Blockchain has seen its popularity and relevance grow rapidly over recent years. While it is most widely recognized as being the technical underpinning of popular networks such as Bitcoin and Ethereum, the core technology has applicability far beyond peer-to-peer cryptocurrency transactions. Blockchain can be leveraged to increase trust and transparency across a myriad of industry verticals—from supply chain and capital markets to real estate and entertainment. Its potential to radically revolutionize engrained transactional processes is the reason behind much of the excitement.
However, as is often the case with emerging technologies, there are still many misunderstandings and areas of confusion. For example, some view blockchain as a remedy for all inefficiencies, a protocol solely for tokens, non-performant, anonymous, etc. This article will explore the history of blockchain’s emergence into the mainstream market and clearly delineate between two distinctly different implementations of the technology— public versus private blockchain networks—with an objective of removing engrained misperceptions.
If you work in the world of blockchain technology, or spend time around those who do, chances are you’ve participated in or overheard a conversation along these lines… You tell someone what you do by asking if they’ve heard of blockchain. A small percentage say something like, “yes, I’m very well versed,” but more often than not the response is some flavor of unfamiliarity.
When chatting with a “non-expert,” you typically elect for one of two routes to progress the conversation. The first potential approach is to explore the fundamental architecture of distributed ledgers and address a few of the core primitives around cryptography and hashing algorithms. While this may seem preferable, it typically does not produce useful results since many of these key aspects are overly complex for those who are unfamiliar with the subject matter.
The second approach is what you might call the cryptocurrency corollary, and it has proven itself to be the more successful of the two conversational tactics. It’s short and sweet, and goes something like this, “Have you heard of Bitcoin or Ethereum? You have? Well, blockchain is the underlying technology facilitating and securing those networks.”
This so-called “cryptocurrency corollary” is a cheap win and it’s consistently effective due to the fact that nearly everyone has come across Bitcoin, and perhaps Ethereum, in some context. However, it also introduces dangerous misconceptions with regards to the overall technology, many of which have now become deeply entrenched with the broader public.
As a first step in addressing the blockchain—cryptocurrency correlation, let’s examine the origins behind the ascendance of Bitcoin and Ethereum. Their ubiquity is predominantly attributable to the crypto roller coaster of 2017-18, a period that can be broadly captured through three main storylines: Growth, ICOs & Crash.
The first storyline deals with the exponential growth in the fiat-mapped value of cryptocurrencies (also referred to as tokens and coins when speaking in blockchain terms). A market-driven frenzy, largely fueled by a fear of missing out, saw 10-20X growth for many digital currencies (e.g. Ethereum, Stellar, Ripple, etc.), with Bitcoin, the oldest kid on the block, briefly surpassing $19,000 per coin. This apex valuation put Bitcoin’s market capitalization at nearly 250 billion dollars, which quickly drew the attention of everyone from the Wall Street Journal and Jamie Dimon to pop culture icons and politicians. You couldn’t avoid it if you tried.
Bitcoin Price (2017-2018)
A World of ICOs
The second storyline is around the endless emergence of ICOs (initial coin offerings) that sought to capitalize on the bullish nature of the crypto market. Thousands of new coins appeared seemingly overnight, many of which were poorly developed, unvetted and lacking any legitimate substance. A small number of ICOs actually had reputable use cases and incentive mechanisms, but these were overshadowed by the countless others that were nothing more than exit scams and Ponzi schemes; coins whose sole purpose was to enrich the developers behind them.
What Goes Up…
Some of these coins were clearly fraudulent from day one, but it took an inevitable pop of the crypto bubble to demonstrably expose the gross overvaluation of the broader field and the worthlessness of the various scam coins. The massive evaporation of wealth that accompanied the crypto market crash throughout 2018, coupled with a widespread realization that many coins were worthless fabrications, left blockchain at large shrouded in a dark cloud of cynicism and distrust.
