‘Private crypto’ and private vs public blockchains explained in simple terms
In India, with the Central Government looking to define and regulate cryptocurrencies, a Cabinet note on the proposed crypto bill reportedly suggested regulation of “private cryptocurrency”, instead of an outright ban.
Earlier, the government considered all cryptocurrencies not issued by the State as “private cryptocurrencies”. The authorities have now been referring to crypto as “crypto assets”, rather than “crypto currencies”.
Amidst the uncertainty around the official definition of cryptocurrencies, the lack of clarity on the difference between public vs private blockchains adds to the confusion.
Thus, by identifying which blockchains function in a public manner vs those that 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 self-governing, decentralised network where anyone can participate anonymously and view transactions that take place on it.
Public blockchains are permissionless – which means there is no middleman or gatekeeper – and are trustless, as users don’t need to trust each other to safely engage with the blockchain. They need to only rely on the protocol governing the blockchain.
As such, public blockchains are managed by a peer-to-peer (P2P) network of 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 centralised 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 disincentivised against attacking the network by standing to lose their stake (on proof of stake) if they engage in fraudulent activity, or by having to control over 51 percent of the network’s computational power for a coordinated attack – which is practically close to impossible.
The Bitcoin blockchain, Ethereum blockchain, and all the other leading blockchains are public. This means anyone can use these networks (Bitcoin to transfer or store value, Ethereum for decentralised app development, and so on).
The native cryptocurrencies powering these public blockchains can be considered “public cryptocurrencies”, although they aren’t usually referred to as such.
It can be argued that Bitcoin (BTC) is the “public cryptocurrency” powering the Bitcoin network, while Ether (ETH) is the “public cryptocurrency” powering Ethereum.
Here, BTC and ETH are not sovereign-issued and not owned or regulated by any centralised entity. Instead, these cryptocurrencies are collectively owned by the network participants and issued basis the network’s governing software protocol.
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 generally consume more power and are slower than their private counterparts (this is now changing with more blockchain scaling solutions entering the market), and are not simple to modify since any change to the network requires consensus from all participants.
Private blockchains and crypto
A private blockchain is a distributed, permission-driven network featuring rules dictating user participation, i.e, top-down control of the blockchain. In simple terms, private blockchains control who is allowed to participate, execute, validate and govern the network.
The owner of the private blockchain also has the right to edit, override or delete transaction entries.
Private chains are thus suited for enterprise and government settings where the distributed nature of blockchain can be utilised without making the network accessible for the public. As such, the participants’ identities on a private blockchain have to be known.
It must be noted that private blockchains are considered centralised despite being distributed. This is because enterprises, governments or other centralised entities control and regulate the network (this makes the blockchain centralised), but the distributed nodes involved in the network can still maintain a copy of the ledger (this makes the network distributed).
Hyperledger and Corda are two famous examples of private blockchains.
Hyperledger, a project featuring private blockchains, is built by Linux Foundation to develop distributed ledgers for supporting private business transactions. Corda, built by R3, is also a private blockchain project designed for businesses that want to build interoperable, distributed networks that feature private transactions.
As these private blockchains are controlled by centralised entities, there is no mandate or requirement for cryptocurrencies to power and incentivise participation on the network.
However, it may sometimes be useful for private blockchain users to tokenise assets on the network. To this end, Hyperledger Fabric 2.0 allows for the easy creation of asset tokens and native crypto through the FabToken system.
On Corda, the Ethereum-compatible XDC (the native token of trade finance blockchain XinFin) 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 chains is fully reliant on third-party management systems, which leads to a centralised authority’s complete control over the network. Further, private chains are only partially immutable, which means the owner can modify 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 others 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 begin using a private blockchain network that an enterprise is using for, let’s say, streamlining its supply chain operations. Only organisations involved in the supply chain – such as vendors or logistics partners – are allowed to participate in the private blockchain.
There are also other types of blockchains – such as permissioned and consortium – that are a mix 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 fit their use case best.
For instance, a country’s Central Bank Digital Currency (CBDC) can be managed on a digital ledger (which can be a blockchain or not), but the network is generally private and controlled by local government and financial institutions.
As such, the currency on such a CBDC network is considered a private currency, and is usable only by the public of the sovereign state issuing it. In India, such a CBDC (which is in the works) would act as legal tender in the state, since it is sovereign-issued and is the digital currency equivalent of INR.
BTC, ETH and other cryptocurrencies, which run on public blockchains, but are not sovereign-issued, would not be allowed to act as legal tender. Instead, they may be treated as an investment class, i.e, “crypto assets” for the public to invest in and trade.