‘Private crypto’ and private vs public blockchains explained in layman’s terms

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(For beginners, it may be helpful to read our how-to articles on Blockchain and Cryptocurrency before trying to learn more about public vs private blockchains and public vs private crypto).

In India, as the central government seeks to define and regulate cryptocurrencies, a Cabinet note on the crypto bill would have suggested regulation of ‘private cryptocurrency’, instead of a ban pure and simple.

Previously, the government considered all non-state-issued cryptocurrencies to be “private cryptocurrencies”. Authorities now refer to crypto as “crypto assets” rather than “cryptocurrencies”.

Amid the uncertainty surrounding the official definition of cryptocurrency, the lack of clarity on the difference between public and private blockchains adds to the confusion.

Thus, by identifying which blockchains operate in a public way versus which are private, it will be easier to understand which cryptocurrencies or crypto-tokens can be considered private or public.

Public blockchains and crypto

A public blockchain is a decentralized and autonomous network where anyone can participate anonymously and view the transactions taking place there.

Public blockchains are unlicensed – meaning there is no middleman or gatekeeper – and are untrustworthy, as users don’t need to trust each other to securely interact with the blockchain. . They only need to rely on the protocol governing the blockchain.

As such, public blockchains are managed by a network of peer-to-peer (P2P) users. When a user wants to exchange information with a peer, they can send it directly to the recipient, without having to go through a centralized system or database.

On these public blockchains, anyone can be rewarded for their role in helping the network reach consensus to validate and execute transactions.

Users are also deterred from attacking the network by losing their stake (on proof of stake) if they engage in fraudulent activity, or by having to control more than 51% of the network’s computing power for a coordinated attack – which is practically close to impossible.

The Bitcoin blockchain, the Ethereum blockchain, and all of the other leading blockchains are public. This means that anyone can use these networks (Bitcoin for transferring or storing value, Ethereum for developing decentralized applications, etc.).

The native cryptocurrencies powering these public blockchains can be considered “public cryptocurrencies”, although they are generally not referred to as such.

It can be argued that Bitcoin (BTC) is the “public cryptocurrency” fueling the Bitcoin network, while Ether (ETH) is the “public cryptocurrency” fueling Ethereum.

Here, BTC and ETH are not issued by sovereigns and are not owned or regulated by a centralized entity. Instead, these cryptocurrencies collectively belong to the participants of the network and are issued based on the software protocol governing the network.

As there is no central authority governing the chain, public blockchains are impervious to censorship and cannot be manipulated.

However, this added security has a downside – public blockchains typically consume more power and are slower than their private counterparts (this is changing as more scaling solutions come to market. blockchain), and are not easy to modify because any modification of the network requires consensus of all participants.

Private blockchains and crypto

A private blockchain is a distributed, permission-based network with rules dictating user participation, i.e. top-down control of the blockchain. Simply put, private blockchains control who is allowed to participate, run, validate, and govern the network.

The owner of the private blockchain also has the right to modify, replace or delete transaction entries.

Private chains are therefore suitable for businesses and governments where the distributed nature of blockchain can be used without making the network accessible to the public. As such, the identity of the participants on a private blockchain must be known.

It should be noted that private blockchains are considered centralized although they are distributed. This is because companies, governments or other centralized entities control and regulate the network (this makes the blockchain centralized), but the distributed nodes involved in the network can still keep a copy of the ledger (this makes the network distributed). .

Hyperledger and Corda are two famous examples of private blockchains.

Hyperledger, a project with private blockchains, is built by the Linux Foundation to develop distributed ledgers to support private business transactions. Corda, built by R3, is also a private blockchain project designed for companies that want to create interoperable distributed networks that involve private transactions.

As these private blockchains are controlled by centralized entities, there is no mandate or requirement for cryptocurrencies to fuel and induce participation on the network.

However, it can sometimes be useful for private blockchain users to tokenize assets on the network. To this end, Hyperledger Fabric 2.0 enables the easy creation of asset tokens and native cryptography through the FabToken system.

On Corda, the Ethereum-enabled XDC (the native token of the XinFin trade finance blockchain) is used as a token to settle transactions.

Private blockchains are generally faster than their public counterparts, and are more compliant and scalable.

However, participation in private channels depends entirely on third-party management systems, which leads to complete control from a centralized authority over the network. In addition, private channels are only partially immutable, which means that the owner can change the entries in the network. Private blockchains and legal tender

From the above explanation of public and private blockchains, it is evident that cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), Dogecoin (DOGE), Shiba Inu (SHIB) and most of the rest are “public cryptocurrencies”. running on public blockchains, and can be used by anyone to interact with the token’s respective network.

On the contrary, a regular or anonymous user cannot start using a private blockchain network that a company uses to, say, streamline its supply chain operations. Only organizations involved in the supply chain – such as suppliers or logistics partners – are allowed to participate in the private blockchain.

There are also other types of blockchains – such as authorized blockchains and consortia – which are a mixture of public and private blockchains. These concepts will be explained in future articles.

With public and private blockchains and crypto, users can determine which solutions best fit their use case.

For example, a country’s central bank digital currency (CBDC) may be managed on a digital ledger (which may or may not be a blockchain), but the network is usually private and controlled by local government and institutions. financial.

As such, currency on such a CBDC network is considered private currency, and is only usable by the public of the sovereign state that issued it. In India, such a CBDC (which is in preparation) would act as legal tender in the state, as it is issued by the sovereign and is the digital currency equivalent of the INR.

BTC, ETH and other cryptocurrencies, which run on public blockchains, but are not issued by sovereigns, would not be allowed to be legal tender. Instead, they can be treated as an investment category, that is, “crypto assets” that the public can invest in and trade in.

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