Understanding Governance in Private and Public Blockchains

- September 18th, 2018

As the applications for blockchain continue to expand, companies are benefiting from unique blockchain governance.

While it has been touted as the prevailing technology of the decade, blockchain is still in the process of being understood by the masses. Among its many complexities are the differences between private and public blockchains, which have varying structures and governance models.

Governance refers to the processes and systems used to facilitate decision making in any organization, and it is an important function in a decentralized blockchain. But as the technology becomes adopted across varying industries, there are questions on how to best design governance applications to suit the individual needs of different sectors.

Summary of blockchain

To review, a blockchain is a secure and decentralized peer-to-peer network where users can send digital assets to one another. By design, it doesn’t require an intermediate or central party, like a bank or a third party, to authenticate and confirm transactions. This is advantageous for people who seek a more secure network, free of fees, to share digital assets.

How governance styles differ in private and public blockchains

In a blockchain, there are different governance styles: permissionless, permissioned and hybrid.

Permissionless governance is also known as public governance ― it allows anyone to participate in the transfer of assets. Transactions are validated and processed by a consensus among peers. The consensus, usually determined by a vote, does not require a user having previous experience with the network, or a prior identity of any kind within the ledger.

Basically, no pre-existing level of trust is needed between participating nodes (computers). Permissionless is like the internet, where anyone and everyone can join the open network and participate by creating new content or improving upon already existing information.

The security of a public blockchain, like the bitcoin blockchain, for example, comes from its proof of work. Proof of work is the work that is done by miners on nodes to confirm that a transaction is true. This makes it mathematically impossible to fake or reverse a transaction without the instance of miners colluding ― considered a highly improbable occurrence.

Permissioned governance is also known as private governance ― it restricts access in terms of who can perform various actions on a blockchain. Transactions are validated and processed by those who are already recognized by the ledger and some level of pre-existing trust is assumed and proven. The internal mechanics of a permissioned blockchain can vary, from existing participants serving as a type of administrator who decides on the inclusion of future entrants to simple observers, but essentially a permissioned blockchain can’t be accessed by the general public.

There are many examples of permissioned blockchains, like Quorum, a distributed ledger protocol with transaction and contract privacy created by JPMorgan (NYSE:JPM); and Corda, an open-source blockchain designed for businesses to transact directly between one another in strict privacy.

The security on private blockchains is only as good as the honesty of the entities validating transactions, i.e. a company. There are no mathematical guarantees behind the irreversibility of transactions in a private blockchain. However, they still use cryptography and data structures to maintain integrity.

Hybrid governance is similar to how it sounds ― it’s a blend of public and private governance that ensures every transaction is private but still verifiable by a fixed record on a public state. The difference between private and public blockchains is that in the former run in a fully permissioned environment, while limiting the access of available information and the latter is open to everyone.

How companies benefit from blockchain governance systems

Blockchain’s governance systems provide companies and users with a multitude of benefits. For instance, between private and public blockchains, the first is more scalable since the framework is controlled by the company. Network parameters like potential congestion or traffic, as well as any transaction fees, can be understood and revealed in advance.

Private blockchains are also more predictable and provide companies with more control over the content of transactions and miners, allowing companies to move quickly and in ways that best fit their business needs. Companies also benefit by eliminating the guesswork that traditionally goes into developing a product or service.

“The top-down decision-making model will be flipped on its head,” eXeBlock Technology (CSE:XBLK) Founder Jonathan Baha’i told INN. “Think of all the time and money companies spend trying to guess what customers want in a product or service. With peer-to-peer voting, users can actually take part in improving a product or service without the central authority figure impacting results.”

A good governance structure, whether public or private, is a key part of how blockchains adapt to the changing demands of their users.

“As popular blockchains like bitcoin and Ethereum have grown, there has been minimal improvement in KPIs such as block times and transactions per second,” said Baha’i. “The communities have struggled to come to agreement on solutions, and the whole process takes place off chain in a disorganized manner. I strongly believe on-chain governance is necessary for blockchain to make the leap to mainstream use.”

As blockchain companies compete for users and publicity, they are developing more unique governance models that blend aspects of both the public and private systems. For instance, Decred is a digital currency that has embraced an autonomous on-chain governance model (on chain refers to keeping all aspects of transfers and communication “on chain”). Decred has its own constitution and allows stakeholders to make protocol upgrades and invalidate blocks if there is a consensus.

Tezos is a decentralized smart contract platform with a built-in governance model and formal mathematical verification of smart contracts. It say this about its governance model: Tezos compensates developers with tokens that have immediate value rather than forcing them to seek corporate sponsorships, foundation salaries or work for internet fame alone.

DFINITY is an “intelligent decentralized cloud” that follows a model similar to Tezos, but that allows direct changes to the ledger given a consensus is reached. Supporters of its system have hailed it because of its ability to smoothly remove any illegal content engraved into the ledger by bad users. Opponents have called it a double-edged sword by questioning where one draws the line on what is or isn’t considered illegal content.

What’s next

Governance in private and public blockchains has distinct nuances and capabilities. Not only do companies that aspire to leverage blockchains need to fully understand these nuances to avoid future mistakes, but users and investors should also understand the differences, as well as continue to stay up to date with the evolution of blockchain technology.

This article was originally published by the Investing News Network in June 2018.

This article was written according to INN editorial standards to educate investors.

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