impossible to delete any block that is present on a public network. The public network does not have the volunteer option to delete any of the blocks that have been added to the network from its first to the latest transaction logs. Since public blockchains are decentralized, no developer or regulator has the authority to make that call.
On the other hand, the private blockchains are under the control of a singular operator. In case the owners of a private blockchain deem it appropriate, they can choose to remove a block at their discretion. Once a block has been removed, the third-party users can’t recall its data since only the authorized personnel of the management can access the transaction logs.
On a public blockchain, anyone can take part in the mining or consensus process. Since public networks are open-sourced, they allow anyone to copy the code and make use of its as they deem fit. Furthermore, regardless of their participation, everyone is allowed to examine the blocks and transaction history available on a public network. Those who wish to use a public network do not need to apply for a registration and can do so with the help of an internet connection and a computer at their disposal.
On the contrary, a private blockchain is under the control of a corporate entity. There are levels of participation that are decided by the management. Only a select few of the development contributors have full access to the blockchain nodes and code. Furthermore, the voting rights are reserved for high stake investors and those who are allowed entry by the management.
- Gas Fees
The transaction fees on the public network are usually the same for all the participants regardless of the size of their financial transfers. Therefore, some of the public chains are not considered an ideal medium for conducting small everyday purchases. On the other hand, these blockchains are considered an ideal vessel for making large-scale transactions.
In some cases, the transaction fees on a public network can increase with the increase of the nodes on the block. Fees on a public network can keep increasing with the buildup of backlogs. That can create some issues for the users of the network. Meanwhile, Private networks often have controlled gas fees that are often almost non-existent since they are reserved for corporate transactions.
- Data Management
All information is universally available and shareable on a public network, while data is controlled and conditionally accessible on a private blockchain.
Public networks are more decentralized in comparison to private networks. Every participant of a public network has an equal amount of authority over the data and can participate in the consensus model without needing any authorization or approval. On the other hand, Private networks reserve the rights of consensus participation, and they can make changes in policies and block information on the network as they deem fit.
Private blockchains are becoming more popular as companies are looking to introduce projects like Blockchain World Wide. BWW is introduced by IBM on the Stellar network to make international transactions more secure and cheaper. Some enterprises are exploring more use cases for blockchains in gaming, supply chain management, record keeping, quality control, construction, project management, and other areas.
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