What Is a Private Blockchain and Why Do You Need It?

Many people associate blockchain technology with Bitcoin, but this is not quite the right association. Bitcoin is just one of the many projects that have gained wide popularity due to a crazy rise in value. But in fact, all this excitement hides great technology.

What is a blockchain? A blockchain is a distributed ledger—a chain of blocks with a set of specific data that records information about each transaction. Blockchain allows you to transfer information faster, safer, and cheaper. According to the degree of access, it can be classified into two groups: public and private.

In this article, we will explain what a private blockchain is and what the differences between private and public blockchains are. So, read on to learn how all of this works.

What Is a Private Blockchain?

A private blockchain is a network, access to which belongs to a single person or authority. Private (also often called controlled) blockchains are technological solutions where each participant has a pre-assigned access level. The data that is uploaded to the private blockchain is not viewable.

Private blockchains do not fully implement the basic principles of the blockchain (technology decentralization and equality of participants) because this can lead to significant risks for corporate systems.

Private Blockchains Examples

The most common private blockchain example that can be used in different projects and industries is the Hyperledger platform.

Hyperledger is an open-source project from the Linux Foundation that focuses on developing a range of business blockchain platforms, including IBM’s Fabric, Intel’s Sawtooth, Iroha, Indy, and more. Based on them, it is possible to create a custom blockchain. Hyperledger provides a framework and a set of compatible tools for further development and customization.

Other popular examples of private blockchains are Corda, Ripple, Quorum, etc.

Features of Private Blockchains

There are several main features of a private blockchain that you need to know:

• A private blockchain provides complete data privacy. Network access on a private blockchain is available only to authorized parties. A potential user must get permission before accessing any data or participating in the process.
• A private blockchain has high performance. Since the number of participants is limited, consensus can be reached through a few validators, which means that private blockchains are much faster and can scale easily.
• There is no anonymity in a private blockchain. Users are known to the administrator; they provide documents and other information to confirm their identity.

Why and When to Use a Private Blockchain?

Private blockchains can be applied in many areas, from accounting to agriculture. It can help save time and money by automating transactions between different organizations.

Why do companies choose private blockchain?

• Increased confidence. Implementing private blockchain helps companies determine the origin and recall counterfeit products in a timely manner.
• Immutability. Once the information is recorded, no one can edit or change it, as the blockchain concept implies immutability. This prevents data corruption and reduces the chance of fraud.
• Efficiency. Private blockchain fast-tracks various transactions. High processing speed is a factor affecting the overall efficiency of a company.

What are the best use cases of private blockchain?

Insurance

Blockchain systems provide a direct link between policyholders and insurers. This helps to avoid the use of unreliable third-party systems and time-consuming and costly manual operations for application management.

Banking&Finance

Any financial transaction involves the participation of many parties, each of which uses its internal solutions. With blockchain, banks can work together on the same system to track transactions, making it faster.

Healthcare

Blockchain is a great idea for storing and managing electronic medical records that contain patients’ health information. Blockchain-based healthcare solutions make these records quickly accessible, keep data secure, and help streamline medical reporting.

Supply Chain

Blockchain technology allows companies to track every component of goods, determine their authenticity and prevent fakes from entering the supply chain. Thus, blockchain makes supply chains faster, more open, and more reliable.

Companies Using Private Blockchains

Here are some examples of successful implementation of private blockchain technologies:

• American multinational retail corporation Walmart uses a private blockchain food tracking system powered by IBM’s Hyperledger Fabric. With it, the company traces the product’s origin and the entire production chain within seconds.
• Streaming service Spotify has acquired blockchain startup Mediachain to create a secure environment to protect copyrights and pay musicians.
• DHL and Accenture have launched a track-and-trace blockchain system for the pharmaceutical industry that documents every step, from production to purchase, using unique serial numbers assigned to products.

How Does a Private Blockchain Network Work?

Private and public blockchains have the same principle of operation.

Every computer on the network must confirm every transaction on the chain. Transactions are processed in blocks, which can store several thousand records. When the memory in one block runs out, it is closed, signed, and transferred to a new block in the form of a unique hash. Thus, each block is connected to the previous block. This structure makes it impossible to return or change a transaction.

However private blockchain has features that differ it from the public and here are some of them:

• A private blockchain has full or partial centralization. Management in such blockchains is carried out with the help of special nodes with increased powers. They are responsible for the policy of data distribution and user identification, and they certify data entry into the blockchain.
• In private blockchains, only participants with the right can record information. Access to information may be general or limited, depending on the particular system.
• The private blockchain system’s functioning mechanism and access policy depend on specific protocols.
• The private network operator has the right to override, edit, or delete entries in the blockchain.

Public vs. Private Blockchain

There is a big misconception that public and private blockchains are competitors. But this is not the case. It is only important to understand the difference between them in order to make a decision for your project. Let’s briefly review the main advantages and disadvantages of each solution.

Public Blockchain

Advantages:

• Safety. The more people working in the network, the more difficult it is to make attacks since all chain elements are connected. It is almost impossible for attackers to gain control over the entire network.
• Low maintenance costs. The efficiency of the public network is “controlled” by the entire community developers, users, service providers, and miners, who ensure the integrity of the network and the convenience of working in it. Therefore, the system allows you to create decentralized applications with minimum maintenance costs.
• Powerful network effect. In such an environment, it is easy for a developer to gather a large user base around his application, as users of some applications in the system quickly become aware of others that have just been created.

Disadvantage

Low scalability. The more users are in the blockchain, the more it loads the network with a large number of transactions; this affects the processing speed.

Private Blockchain

Advantages

• Confidentiality. Private blockchain provides better data privacy, as access to the network is controlled, and data is often not even readable.
• Speed. Private blockchains have far fewer participants, so it takes less time for the network to reach a consensus.
• Efficiency. Fast transaction processing increases the efficiency of a business.
• Scalability. Private blockchains can increase the number of transactions without slowing down.
• Low cost of transactions. Verification of transactions in private networks is done by trusted and high-performance nodes instead of tens of thousands of user devices, as is the case with public networks.
• Confidence. The fact that each participant’s identity and role are not anonymous forces users to behave according to the established rules (or be liable in accordance with the policy of the blockchain owner).

Disadvantages

Susceptibility to threats. Since private blockchains contain fewer nodes, this makes the network more susceptible to malicious attacks.

The main reasons for choosing private blockchain for corporate applications are that companies want to know exactly the participants in the process and that they do not want to share their data with a wide audience.

Conclusion

Data distribution using blockchain technology reduces the human factor, makes operations more transparent, and increases data security. Thus, blockchain provides new opportunities for a variety of processes and can replace many intermediaries.

Blockchain can be divided into two main groups—public and private. The principle of operation of both systems is the same, but the main difference is that private blockchain is less decentralized and not anonymous.

Despite this, both public and private blockchains are in demand in different areas. Each of them has its own advantages and disadvantages. Therefore, when integrating blockchain technology into your project, you should make sure that you have an experienced team who can make the right choice — or hire blockchain developers on project or outstaffing basis.