Public vs Private Blockchains: Challenges and Gaps

Since its introduction, blockchain has undergone several iterations as the general public and private corporations sought to take advantage of its valuable infrastructure.  

While its spectacular design has long played second fiddle to the speculative sentiment driving valuations in cryptocurrencies, blockchain’s actual technological rewards should not be discounted.  If anything, the attention fixated on the rampant rally in cryptocurrency valuations has brought increased attention to the entire ecosystem, accelerating adoption and even raising a greater likelihood of institutional participation.

Already, countless name brand global multinationals have entered the space in a drive to revolutionize their offerings.  IBM, for example, is one of the companies at the vanguard of blockchain technology applications for business, especially amid the growing drive to migrate more services to cloud-based infrastructure.  Even so, it is just one example of the growing corporate embrace of blockchain, though it highlights the shift towards the deployment of private blockchains that eschew many of the properties and principles popularized by the earliest chains.

Building on Efficiencies

At its core, blockchain can be viewed as a decentralized store of information, or a database that is updated in real-time and distributed across its user-base for validated record-keeping.  Distilling the concept even further, it can be a trustless means to exchange value, both informational and asset-based.  Above all, public chains are especially valuable due to the transparency inherent in the technology, with anyone able to view and verify all the data recorded on each block.  

One of the reasons blockchain has gained such prominence is that just like ERP systems are designed to help enterprises connect different departments and systems, the technology can serve as a similar hub.  IBM’s collaboration with global shipping giant Maersk and logistics provider Agility highlights the intersection of multiple common interests, namely deploying the Hyperledger Fabric 1.0 blockchain to reduce administrative costs by building a more efficient mechanism to transfer information.

Blockchain is a capable architecture that enables frictionless relationships, whether between company units and service providers in the case of private blockchains, or communities separated by national boundaries when referencing public chains.  

Public blockchains are extraordinarily valuable because they can serve as a backbone for nearly any democratized solution.  Whether verifying an identity, helping internet surfers gain control over their own data through solutions like VALID, or even using MATRYX to enhance collaborative efforts between researchers, public blockchains are at the front line of the revolution because of their permissionless design that allows anyone to participate.  

Nonetheless, public chains are not without drawbacks.  Early entrants like bitcoin and Ethereum reveal several limitations that are harming adoption efforts.  One of the biggest problems is efficiency and the amount of processing power required to run these networks.  

Resource-intensive and expensive proof-of-work consensus for transaction verification means that despite its popularity, bitcoin is still not a viable replacement for traditional currencies.  If you’re a trader, you’ve probably already encountered these issues in one form or another, either because of network sluggishness or high fees accompanying trades.

Although newer, lighter blockchains like Qtum are overcoming the amount of processing power needed to host public blockchains, private blockchains have already overcome this hurdle out of necessity.  (See also: What Is Qtum? How the Cryptocurrency Differs from Bitcoin.)

By reducing their focus on protecting user identities and promoting transparency, private blockchains prioritize efficiency and immutability. These are important features in the realm of logistics, for instance, which requires low-cost exchange of tracking information in real time.  However, the permissioned nature of these chains implies that they are much less transparent and not designed for broad adoption and openness, thus limiting their potential reach and application.

Bridging Inclusivity and Exclusivity

Public blockchains are just that: designed for public consumption.  By their inherent design, they allow anyone to participate in the community in nearly any capacity, thereby contributing to increasing rates of adoption. Many of the projects that have emerged aim to provide decentralized utility to as many users as possible, but they remain constricted by scalability and trust issues. Though second-layer solutions have solved some parts of these problems, they are still not enough.

Private blockchains, while purposefully designed for enterprise applications, lose out on many of the valuable attributes of the permissionless systems simply because they are not widely applicable, but are instead built to accomplish specific tasks and functions. Companies like Brazil’s Construtivo use private blockchains to solve specific issues such as transparency and easier auditability of records in infrastructure projects.

Construtivo utilizes a platform built by MultiChain, which allows for permissioned blockchain creation for specific use cases, as opposed to larger public chains that offer broad applicability.  However, despite the drawbacks of a more closed ecosystem and the associated limitations, the next big leap in blockchain intends to overcome these constraints, narrowing the gap between public and private, even potentially enabling them to interact.

One of the major complaints about blockchains is their inability to share data, or lack of compatibility, a common challenge faced by both private and public chains.  If blockchains are a means to transmit and transfer value, whether digital or physical, eventually a conduit must be formed to bridge disconnected systems to expand the reach of existing applications.  The most oft-cited example is exchanging value from one cryptocurrency to another.  

Although there are many different tradeable cryptocurrency pairs, either pegged to fiat currencies or other competing cryptocurrencies, the process of transferring value from say bitcoin to an ERC20 token may involve multiple steps that add costs instead of subtracting them through seamless transfer. (See also: Blockchain Is Changing How Dating Apps Work.)

The growing movement towards building solutions bent on delivering cross-chain functionality means that many of the existing obstacles currently governing the exchange of value will gradually fade.  In effect, cross-chain functionality could gather together the best features of blockchains, both private and public for the purposes of exchanging value across disconnected ecosystems.  Ripple has already made notable strides to this effect, with Interledger already testing transactions across multiple ledgers simultaneously in different currencies.  

Other solutions are tackling similar challenges from a different perspective by focusing on promoting the Internet of Value. By developing an open code public chain designed for cryptofinance applications and third-party developers to contribute to the ecosystem, FUSION focuses on building interoperability to improve compatibility between the values transferred on various chains.  With solutions like multi-token smart contracts, off-chain data support, and even parallel processing capabilities, FUSION intends to accomplish the early goals of disintermediation touted by blockchain within a single platform.

“The FUSION Foundation hopes to create a 5I (inclusive, interoperable, independent, intelligent, innovative, independent) public chain for the cryptofinance in the era of the Internet of Values under the guidance of 5D (distributed, democratic, disintermediate, decentralized, democratic, disappeared),” said Dejun Qian, CEO of FUSION, in a recent interview.

Bumping Up Against The Limits

Although noble in its original quest, blockchain’s advance is bumping up against the barrier of limitations.  Decentralized formats like blockchain offer immense potential, but the key to unlocking all its capabilities depends on developing systems designed to link disconnected chains.

Interoperability has long been the missing key to overcoming the hurdles faced by both private and public blockchains by empowering them to interact and exchange values across platforms seamlessly.  Though separated by their functionalities and purposes, the potential to merge public and private blockchains with innovative new solutions designed to accomplish cross-chain exchange and greater compatibility holds great promise for all interests, both individual and corporate.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrencies.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.