Public vs Private vs Consortium Blockchains — what’s best for enterprises?

It is the year 2018… While the majority of companies is still looking for meaningful applications of blockchain technology, those who have already found them are facing a minefield of potential technologies for implementation. If you have the luckiest day in your live, you will create a case, implement it with one technology and, at the end, it will simply work. On all other days, when you do not have all the luck in the world, you are probably going to create something that will crash totally in a spectacular way sooner or later.

And the reason therefore is that at the moment, a lot is sold as “blockchain”, which is not a blockchain at all, just to carry this fancy label. I already dedicated an article to the topic Public or Private Chains in 2017. Today, I will update on this still interesting topic.

The faith in blockchains

The reason why blockchain was such a popular topic over the recent years is the quest to build a digital world, which is not dominated by a few central players. That quest is industry-independent, due to the circumstance that the need to cooperate in a flexible and efficient manner is an almost pan-industrial topic. Nobody wants to share his most important data with market-dominating platforms and no one wants to give up sovereignty over his own data and business.

Undoubtedly, public chains like the Ethereum public chain are the best option with respect to decentralization, the main reason to use blockchains. Therefore, the question is worth asking whether solutions other than the public chain have a right to exist at all.

Photo by Nikita Kachanovsky on Unsplash

Do we need alternatives to public chains?

Why does the question of alternatives to public chains arise? From the perspective of the current situation, there are two answers. One is an attempt to save traditional business models into a new era. An impressive example of this is the joint venture between IBM & Maersk, which has the goal to create

“… the first open platform of significant scale for sharing information and developing digital products related to trade.”

Two market dominating enterprises create a new central entity to build an “open” platform — regarding the ideas behind decentralization, openness and blockchain, this sounds completely wrong.

The second answer is not that easy because it is caused by some hurdles of today’s public chains on the technical but more important on the legal side. Technically, there are still issues like the weak performance of public chains. Ethereum today supports roughly 15 transactions per second, which is far beyond the requirements for a global cross-industry transaction handling platform. There is currently much focus on this issue and with second-layer solutions such as Sharding and Plasma this problem shall be solved.

Vitalik Buterin explained recently…

“… So if you get a 100x from Sharding and a 100x from Plasma, those two basically give you a 10,000x scalability gain, which basically means blockchains will be powerful enough to handle most applications most people are trying to do with them. …”

Another hurdle from a business perspective is the volatility of the networks core tokens, which are required to pay for transaction processing. It’s easy to understand that it is a big problem for companies today not to know what a transaction will cost in the future. A look on the price fluctuations of Ether for instance reveals the problem. Over 12 months, there is a volatility of factor 5 and more and therefore it is absolutely unsuitable for enterprise applications. This is not only an issue of Ethereum, but of all the chains whose native tokens are traded on market places. Perhaps the problem will become less significant if market prices become more stable, but this is not foreseeable today.

But the biggest hurdle is in the legal environment. And that’s not just a hurdle, it could be a show-stopper. The use of public chains creates an absolute legal uncertainty with regard to data privacy and especially the GDPR. Beside the problem that you cannot delete data within a blockchain (the right to be forgotten), you cannot create the required contractual basis consisting of data controllers and data processors. This is because you do not know, who operates the blockchain nodes: so you cannot close data processing agreements with them. That’s a show stopper for all applications, which process personal data on a public blockchain. You can argue now that you do not have to place personal data within a blockchain, but in reality this would be very hard or limits extremely the cases you can realize using blockchain technology.

Let’s think about private chains

A characteristic feature of a private chain is that it is operated and controlled by a single organization. This organization then also determines the rules of the chain. Often, tight partner organizations are involved in the consensus, giving the impression of quasi-decentralization.

Nevertheless, the rules of the game will still be centrally determined. Use cases converted to private chains can be sold well with this quasi-decentrality. However, this does not make sense in the end.

Because then it is just like when you paint your 23-year old Corolla in a new color and say to your neighbors: “Hey guys — this is my brand-new car!”

Of course, there are cases where such a private solution makes sense, but then you can also use distributed databases, a classic and well established technology. This is exactly what usually happens with “Private Blockchain” projects. Solutions such as Hyperledger Fabric are used here, in which “blockchain” is written on the package, but the content is a distributed database. More about this in my last blog post “Ethereum, Hyperledger or IOTA for enterprises — where are the differences?” .

What about consortium chains?

If different companies operate a blockchain together, we speak of a consortium chain. In order to be a consortium and not a private chain, the participating companies must be equally involved in the consensus and the decision-making processes of the chain. Technologically, consortium chains can be easily implemented using solutions such as parity. However, the balanced control of the consortium by the partners involved is critical. Since this governance is often neglected in such projects, the result of all efforts is often again a centrally controlled private chain.

Photo by Perry Grone on Unsplash

Nevertheless, well-established consortia can of course make a difference. We have seen in various initiatives how companies find each other, define common communication standards and make them executable on the basis of blockchain. The example of a construction machinery rental project, through which availability information of construction machinery can be exchanged with the help of blockchain without creating a central marketplace, is just one example of such a consortium project.

Nevertheless, the possibilities of these consortia are very limited. A cross-industry, decentralized ecosystem requires above all the following essential components:

Trustful identities — the key to decentralized ecosystems are the identities of users, suppliers, partners and all further stakeholders. To work with identities across multiple applications, they must be trusted, which can either be explicitly given by trusted third parties (certificates, identity documents) or implicitly resulting from interactions with other partners.

Overarching token models — decentralized ecosystems are characterized by the fact that services can be provided and used uniformly by different partners. In addition to identity, it must also be possible to transfer values between different applications from different providers. Whether these are rewards or representations of real products depends on the respective area of application.

Digital currencies — there is still no credible digital currency that can be exchanged for classic money at any time and has a stable value structure. It is undisputed that this makes sense in order to process fully digital transactions. This, too, requires a trustful ecosystem that is carried on broad arms.

With the help of these mechanisms, digital ecosystems can be created in the future that are truly decentralized and without central intermediaries. This requires more than just individual consortia. Such an ecosystem can only be created on the backs of different organizations from different industries. There is a need for a chain infrastructure that exists independently of the applications operated on it and in which every interested organization has opportunities for participation. The applications running on it must be able to be realized — permissionless — by everyone. It all sounds like public chain principles, doesn’t it? This is also the case, with the difference that nodes that operate the chain are known and are committed to compliance with data protection standards. In addition, less labor-intensive consensus algorithms such as Proof of Authority can be used in an environment of known nodes.

It’s all about governance

At the end of the day, it is rather a question of governance than of technology, whether decentralized cooperation initiatives are successful or fail (or do the same things with the blockchain label that they have done in the past). Adequate governance must determine what the participants can vote on. This includes technological issues such as chain updates, block sizes and block speeds as well as financial issues (How much does a transaction cost?) and above all technical issues such as interfaces and data exchange formats.

In the case of a cross-industry blockchain ecosystem, the decision and control areas at the platform level (technology, updates, forks,…) should be separated from those at the business level (interfaces, data formats,…), otherwise governance constructs become unmanageable. It is therefore also important to think in a decentralized way when it comes to governance.

With the, we create exactly such an industry-wide consortial blockchain based on Ethereum technology. Out of the box, functions for identity management, secure data handling and the simple creation of decentralized enterprise applications are offered here. Governance, i.e. who, how and with whom exactly determines what, is still being finalized with the industry partners. Interested companies are cordially invited to join us on our journey.

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