Public and Private Blockchains: an Argument for Compromise

As the debate to whether and when blockchain’s promise will materialise rages on, a sub-debate is simmering, one which boils to the core of the decentralized nature of blockchain.

In the beginning, blockchains were designed to be fully decentralized, publically accessible ledgers that did away with the kind of intermediaries that could label bad money good and bring the global economy to its knees. They were designed to be transparent and open tools for value exchange that promised to overhaul financial transactions and advance digital money into a new era. Investment poured in, and even though interest waned in 2018, PwC reported that $13.7 billion was raised in ICOs in the first five months of 2018.

Then there was the realization that the technology could be applied to other spheres where data is transacted. In fact, whilst financial services accounted for 82% of all blockchain use cases in 2017, the figure almost halved to 46% in 2018 (Gartner). Different leaders in different sectors began to realize that by utilising the distributed ledgers of blockchain, they could create better connected environments for industry and increasing data sharing, meaning increased value.

In fact, a recent Forrester report highlights the value of such interconnection, with the report stating that enterprises can expect a 3-fold ROI from solutions (such as blockchain) that bring about increased interconnectivity.

However, as much as the figures show the upside, not everyone is happy in the blockchain sphere.

The data built up by enterprises over the years was proprietary to them and a valuable trade secret. Sharing may mean caring, but for these business behemoths, opening up their data to third parties and competitors seems more like madness. But maybe there was a way enterprise could take advantage of blockchain without sharing data with the wider public. Sections of the blockchain community would sulk that this means centralizing a technology that was built to be decentralized, but, as the old saying goes: you can’t please everyone all of the time (or can you?).

And so there were private blockchains.

“For private and permissioned, I would use the intranet analogy, and the public networks I would use as the internet analogy,” John Whelan, director of Banco Santander’s Blockchain Lab

So what is the difference in practice? Some relate it to an intranet/internet analogy, but when the internet brought so much value and intranets are all but forgotten, where’s the value in a private blockchain?

With data being the new oil, there is a lot of value in keeping it locked behind closed doors, providing access on a paid basis. Interconnection to even private ecosystems can accelerate growth by fostering more efficient and effective interactions, and bringing about faster product introduction before clients. Moreover, providing network members permissioned access to data means there can be some degree of control over data flows, with resulting culpability for unlawful disclosure and release into the public domain.

But there’s a problem: private chains are not decentralized, so it begs the question of why would a company introduce a private blockchain over proven, legacy database technology? It makes little sense to implement blockchain where it doesn’t enable parties that do not trust each other to work together, and this is essentially a private blockchain: where trusted parties are invited to take part, with all the regular legal contracts signed and enforced externally.

Whilst private chains are scalable, they can be easily substituted by non-blockchain tech. Created to solve a particular case, yet not fully decentralized, they do not facilitate a distributed interconnected network. Again, returning to the intranet/internet analogy, private blockchains will always remain a kind of intranet since they are not designed to be part of a massive interconnected network which anyone can join.

However, there is value-add in hybrid permissioned environments in which there is an open-access public blockchain which merges with proprietary, private blockchains that are member only.

“That interconnection of public and private chains actually creates a very strong network. Each chain strengthens the other at an exponential level.” Alex Batlin, blockchain lead at Bank of New York Mellon

So it turns out that the value blockchain can bring to enterprise isn’t a zero-sum question of either private, either public networks, but somewhere in the middle. As such, blockchain-based platforms need to work towards providing solutions that offer integratable and flexible networks that cater to both the private and public aspects of enterprise needs. This can be done by merging the open and closed blockchain ledgers at the infrastructure level so that public and private transactions can be supported. Gartner predicts that this public/private network osmosis could take almost another decade to materialize. I don’t think it will take so long as work is underway by dominant platforms to realize hybrid networks.

There’s always a “but”

The problem here is that the creation of hybrid networks alone doesn’t solve all the issues around blockchain adoption by enterprise. Business-needs dictate that adoption of a particular solution will not only improve process efficiency, but be flexible to meet the requirements of future advances in technology, thus avoiding vendor lock-in.

Moreover, if a certain blockchain solution is not integratable with legacy systems, it will be a difficult feat (if not impossible) to convince companies to overhaul their systems by switching to a new technology. (Here I will not even mention how departments of organizations may provide valid and accepted points about how and why they will be unable to switch from their current system to a blockchain-based one.)

Generally speaking, integration of a new technology takes place in three stages:

1. Measure against current system
2. Run concurrently and integrate with current system
3. Complete switch to new system

Taking these stages into account, in addition to vendor-lock in risk, we come to the conclusion that a viable enterprise blockchain solution shouldn’t just be a hybrid public/private network, but also one which is interoperable with both current IT systems and integratable with existing solutions, yet future-proof for possible integration with new innovations.

Until these issues are overcome, the vast majority of blockchains for enterprise will remain in pilot or development mode. Furthermore, should an enterprise adopt a private blockchain solution when they are likely to find that a proven legacy database technology may have been a better option? Just as with other networks, blockchain networks provide more value the more participants are able to join (Metcalfe’s law).

It’s pretty clear that interconnectivity is something of critical importance to enterprise and this is at the heart of blockchain networks. However, since the majority of blockchain-based applications are currently only active on private networks, the benefits of interconnectivity are drastically reduced.

This is why the best solution is somewhere in the middle: a compromise, hybrid solution that pairs both public and private data management.

Andrey Zhulin is the CEO and co-founder of Insolar.

Insolar is an open-source enterprise-grade blockchain platform to enable seamless interactions between companies and new growth opportunities powered by distributed trust.