Distributed Ledger Technology: Private Blockchains

Björn Michael Solvan Theilmann

In this blog article, we will have a look into private blockchains, which are permissioned and usually operated by a single organization that creates the possibility of new use cases especially for industry, banks and governments.

Public blockchains hold a lot of trust because they are permissionless and everybody can join the network and support it. As more and more people are supporting the network with a node, the more secure it becomes. For example, Bitcoin and Ethereum have more than 10.000 reachable nodes. Nodes are validating transactions and finding a shared consensus about which block is added to the chain.

The basic idea of a private blockchain is a blockchain operated by a single organization. To reach the same trust as public blockchains, the idea of consortiums has come up. A consortium is a trusted network between organizations in which every organization plays an equal role to keep the network transparent and secure. This can be organizations from the same industries, like insurances and the health sector, or from different ones. The future internet seems to be an internet with a lot of different public and private blockchains which will be connected to each other, sharing and exchanging data.

A private blockchain is not necessarily closed but can also be open. A private open blockchain is a blockchain in which only selected members can write data but everybody can read it. A private closed blockchain has restricted access for both: writing and reading. Usually a private blockchain is a synonym for private closed and a public blockchain for public open.

There are a lot of use cases which cannot be realized with a public blockchain and so we will have a look at the new possibilities that private ones offer.

Use Cases

Supply Chain

One of the hot topics for private blockchains is supply chain management. Today there are still a lot of manual steps in the management of a supply chain where companies still rely on paperwork – which can be manipulated. Also, if we take a product, for example, that needs to have a specific temperature over the complete storing cycle there is no possibility to make really sure whether there was an interruption or change of the temperature during the storing process. A private blockchain, which holds position data of the complete movement with additional sensor data, can increase trust and transparency and guarantees that there was no interruption in sensor values.

E-Health

Another topic in the E-Health sector is the digital medical history of patients. There is a big privacy discussion about patient data and blockchains have the potential to play a big role in the solution. A consortium blockchain operated from health insurances could hold the complete medical history of patients. Every patient could then decide by him- or herself which doctor, hospital or pharmacy he or she wants to give access to the medical history. This blockchain could also be connected to other blockchains from companies with products like disability or supplementary insurances. Smart contracts would be able to trigger payments to customers when there are changes in their medical history without any manual step involved. 

Insurances

Also other insurances can benefit from blockchains with smart contracts. When somebody is booking a flight with travel cancellation insurance it takes time and employees to fulfill the insurance case. In the future, an airline can give information about passengers to an insurance consortium blockchain in which a smart contract automatically triggers the payment process when a passenger is not able to take his booked flight.

Registration

There are also discussions about the digitization of land registers. A land register is a record of all land and real estate ownerships. In Germany, to create an entry can take a few weeks up until several months and costs 1,5% of the land or real estate price. To create a land register on a private blockchain can reduce time and costs. Additionally, the immutability of a blockchain enables the possibility to track the complete transaction history of a given property. Together with the tokenization of real estates and a digital notary it can automate the buying and selling process of land and real estates.

Banking

Bitcoin was founded as a decentralized electronic cash system which eliminates the role of a central instance like a bank. In the last few years, there was a discussion about a digital currency from a central bank based on a private blockchain, like the digital EUR or the digital Dollar. A digital EUR would be equal to the currency EUR as we know it today and they would be interchangeable. With the same advantages and disadvantages we have today, a digital EUR would be essential to connect the classical money infrastructure based on the national currencies to smart contract based workflows.

Solutions

A promising private blockchain, which is also open source, is Hyperledger initiated by the Linux Foundation. Smart contracts can be written on it with Go, Java and JavaScript and are also supporting EVM and Solidity. In the Hyperledger world smart contracts are called chaincode. Hyperledger has a modular architecture and every module is plug and play.

There is one big disadvantage of public blockchains: when smart contracts are deployed to a blockchain there is no possibility to update or delete them. Smart contracts are living forever on the chain. A private blockchain has always an identity management behind which is managing the access to the network. This makes it possible that a chaincode in Hyperledger can be updated with a versioning system in the background. It is also possible to change the consensus mechanism from standard Proof-of-Work (PoW) like in most of the current public blockchains, to a permissioned lotterie based or permissioned voting based consensus mechanism. In a private blockchain every node is known by the network and this creates an environment of trust where the consensus mechanism doesn’t need to handle potential attackers. This increases the speed of transactions and reduces the power consumption essentially.

Another promising blockchain project is Hedera Hashgraph. All the members are operated by the Hedera Governing Council. The Hedera Governing Council is a union of 39 companies of 11 different industries like Deutsche Telekom, Boeing, Google and IBM. The idea behind it is a network that is maintained by a lot of different organizations which are rotating after a maximum term of 3 years. This is making sure that the network is staying decentralized and that no organization is getting too much power over it. Hedera is a private open blockchain which means that everybody can build applications on it but only members of the Hedera Governing Council can operate nodes for validate transactions and keep the network secure.  

Summary

Since 2009, the birth of the first public blockchain Bitcoin, there has been a lot of development in this sector. 2015 gave us the possibility of smart contracts on Ethereum and all the progress of the token standards ERC-20 and ERC-721. One of the first private blockchain projects was Hyperledger which released its first stable version in January 2018. Like the internet in the beginning of the 90s, it is still a very new technology which is going through the Gartner hype cycle. At the moment, blockchain is in phase 4, the “Slope of Enlightenment“, which means that we are seeing the second and third generation with a lot of improvements in energy consumption and increasing performance. More and more enterprises are starting with proof-of-concepts (PoC) and getting interested in real world use cases.

With the beginning of social media in the mid of 90s and the selling and misuse of customer data especially ownership of the uploaded content we reached a time where most of the social media users agreeing or strongly agreeing that they have lost control of their personal information in the internet. There are a handful of startup companies which wants to give data control back to the customer which is based on the blockchain technology. It seems that the internet of the future which will be a transformation to an internet of value is also addressing and solving this problem.

Since the 80s, the focus of the digital transformation in organizations has been mostly lying on increasing communication, automating workflows, improving efficiency and making collaboration better within an organization. In the future, there will be a shift to increasing communication, automating workflows, improving efficiency and making collaboration better in between organizations. Blockchain is a technology which has the power to overcome organizational barriers and to build up new tools that reshape how organizations collaborate together in a decentral, trustful and transparent way.