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Consortium vs. Federated vs. Public vs. Private Blockchain

Dec 27, 2023

Public Blockchain

Let’s begin with public blockchains, arguably the most emblematic type of blockchains. Bitcoin and Ethereum stand as prominent examples of public blockchains. When the notions of decentralization, accessibility, and openness are discussed in the context of blockchains, they are referring to public blockchains.

Image source: InvestaX

Data on public blockchains is freely accessible to all. Any individual can join a public blockchain, contributing data, scrutinizing existing data, participating in transaction validation, or being involved in network governance. These blockchains rely on voluntary participation, underscoring the importance of incentivizing more individuals to join the network to maintain decentralization and data security. This incentive structure forms the basis for offering mining rewards on the Bitcoin blockchain.

These blockchains embody principles of equality, free access, complete transparency, and lack of centralized authority. They are well-suited for projects seeking self-sustaining networks free from singular entity oversight, safeguarded by encryption and automation. Bitcoin’s robust design and the collective strength of the community have effectively safeguarded it against significant security breaches over its 10+ years of operation.

However, challenges arise when projects necessitate privacy and anonymity, areas in which public blockchains fall short. Transactions can be traced, and sharing a wallet address typically enables others to track its associated history.

Another concern lies in the mechanisms of transaction validation. While the Proof-of-Work (PoW) consensus mechanism employed on the Bitcoin blockchain has been critiqued for its environmental impact, other cleaner protocols (e.g., Proof-of-Stake) are often perceived as more centralized. The open nature of public blockchains means that bad actors do not face the same barriers to entry, posing another drawback.

Private Blockchain

Private blockchains represent the antithesis of public blockchains. Participation in a private blockchain is strictly by direct invitation, extended to identified users with verified personal information. Verification can be executed through smart contracts or other automated confirmation mechanisms. A principal responsibility of private blockchains is to fortify the network against intruders.

These centralized distributed ledgers embody exclusivity. Only chosen members partake in mining, governance, ledger maintenance, or network rule updates. Solely the network owner or designated individuals possess the authority to modify, delete, and oversee the on-chain data, and they or appointed agents can operate the full node of a private blockchain.

Due to a lesser focus on concealing users’ identities and ensuring data transparency, architects of private blockchains can dedicate substantial resources and space to perfect the network’s immutability. This enhances the resilience of data stored on private blockchains against intrusions, making them particularly suitable for industries such as supply chains, logistics, payrolls, accounting, finance, healthcare, law enforcement data management, and others.

Given their specific utility, private blockchains are not prevalent. With a limited base of validators and pronounced centralization, private blockchains are less resilient to attacks compared to decentralized public blockchains.

Consortium or Federated Blockchain

Lastly, we turn to a blockchain type occupying a midway position between private and public blockchains – the consortium or federated blockchain (also known as a permissioned blockchain). We have previously published an in-depth article on this topic, accessible via the link. Here, we aim to provide fundamental insights into consortium blockchains.

Image source: Foley & Lardner LLP

Consortium (or federated) blockchains cater to the collective needs of corporate groups. When several institutions collaborate, or need to share a common information space with equal data access and transparency within a network closed to non-members, they opt for a consortium blockchain.

Consortium blockchains restrict network access to verified permitted members exclusively. This serves to shield sensitive data from unwarranted attention while maintaining transparent and freely accessible data for all participants involved, ensuring the veracity of shared information across the consortium.

Typically built on Proof-of-Stake (PoS), consortium blockchains are governed by consortium members or corporate leaders, ensuring equal access to governance and transparent data. This fosters a horizontal, secure, and private working environment with straightforward communication channels for all involved participants. Some federated blockchains exhibit a more intricate structure with different permissions for various actors.

The most renowned consortium blockchain is Ripple, serving as the foundational blockchain for the XRP token, one of the highest-rated cryptocurrencies industry-wide as of 2023. Given Ripple’s role as an ecosystem facilitating cross-border remittances through financial institutions globally, the characteristics of consortium blockchains align seamlessly with Ripple’s needs. The provision of financial data to these institutions for conducting payments necessitates restricted access due to its sensitive nature, making public and private blockchains unsuitable for Ripple.

Differences

Let’s now recap the main disparities between these types of blockchains:

Centralization: Private blockchains are centralized, affording the owner the authority to write, delete, and modify the stored data. Public blockchains, in contrast, are decentralized. Consortium blockchains, although decentralized, involve fewer participants than public blockchains.

Privacy: As the name suggests, private blockchains offer the highest level of privacy. Access to information is restricted to prevent unauthorized access. In contrast, public blockchains operate with complete transparency, displaying encrypted data, though this does not preclude individuals from being traced using this data.

Access: Private blockchains can be accessed by identified individuals via direct invitation. Consortium blockchains have restricted access too. Although the selection is not so tight as on private blockchains. Public blockchains can be joined by anyone. The identities of users remain unknown.

Incentives: Public blockchains exclusively provide incentives, thriving on decentralization and seeking to attract as many participants as possible. Consortium and private blockchains are closed systems, with users typically driven by other motivations.

Security: Decentralization contributes to the security of blockchains. Public blockchains are generally considered secure as long as they maintain a high level of decentralization. Conversely, private and federated blockchains prevent unauthorized access to data, bolstering data security. However, centralized ledgers are more susceptible to data interference.

Conclusion

Having acquainted yourself with the specificities and distinctions among blockchain types, it becomes evident how diverse they can be based on their intended purposes. Furthermore, you realize that perceiving blockchain as intrinsically decentralized and transparent is an oversimplification. While public blockchains, exemplified by Bitcoin and Ethereum, embody the stereotypical perception of blockchain, federated blockchains like Ripple also deserve recognition. Private blockchains present an entirely distinct landscape, often employed for internal purposes by numerous companies, not all of which are widely recognized on a global scale.

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