Spoiler alert: Private blockchains have no compelling value proposition. If you and a bunch of other companies could agree upon a single vendor to build and run a blockchain, you could just as easily agree upon the rules of setting up a centralized server. Blockchains, as just about any technical expert will tell you, are complicated and expensive to build and run. If you just need a database and a web server, they don’t make a lot of sense.
Defenders of private blockchains will cite the decentralization of decision-making, distribution of data and redundancy as benefits, but all of these capabilities are easily replicated at a lower cost with existing fault-tolerant, disaster-resistant services that have proven track records of 99.999% uptime and a more mature development ecosystem.
Indeed, most enterprises have come to that conclusion. A survey commissioned by EY and Forrester in 2019 showed that for each company that was willing to join another company’s private blockchain, two companies started their own. There is no path there to sustainable network scale. Nearly 75% of private blockchain users believe the best future path is on a public network.
So why is it that so many companies continue to invest in private blockchains? The answer is that large enterprises are deeply risk-averse. They want to get to the real thing: public blockchains; they just want to get there in the lowest risk manner possible.
The most common road map is the creation of a separate Ethereum-based private blockchain with the intent to connect and migrate to the public Ethereum main network in the future once the entities involved are comfortable with the technology. The problem is that permissioned systems are much too easy to customize in ways that make them unsustainable in the long-term.
The result is private blockchains that, while operating in the Ethereum ecosystem, are designed for a world where all the participants are carefully vetted, and the security risks are low or manageable and there’s no such thing as an irreversible transaction. Private blockchains can be rolled back and restored from backups, and rules and systems can be changed. They store sensitive user and customer data, run hugely complex smart contracts and never charge anyone gas fees. It’s like blockchain technology without everything that’s scary about blockchains – irreversible transactions, total transparency, aggressive hackers and per-transaction gas fees.
From a technical standpoint, building private networks is entirely manageable. But very quickly, companies come to see the limitations and start thinking about migration to the public ecosystem. Once that happens, the trouble begins.
These delicate ecosystems, built in a safe, cozy world of design-by-committee with only nice people at the table, would be slaughtered if exposed to the real Ethereum blockchain ecosystem. Even worse, over time, these sheltered ecosystems drift ever further from the public standards. Migrating these systems to the public Ethereum network would be so costly it would just be cheaper to rewrite and redo the whole thing.
There’s a better way: Instead of building a fully private blockchain, companies that cannot bring themselves to go all the way public from day one should look at building connected, permissioned sidechains to the Ethereum network. Though still permissioned, these connected side chains would be much more closely linked to the standards and tooling of the public Ethereum main network. They can and should use the same token and security standards as the public networks, even if all the participants are permissioned.
In this model, migrating to a public network would be a much faster and actually viable path forward with lower risk of stranded investment. And in the interim, as an integrated layer 2 sidechain, these permissioned systems could still have interactions with the liquidity and user base in the main network.
Blockchains offer some compelling advantages for a lot of enterprises and processes, and these advantages are worth braving the risks, provided companies have a careful road map toward the future. For some use cases, like product traceability, going directly to public blockchains is easy and low risk. There are no privacy concerns in many cases; the whole point is public transparency and accountability.
For more advanced business processes, such as procurement, the risks and the rewards are bigger. Smart contract-based procurement systems offer a future where companies can not only negotiate discounts and rebates, they can also be sure they actually get those incentives.
Putting procurement agreements on a blockchain means getting comfortable with the privacy and payment technology on-chain. Initiatives like the Baseline Protocol have gone a long way toward enabling privacy using zero-knowledge proofs and off-chain data storage. There’s no risk of exposing private data if it is never stored on-chain in the first place.
Building these products on permissioned side chains first will allow enterprise users to get comfortable with the challenges and issues, while staying close to the public Ethereum network. So, is it still necessary to go all the way to public? I think yes for a very simple reason – to access the full range of services available on public blockchains.
Nearly all permissioned systems suffer from a lack of supplier and partner diversity. It’s hard enough getting several companies to agree upon the rules. Now imagine trying to get your financial partners, insurance companies, logistics providers and others on the same page. It is not going to happen. Throwing the ecosystem open to the public infrastructure and adhering to open standards means it also isn’t necessary. More competition, more choice and more services immediately become available when networks open.
For all the same reasons that the open, public internet has become our dominant networking technology, public blockchains, most probably Ethereum, will take up a similar role in the economy. And private networks, a lot like corporate private intranets, will never go away, but they will become ever-less strategic to the ecosystem or the companies involved.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.