A quick synopsis before continuing: 1.) Bitcoin, Ethereum and other cryptocurrencies became household names thanks to an unprecedented surge in their fiat-mapped value over the course of 2017-18. For most people, blockchain = cryptocurrency. 2.) The crypto market experienced a massive crash and has remained bearish, leading many people to view blockchain in general through a lens of skepticism and caution.
The cryptocurrency association that most people apply to blockchain is both biased and undeserving. Cryptocurrencies and tokens are simply one small feature of blockchain, but they are in no way an accurate representation of its overall applicability. In actuality, Bitcoin was simply the first of many blockchain applications yet to come, similar to the Myspace of social networking.
One might argue though that a conflation of blockchain with cryptocurrencies isn’t necessarily the worst thing. Sure, it’s a misguided perception, but it provides a foundation of sorts for people who would be otherwise unfamiliar with the technology. Core tenets such as digital signatures and hash trees might even be non-foreign concepts to some! So let’s take the cryptocurrency foundation and examine the networks on which they exist: the public chains.
The Public Blockchains
The two most widely referenced public blockchains are Bitcoin and Ethereum. Each of the networks are unique in their own right (intrinsic tokens, balance models, smart contract compatibility, etc.), but are also wildly similar in both their core architecture and the manner in which they agree upon state updates.
Now, what do we mean by “agree upon state updates?” In order to fully address this concept, we first need to take a bird’s eye view of the networks. Both Ethereum and Bitcoin consist of thousands of decentralized nodes (computing resources) around the world, all independently processing the transactions contained in a block and maintaining their own instances of an “append-only” ledger. This ledger, or, the blockchain, is simply a never-ending audit log containing a historical record of every transaction issued on the network.
So, with this image in mind, you can easily see the necessity for some trustworthy method that ensures deterministic execution of transactions and also combats against the ability to “double spend” an asset or go back in time and rewrite the ledger. If every node is independently processing transactions, then there has to be a rigid mechanism in place to keep the network in sync and protect the finality of confirmed transactions.
This mechanism is referred to as consensus, and its core responsibility is to maintain the integrity of the network and to prevent malicious actors from manipulating the system. Ethereum and Bitcoin operate on a special flavor of consensus called Proof of Work (PoW) that is performed by a distributed set of network participants called mining nodes.
How Proof of Work, works
As decentralized apps (dApps) submit pending transactions to the network, participating mining nodes will simultaneously compete to package them and “mine” a block that is considered valid. In blockchain orchestrations, transactions are represented as hashes in a binary merkle tree, with the root hash of the tree serving as one of the critical pieces of metadata in the block header. The block header is an aggregated collection of the critical pieces of data comprising a block (previous block hash, merkle hash, timestamp, difficulty, version, etc.). The architecture of a block, coupled with the usage of hashing algorithms (one-way cryptographic functions transforming arbitrarily sized data to a fixed size), plays a major role in the immutability of the overall chain.
In order to produce a valid block, the mining node must discover a unique value (referred to as a nonce) that satisfies the difficulty target of the network. This nonce is only attainable through sheer brute force computing and serves as proof that the mining node has exerted a massive amount of computational effort (i.e. work).
The nonce is hard to find, but it’s a lightweight operation for the fellow nodes to verify the validity of the proposed block. They simply aggregate the nonce along with the other values comprising the block header and pass this data through a hashing algorithm. If the ensuing output complies with the difficulty parameter, then they will accept the block and append it to their chain. The explicit nuances of PoW consensus are beyond the scope of this post, however, suffice it to say that it’s a computationally intensive endeavor to generate a properly constructed block that will be accepted by the network.
The purpose of blockchain mining
Mining operations require advanced hardware components (namely graphical processing units), large amounts of electricity and sophisticated cooling systems. So why would anyone choose to incur the immense costs and maintenance responsibilities associated with these complicated orchestrations? The answer is simple. Nodes that mine valid blocks are rewarded with a certain amount of the public network’s intrinsic token (i.e. incentivization). As a result, if the earned reward is more valuable than the exerted cost to mine a block, then the operation is considered economically practical.
