All in a name: why ‘private blockchains’ weaken the blockchain case

All in a name: why ‘private blockchains’ weaken the blockchain case

Many projects labeled ‘private blockchains’ are merely database hygiene or ‘permissioned DLT’ solutions given a more marketing-friendly moniker. But increasing misuse of the term ‘private blockchain’ could create confusion in the market and undermine a clear understanding of blockchain’s real strengths in specific use cases.

Iga Pilewska ([email protected])

Blockchain

Off the block

As investment in blockchain projects slows – venture capital funding has already dropped from more than $4 billion in 2018 to around $800 million so far in 2019 – now is probably a good time to reflect on where the much-hyped, much-heralded technology is heading. According to its original definition, blockchain is a distributed ledger technology (DLT) that a network of users employs to create secure ‘blocks’ of data after reaching a consensus about them. One of its aims was to decentralize decision-making, shifting the burden of trust from a single entity (such as a bank) to a technology-driven process, while granting users some degree of anonymity (by keeping their identities hidden behind secure keys).

In recent years, several private companies have started to experiment with blockchain within so-called ‘permissioned networks’. In contrast to public blockchains, which anyone can join, permissioned networks can only be created and joined by approved participants (see Figure 1). Partly because of this, the phrase ‘private blockchain’ has entered popular usage. But these so-called ‘blockchains’ contradict two of the technology’s fundamental tenets, according to its original definition.

Figure 1: Comparing blockchain and permissioned networks

Comparing blockchain and permissioned networks

In a blockchain network, anonymous users agree on the creation of data blocks. In a permissioned network, although users sit behind security keys, anonymity is not guaranteed, nor does the process create a chain of data blocks. In addition, in permissioned DLT networks users may have different levels of access (they may be able to see transactions, for example, but not transact themselves).
Source: Chartis Research

By their nature private ‘blockchains’ are more centralized than other blockchains because the entity that sets them up controls access to them. Anonymity also suffers – the entity running the project needs to know your identity to check you meet the criteria for joining. In this way, private blockchains not only increase centralization, rather than decreasing it, they also rely on a trusted third-party granting access to the network. Critics of the private approach believe it robs the blockchain of its core benefit as a peer-to-peer solution.

Terminological confusion

The wider public are unlikely to appreciate the subtle differences between blockchain and DLT any time soon. Blockchain is a type of DLT; however, while DLT creates datasets in line with the consensus of a majority of participants on a network, it does not necessarily produce data in ‘chains’. Knowingly or otherwise, entities that use the phrase ‘private blockchain’ are to some extent relying on this relative lack of public awareness. And by doing so, they could also be creating wider confusion.

Some financial institutions may add a ‘blockchain’ tag to a specific project to appear more innovative. But often what they are creating is a centralized database with some level of consensus needed for data management. A key differentiator for blockchain compared with other approaches is the level to which users can modify data – blockchain features a central record that cannot be altered by one entity*.

Equally, some firms may dabble in DLT solutions without having a strong use case for them. Rather than brand these under the banner ‘DLT’, however, a term that requires more explanation due to its wider scope, they opt for the ‘private blockchain’ label, which is more recognizable and is seen as more specific. Having ‘blockchain’ in your name can even bring unexpected financial benefits (for a short time at least), as one company has discovered.

A clearer view

The concept of a ‘private blockchain’ is something of an oxymoron, and arguably it doesn’t even exist. ‘Permissioned DLT’ is a more beneficial term; the development of DLT in financial services (cryptocurrencies aside) will most likely happen within permissioned frameworks, as they allow for more control. So clarification of what they are and how they differ from blockchain will be needed if regulators, vendors and investors are to work together effectively in using them to their fullest potential. Like artificial intelligence, blockchain has far more limited applications than common perception would have us believe, and works better as a ‘cog’ in a bigger machine than as an overarching technology layer. But overuse and misuse of the term can create the opposite illusion.

As the hype stabilizes, along with blockchain investment, now is the time to focus on DLT and how it can develop within specific use cases (such as trade settlement or fixed-income issuance). One of the reasons blockchain took off so quickly was that it was based on a strong, ideologically fertile idea. The ‘private’ tag could complicate matters and potentially hamper its successful ongoing development.

For the short term at least, however, marketing teams tasked with promoting what is essentially ‘database hygiene’ (new alterations to databases that are closer to cryptography, decentralization or consensus-based systems) – or even ‘permissioned DLT’ – are more likely to opt for the more hyped ‘private blockchain’. Perhaps, though, by being more honest, accepting blockchain’s limitations, and focusing on specific use cases, they could develop a new marketing angle, and even sell more effectively.

* An 'editable blockchain' was patented in 2017, although the project is fundamentally at odds with what blockchain was originally intended to achieve.

Further reading

Spotlight on Blockchain in Financial Services - Time to Rein in Expectations
(August 2016, Chartis Research)

On Blockchain Skepticism
(July 2019, WatersTechnology)

As Blockchain Projects Sputter, Capital Markets Firms are Having Second Thoughts
(July 2019, WatersTechnology)

Points of View are short articles in which members of the Chartis team express their opinions on relevant topics in the risk technology marketplace. Chartis is a trading name of Infopro Digital Services Limited, whose branded publications consist of the opinions of its research analysts and should not be construed as advice.

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