04 July 2019

Public vs. Private Ledger

  • Articles
  • Legal
  • Blockchain / Digital Assets

Digitalization is one of the most important pillars of innovative business activities and in the longer term, it contributes to the competitiveness of Switzerland.

  • Thomas Linder

    Tax Partner

  • Dr. Luka Müller

    Legal Partner

  • Aurelia Nick

    Senior Legal Advisor

  • Andreas Rudolf

    Legal Partner
Digitalization is one of the most important pillars of innovative business activities and in the longer term, it contributes to the competitiveness of Switzerland. In the field of Distributed Ledger Technology (DLT), which includes blockchain technology, major technical advances have been made in recent years. 

DLT describes decentralized and digitally managed ledgers. To put it simply, they are databases which are kept on a large number of networked computers. Information is validated based on a consensus mechanism, stored in blocks. A copy of the entire blockchain is stored on each participating drive. The blockchain itself is an application of DLT technology; it is a decentralized virtual transaction ledger. Transactions can be recorded and processed without intermediaries. Due to their decentralized characters, DLT and blockchain technology enable information to be shared and transactions to be carried out with a high degree of confidentiality and security. 

However, blockchains are not all the same. Each blockchain type fulfils a certain purpose and has its inherent right to exist. Blockchain types can be divided compactly into three groups:

1. Public Blockchains,

2. Private Blockchains, as well as

3. Federated Blockchains or also consortium blockchains. 

Furthermore, there are various mixed forms such as public/private permissioned or public/private permissionless blockchains. Due to its complexity and concentration, this article focuses only on the public and private blockchain. Mixed forms as well as the federated blockchain are left out in this article.

Public Blockchain vs. Private Blockchain

Public and private blockchains are both distributed peer-to-peer networks, in which each participant keeps a copy of the common register.

If the blockchain is public or private can be determined as follows:

1. Who is allowed to participate in the network?

2. Who is allowed to validate blockchain entries according to the consensus mechanism?

3. Who is allowed to keep the decentralized register?

Public Blockchain

As the name suggests, this blockchain is a public ledger. It is completely decentralized, so that everyone can participate in the network. Some networks have built -an incentive mechanism to encourage contributors to contributor in the network. Every network contributor can contribute in reading, writing and verifying the blockchain entries. Decision making and validation are carried out by various consensus-mechanisms such as the “Proof of Work” or the “Proof of Stake”. Within a public blockchain, all participants are further allowed to operate a node within the network and to create tokens by mining.

One of the advantages of the public blockchain that intermediaries are no longer required for the execution of transactions or for the keeping of registers. Transactions can, for example, be made between the sender and the recipient without the need to interpose an intermediary such as a bank or a payment service provider. This is in complete contrast to traditional payment systems. Instead, as mentioned above, transactions are validated by the participants. Blockchain enthusiasts see a further advantage of the public blockchain in a sense that all transaction data is public which contributes to increased transparency.

A disadvantage of the public blockchain can be seen in the fact that one of the common validation forms, Proof of Work, requires a lot of computing power. This is because each node must solve a complex, resource-intensive computing problem to reach consensus. In addition, the desired openness and transparency of a public blockchain for certain applications can be seen as a disadvantage because private transactions are not possible.

Examples for public blockchains are Bitcoin and Ethereum.

Private Blockchain

A private blockchain is managed by a network administrator and is only available to a specific group of permitted participants. The network administrator therefore has an important function: he grants or denies participants access to the network. Thereby, the network operator is aware of the participants of a private blockchain. The information about a transaction is not publicly viewable, only the involved transaction participants can see the information. Furthermore, the network administrator may grant or deny certain privileges to participants, e.g. write or read permissions. The participants cannot carry out any validations themselves; this is carried out either by the network operator or by a certain group pursuant to the individually defined validation rules. A private blockchain is, therefore, formally not decentralized and is rather a distributed ledger that is secured by cryptography.

The advantage of the private blockchain is certainly the fast processing of transactions. Private blockchains can process thousands of transactions per second because only a few selected participants need to validate them.

For blockchain experts, the private blockchain contradicts the basic idea of decentralization. From their point of view, this is a disadvantage of the private blockchain.

Examples for private blockchains are Hyperledger and Ripple.

Which blockchain is suitable for which project?

Public blockchains are particularly suitable for applications that want to take advantage of an open system. A good example is the open source-based blockchain Ethereum which combines the advantages of a public blockchain with automatically executable and ""programmable action chains"", the so-called smart contracts. Possible uses of Ethereum and smart contracts could include real estate and healthcare. Private blockchains are particularly suitable for internal applications of companies because they generally want to select the participants of the application used themselves and manage the transaction contents. In addition, it is generally desirable for companies to grant only certain (limited) rights to the selected participants. This enables companies to determine exactly which participate may exercise which rights within their organization. The transactions are validated purely within the company and are not publicly accessible. A current example would be the daura platform which enables Swiss stock corporations (AG) to keep a digital share register in an automated matter. The daura platform allows further to issue newly created digital shares and participation shares from capital increases and to transfer such shares over the blockchain. Lastly the participants are known to the platform operator of daura.

This is why daura has opted for the Hyperledger blockchain

As mentioned above, not all blockchains are suitable for every project. The daura platform is an application of the Hyperledger protocol, i.e. a private blockchain.

The Hyperledger protocol is a great advantage for daura as it is based on a private permissioned blockchain. For example, the daura project does not run the risk of the blockchain being split by a hardfork. In case of a hardfork, participants decide to use a new version of the blockchain. They will then be separated from the participants of the original version. In fact, this results in two different blockchains. Therefore, in case of a fork, the daura versions would not be compatible with each other anymore. Lastly, the hyperledger blockchains allows daura to know it participants since only ""whitelisted addresses"" are permitted in the daura ecosystem.

 
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