Why blockchain mining is so difficult
Is it really necessary to require billions of calculations in order to derive a valid nonce and construct a well-formed block? This answer is also simple. Anyone can join and participate in these “public” networks, including malicious actors, so there needs to be immense protections on the permanence of confirmed transactions.
The difficulty target of the public networks can fluctuate, but it is directly bound to the number of mining nodes and the corresponding “hash rate” of the network. You can think of hash rate as the aggregated amount of computing resources across the network. As the number of mining nodes increases, so the does the difficulty target. As the number of mining nodes decreases, so does the difficulty target. This provides an equitable benchmark for everyone to work against and ensures a level playing field and consistent timeframe for state updates.
So why the difficulty? Nodes in these public networks are programmed to work against the longest version of the blockchain, or, the canonical chain. This means that for anyone to successfully hack the network and reverse transactions or double spend assets, they would need to overtake the canonical chain with a version of their own. Because the hash rate is directly bound to the computing resources in the network, a malicious actor would need to account for over 50% of the network’s hash rate in order to consistently produce and maintain their own canonical chain that would be trusted by the network. This is an unfathomable amount of computing power. For example, at the time of this writing the Ethereum hash rate is 130 TH/s. As such, a collection of computing resources would need to generate over 65 trillion hashes per second in order to steer the network.
The important takeaway is that it’s prohibitively expensive to even attempt such an operation in a public network with a high hash rate. It would require precise coordination across numerous disparate parties, participation of various mining pools/server farms and the willingness to expend excessive amounts in compute and electrical costs. In a blockchain, all blocks contain the hash of the previous block, meaning that the deeper a transaction exists in the chain, the greater protections that transaction has against ever being reversed. As such, confirmed transactions that are nested six or more blocks deep are generally considered safely immutable by exchanges and vendors.
If you’re interested in further details, the following video provides an excellent overview of how the public networks operate. I promise it’s worth your time.
Constraints of public blockchains
While the public networks offer incredible resistance to data mutations after a certain number of blocks have been appended (thanks to the previously mentioned Proof of Work consensus), they also bring along various constraints. Firstly, it is very costly to participate as one of the critical mining nodes. Secondly, scalability and performance are directly bound to the implemented consensus algorithm; meaning that it may take a long time for submitted transactions to be ultimately appended into the chain. Thirdly, many networks enforce service fees (e.g. gas costs in Ethereum) as payment for the expended compute by the nodes mining blocks. And lastly, due to the vast distribution of the chain across thousands of nodes, privacy and confidentiality become considerably more challenging.
There are numerous projects and proposals underway seeking a way to address some of these shortcomings. The implementation of side chains is a particularly interesting area of exploration, allowing for faster transaction processing and easier scalability.
A quick summary on the public chains… 1.) Anyone can participate (anonymously) in the networks, including potentially malicious actors. 2.) Proof of Work consensus is used as a trust mechanism and as a protection against reversing confirmed transactions. 3.) Mining nodes assume the immense electrical and hardware expenditures in return for cryptocurrency that is redeemable upon the generation of an accepted block. 4.) The chain and its underlying state is fully shared by all participants in the network, which leads to constraints around achievable privacy and confidentiality.
Private (or Permissioned) Blockchains
Enterprises, Government Organizations, NGOs, and small businesses alike are drawn to blockchain technology as a way to increase transparency, offer shared access to data and achieve immutability of appended transactions. They also see it as a way to remove costly third parties traditionally required for bilateral trust in various transactional processes and to streamline and digitize many of the engrained and antiquated paper-intensive methodologies that exist today.
Looking at blockchain through the lens of an enterprise though, it’s easy to see that the aforementioned burdens of the public chains are untenable. Features such as identity, governance, privacy, throughput and configurability are first-class considerations that must be baked into the DNA of the blockchain. Therefore, these organizations are drawn to private or “permissioned” blockchain orchestrations, where only invited and authenticated parties have access to the network.
