Do we need mining in private and permissioned blockchains?

Talks on private and permissioned blockchains always raise the questions like.

“Where does the mining happen in private and permissioned blockchain?”

“How can a blockchain work without mining?”

The frequency of questions motivated me to write this post. I will try to explain what are differences between public, private and permissioned blockchains. Why do we have mining in public blockchain. And at the end hopefully give you answer about mining in the context of private and permissioned blockchains.

Let’s first define what I mean by public, private and permissioned blockchains*).

What public, private and permissioned blockchains have in common ?

• Decentralized peer-to-peer networks, where each participant maintains a replica of a shared append-only ledger of digitally signed transactions.
• Maintain the replicas in sync through a protocol referred to as consensus.
• Provide certain guarantees on the immutability of the ledger, even when some participants are faulty or malicious.

What are public, private and permissioned blockchains differences ?

• Who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger.
• Public blockchain network — Open, anyone can join and participate, has incentivizing mechanism to motivate participants to join.
• Private blockchain network — Private deployment might use different consensus, typically does not need incentives for participants
• Permissioned — Restrictions on who is allowed to participate in the network, and only in particular transaction

Mining in public blockchains like bitcoin is part of the consensus protocol named Proof of Work. The word itself is connected with incentive given to miners in exchange for energy they spent to enhance stability, security and safety of the network. Lets look on these properties in more detail.

Stability

In bitcoin network, the average time to solve the puzzle by miners is set to 10 minutes (Litecoin ~2.5 minutes, Ethereum ~15 seconds). The probability that two or more miners will successfully solve the puzzle in about the same time and broadcast the new block into the network is proportional to the frequency new blocks are created**). This goes against stability of network where we want to minimize chain forks.

The longer average time to create a new block is, the higher probability transactions will reach all the nodes. It helps to increase the network stability preventing forks too.

Safety and Security
The second aspect of mining is to strengthen irreversibility of the transaction. Mining of new block requires energy to solve the puzzle. The transactions within blocks are guarded by all the energy spent on mining blocks before them. The older the block is, the lower is the probability it would be orphaned. The older the block is, then more energy would be required to modify the block. ***)

Fairness
Reward coming from coinbase transaction incentivizes members of the network (e.g., new bitcoins) and fees collected from transactions included in the forged block. The race for the block brings fairness about spreading the incentives between miners proportionally to the power they are spending to safeguard the blockchain. The fairness has also other benefits regarding decentralization and safety, but lest keep that apart for clarity now.

The Proof of Work provides high levels of security, safety, and irreversibility that is required in the anonymous public environment. The price for that is high energy costs and limits on transaction throughput.

Let’s evaluate the above mentioned properties in the private and restricted blockchain case.

The number of nodes in a business network is typically an order of magnitudes lower, and there is usually direct network visibility. Therefore you do not need a big time windows to ensure transactions are spread through the whole network. Slowing down the creation of new blocks through PoW is not required or not to that level to achieve stability.

In the permissioned and private blockchains, the identities of members are known. It is restricted who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger. There is typically no native token or incentives to motivate members to join and perform mining. Fairness required for distribution of incentives is not present at all.

Because members are not anonymous and networks are usually not exposed to hostile public internet environment the requirements on cost of immutability are weaker. The blockchain does not have to be guarded by the enormous cost of energy. For immutability integrity through hash chain and replicas owned by different parties is usually sufficient.

Differences in the environment and known identity of network participants along with their defined roles removes the need for the high cost protection through the PoW mining. More emphasis is put on transaction throughput, fault tolerance, overall efficiency and restriction of access to the blockchain data and smart contracts.

This affects selection of the consensus algorithm (voting based are preferred) and enables achieve high transaction throughput without using side chains as “work-around” solution for the public blockchains.

*) Source https://www.ibm.com/blogs/blockchain/2017/05/the-difference-between-public-and-private-blockchain

**) The situation when one or more valid blocks appear is resolved by the “longest chain rule”. The longest chain (the one where most energy has been spent) takes the precedence and therefore network converges back to a single chain. The transactions from orphaned chains move back to miner mempools and are candidates for the next block.

***) In the bitcoin network, a transaction is considered safe if confirmed by six blocks. Creating a parallel chain with transactions in favor of attacker is expensive or close to impossible by all the energy needed to achieve that.