Private and permissioned ledgers
Part 4 of a series on “Privacy on the Blockchain”.
In the 4th part of this series, I’ll take a deeper look at a different approach to maintaining data privacy — private blockchains.
So far, this series has focused on solutions to improving privacy on public blockchains. As we’ve seen, it’s not easy to maintain financial and data privacy in the face of systems whose strengths are rooted in their public nature. Through cryptography and diligent engineering, the community have found a number of solutions to common privacy issues.
As I’ll explain, private blockchains are not one of those solutions. Instead, I believe they serve best as a restatement of the issues facing public blockchains today, especially acute for the enterprise — privacy and scalability.
The case for private blockchains
In the second half of 2015, the industry took a turn. The price of Bitcoin was stagnant. The Ethereum Genesis block had been mined, but Ethereum wasn’t yet on many people’s radar. After the excitement of 2013 and maintained interest of 2014, VC funding was getting harder to come by.
Having just graduated a Bitcoin-focused accelerator, our team saw this effect first-hand. Fellow graduates struggled to raise traditional venture capital, opting instead to join other accelerators or forgo funding altogether.
Others, however, pivoted to serve enterprise clients, and went on to raise significant rounds. In fact, the trend was mirrored in the greater space, with high-profile Bitcoin infrastructure companies like Gem and Chain pivoting to work on private blockchains and “permissioned ledgers”.
What, exactly, is a permissioned ledger?
Businesses were sold on the idea of a blockchain. Some were convinced that it could lessen coordination costs between disparate parties. Fair enough. Others heard that blockchains were an existential threat, and were looking to get out in front of the whole thing — historically, a difficult proposition for entrenched businesses.
Suddenly, blockchain conferences were springing up everywhere. Instead of the usual mix of cryptographers and fringe ideologues that made up early Bitcoin events, these conferences were mostly bankers and others from finance attending to learn more about blockchain¹, and take the knowledge back to their respective organizations.
Banks, payment processors, insurance providers, and other entrenched players started proofs of concept with newly-pivoted infrastructure companies. It was a gold rush for anyone comfortable calling themselves a “blockchain expert”. A common refrain was “blockchain without Bitcoin”.
Eventually, engineers were tasked with implementing these proofs of concept. Customers weren’t okay with making their business data public, and needed a solution to keep data private, but it also quickly became apparent that most customers neither wanted nor needed the benefits of a blockchain — immutability, censorship-resistance — and instead just wanted better software.
New terminology was introduced to lessen cognitive dissonance. “Private blockchains” became “permissioned ledgers”, essentially Google Sheets for the Enterprise™. Trustless consensus mechanisms like Bitcoin mining and decentralized validation were replaced with single “validator nodes”, which work remarkably like centralized servers always have. Tim Swanson, former Director of Marketing at R3, introduced the term “distributed ledger technology” to better describe the space².
It was a difficult time for the rest of us. What were these people even selling? Considering the funding crunch, we discussed pitching a product for “gift cards on private blockchains” to sell to issuers. No one on the team could stomach the idea. We strapped in and waited for the pendulum of market interest to swing back toward decentralization.
Boats and blockchains
Eventually, the hype died down, and the pendulum swung. The renewed interest in cryptocurrency and public blockchains led to the breakout of Bitcoin and Ethereum².
I asked on Twitter for quotes on the private blockchain phenomenon. I got some great, if one-sided, replies
And this one, from Samson Mow
But the best I’ve heard recently was an off-hand comment from Joseph Poon, co-creator of the Lightning and Plasma scalability networks, at a recent Ethereum meetup.
The people building enterprise blockchains are second-tier at best. — Joseph Poon
When asked about it afterward, he said he was trolling. Joseph is a notoriously nice guy, and it’s easy to discount this as grade-A snark.
But there’s a serious idea behind the snark. If a problem can be solved on a public blockchain, its solution can be simply ported to a private blockchain.
The inverse is rarely the case. The tech behind private chains can afford less stringent security guarantees — so the work that goes into them isn’t generally useful on public chains.
For this reason, the best minds in the space and the forefront of the field are working on public chains.
Private blockchains today
The trend of private blockchains lives on today, often in the form of private forks of Ethereum. Ultimately, that’s a good thing. The hype around private chains might have been misguided, but there’s still good work being done.
There’s a clear continuum between use cases that require trustlessness — served by public blockchains — and fully trusted networks. It’s difficult to find the middle in practice, hidden in the back-of-house operations of medium and large businesses, but well-positioned business people and technologists are finding the sweet spots, across medicine, supply chain management, and trade finance.
When I and others talk to companies about building their applications on a blockchain, two primary issues always come up: scalability and privacy.” ― Vitalik Buterin
The same quote that kicked off this series is still great motivation for private chains. This time around, though, the private chains are forks of Ethereum. When the public chain is ready to provide the scale and privacy these large businesses need, there’s a clear path to migrate.
Businesses need solutions that work today. Tomorrow, perhaps, we can be ready for them on the public blockchain. In the next post, I’ll discuss data privacy for smart contracts, and how we plan to move the start of the art in public blockchain privacy forward.
Thanks to Laura Wallendal for reviewing an early draft of this story.
[1] Blockchain had somehow become an uncountable noun.
[2] Pretty sure it was Tim, please correct me if I’m mistaken.
[3] You caught me, I don’t know which led to which — explaining the behavior or markets is hard. I do know that price/interest can act as a positive feedback loop.
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