When contrasting public and private blockchains, there are two distinctions worth pointing out – authentication and consensus algorithms. The core constructs of the actual blockchain don’t change (block headers, merkle trees, timestamps, hashing algorithms, etc.), but thanks to these two differences, the available functionality is vastly increased. Ethereum, in particular, is capable of supporting these two critical features.
Controlling participation through node authentication
The first, and perhaps the most obvious difference, is the fact that only nodes that have been permissioned to participate in the network will be able to take part in transaction execution and state agreements. These nodes are typically owned and operated by a trusted organization that has been invited to take part in the network, although sometimes they are managed by a trusted counterparty tasked with managing the network on behalf of the fellow constituents. Regardless of the ownership schema, the network is solely isolated to the nodes that have been authenticated to join. As a result, private networks tend to consist of a limited number of nodes, all of which can be directly mapped to a participating business organization.
Improving performance with lighter weight consensus algorithms
When operating within an isolated domain, where all nodes are authenticated and permitted to take part in the network, the draconian measures associated with PoW consensus are no longer necessary. Instead, these networks can take advantage of lighter-weight consensus algorithms that rely on voting rounds and digital signatures for protection, as opposed to brute force computation proofs. This results in far greater performance and throughput, and zero need for expensive hardware processors and electricity consumption. Examples of these consensus algorithms are IBFT, clique PoA and Raft, all of which are available today on Kaleido.
Marrying together these two critical features (authentication and lightweight consensus) allows for private/permissioned networks to offer incredible versatility and flexibility, and to accommodate the unwavering requirements of enterprises. At Kaleido, we have built a full-stack blockchain cloud platform that delivers an intuitive end-to-end experience for the construction and management of permissioned consortia blockchains. And thanks to the protections of permissioned networks, we are able to offer extensive ancillary services around identity, smart contracts, access control, storage, etc. that help form the critical scaffolding of a bonafide production-caliber solution.
How public and private blockchains work together
While traditionally operating independently, there are scenarios where it can be advantageous to blend these public/private worlds together. As described above, private networks eliminate many of the burdens of the public chains and deliver high-performance thanks to a different class of consensus algorithms. These algorithms, however, are reliant on digital signatures from validating nodes, making the private signing keys the critical pieces in the entire consensus apparatus. As a result, if the integrity of these keys was compromised by a malicious actor or a supermajority of participants seeking to collude, it would be technically feasible to reconstruct the chain (recall that it’s not a computationally intensive exercise to mine blocks in a private network).
Therefore, as a way to ensure the historical accuracy of an isolated ledger, it makes sense to pin collectively agreed state proofs to a public network, where the immutability of transactions is protected through Proof of Work. Kaleido addresses this potential attack vector by offering a Public Ethereum Tether service for shared use within a private blockchain environment.
The objective of this article was to remove a number of the ambiguities and misunderstandings surrounding blockchain in general, and to clearly outline public versus private blockchain networks. To summarize:
- Bitcoin was the first mainstream implementation of blockchain and along with Ethereum and other cryptocurrencies, forms the foundation for most people’s interpretation of the technology.
- A crash of the crypto bubble, coupled with the realization that many ICOs were fraudulent in nature, leads many to view blockchain through a lens of skepticism and distrust.
- From a use case perspective, blockchain technology is far more versatile than peer to peer cryptocurrency transactions. The shared ledger can be applied to supply chains, capital markets, healthcare, real estate and more.
- Public chains are accessible to everyone and operate without rigid authentication schemes.
- Public chains rely on a robust and computationally intensive consensus algorithm called Proof of Work, that serves to protect the integrity of the network by making attempted transaction reversals an economically impractical exercise.
- Nodes that successfully “mine” blocks on public chains are rewarded with the network’s intrinsic cryptocurrency (e.g. Ether and Bitcoin).
- Private chains require no concept of a native currency and instead rely on strong authentication/permission mechanisms, as well as high-speed consensus algorithms backed by the protection of digital signatures.
- Private chains demand additional functionality around governance, smart contracts, identity integration, etc. in order to deliver enterprise-grade solutions.
We invite you to explore our platform with our free Starter Plan and let us know what you think.