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What is a Private Blockchain and How Does It Work?

By Brian Nibley · October 28, 2021 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What is a Private Blockchain and How Does It Work?

The term “blockchain” most often implies a public blockchain. The Bitcoin blockchain, the first ever created, is a public blockchain, and for a time it seemed like all blockchains functioned the same.

But in the 12 years since the creation of Bitcoin, many individuals and organizations have experimented with different versions of blockchain technology. As a result, the answer to the question “what is blockchain” has become somewhat more complicated. In this article, we will examine the differences between a public vs private blockchain.

Basics of Blockchain

Blockchain technology is a form of decentralized ledger technology (DLT). A distributed ledger consists of multiple servers that can be spread across different geographical regions. The ledger can be used to record transactions or other information without relying on a single computer.

A blockchain is unique in terms of DLT in that blockchains are decentralized, permissionless, and create an immutable public record of transactions. The servers in a blockchain are referred to as “nodes,” which are computers that make sure everyone on the network agrees on the blockchain’s history, a feat known as “consensus.” At least, that’s the case for the Bitcoin blockchain, which was the first ever created.

Since the launch of Bitcoin in 2009, many variations of the original blockchain technology have sprung up. Some are more centralized, require permission to use, or use different consensus mechanisms.

Recommended: What Happens When Bitcoin Forks?

What is a Public Blockchain?

A public blockchain is one that is decentralized, can be used by anyone, and maintains a public ledger of all network activity.

Bitcoin is a good example of a public blockchain. All Bitcoin transactions are recorded on the blockchain and can be seen by anyone using a simple block explorer like blockchain.info. There are also more advanced tools, like those created by companies such as Chainalysis, that can analyze blockchain data for more specific details. Those details can be useful for finding illicit transactions or hacked coins, for example.

Bitcoin is also a permissionless blockchain, meaning anyone can use it without needing permission. This makes the network equitable in that there are very few barriers to entry. All anyone really needs to initiate a Bitcoin transaction is either a home computer or a smartphone and a Bitcoin ATM.

What is a Private Blockchain?

A private blockchain can be thought of as the opposite of a public blockchain. It’s kind of like a personal blockchain for whoever runs it.

Rather than a decentralized network of nodes achieving consensus on a network that can’t be owned or controlled by any single person or group, private blockchains represent a different kind of system.

Private blockchains are more like centralized distributed ledgers. Some might even argue that they are not blockchains at all, given that decentralization is often thought to be a key feature of blockchain technology.

How Do Private Blockchains Work?

Rather than being decentralized, a private blockchain is owned and controlled by one person, group, or organization. This party will control:

•   who can participate in the network (users must be invited and verified, meaning that private blockchains are also permissioned blockchains)

•   how consensus will be achieved between the nodes

•   how mining rights and rewards will be distributed

•   how the ledger will be maintained

Whereas public blockchains create an immutable ledger, the owner of a private blockchain can override, reverse, or delete transactions as they see fit.

When it comes down to it, a private blockchain is a distributed ledger that functions as a closed database based on cryptography. The only parties who can run full nodes on a private blockchain are those that have received permission from the owners of the network.

Readers interested in learning more about a specific private blockchain example could research projects like Ripple, Quorum, or Hyperledger Fabric.

Recommended: What is Ripple XRP?

Pros and Cons of Private Blockchains

Private blockchains offer some pros and cons that are distinct from those of public blockchains.

Pros of Private Blockchains

There are a number of pros of private blockchains, including potentially lower energy usage, higher transaction throughput, and more control over unwanted network activity.

Lower Energy Usage

The computing power required to run thousands of nodes around the world to achieve consensus on a public blockchain can add up to a significant amount. In contrast, centralized private blockchains use less energy because they run on just a handful of servers.

Ability to Remove Unwanted Activity

A private blockchain gives its owner the ability to reverse or delete transactions. So, if someone steals funds or information, that problem can be solved easily.

Faster Transactions

Private blockchains can scale more easily than public ones. The number of authorized participants will be much less in a private blockchain, allowing it to process many more transactions per second than a public blockchain.

Cons of Private Blockchain

There are a few downsides to a private blockchain, both of which trace back to its centralization.

Potential for Censorship

Private blockchains face the same challenge as all centralized systems: They require users to put full faith in whomever runs the system. If that person or group decides to take actions that benefit themselves and hurt network participants, there is often little anyone can do. And if the network operators want to exclude certain people from participating in the network for whatever reason, they can do so.

Decreased Security

Private blockchains may be seen as less secure because they create a single point of potential failure. If attackers can seize upon this single attack vector, the network could be in big trouble. Public blockchains, in contrast, have greater blockchain security because controlling the network requires controlling 51% of the network’s nodes.

Recommended: What is a 51% Attack?

Public vs Private Blockchains: Main Differences

In many ways, the distinctions between a public and a private blockchain are easy to point out because they are polar opposites. Here is a recap of their main differences.

Public Blockchain

Private Blockchain

Anyone can run a full node. Only selected participants can run a full node.
No one needs permission to use the network. Only selected participants can use the network.
An immutable public ledger is maintained in a decentralized manner. The ledger can be altered by the entity that controls it.
It’s owned by no one. It’s owned by a single centralized entity.

Is a Public or Private Blockchain Better?

There is no definitive answer as to whether a public or private blockchain is better.

Private blockchains might have some specific use cases in private industry. But because they can be centrally controlled, some might argue that private blockchains defeat the entire purpose of blockchain technology.

Yes, a private blockchain could consume less power, enable faster transactions, and give greater privacy to its users. But the tradeoff is that power becomes concentrated into the hands of whoever controls the network, and they can change the rules anytime they like.

An open, public blockchain like the one that Bitcoin runs on is the most equitable approach and makes the system nearly immune to censorship or corruption. No one can stop someone from using Bitcoin, and no single person or entity can control Bitcoin. Changing the rules on a decentralized network requires a majority of nodes to come to an agreement.

The Takeaway

Public and private blockchains couldn’t be more different from each other. And while the permissioned approach of private blockchains may result in higher speed and efficiency, it can also come with a higher potential for corruption.

For those interested in exploring the world of crypto, the SoFi Invest® investment platform is a good place to start. With SoFi Invest, investors can trade more than two dozen cryptocurrencies, including Bitcoin, Litecoin, Cardano, Dogecoin, Solana, Enjin Coin, and Ethereum.

Find out how to get started with SoFi Invest.

Photo credit: iStock/anilakkus


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