Welcome back. In this video, we'll explore the differences between public and private blockchains. Let's begin with the basic yet important concept of data storage. Most firms still store enterprise data in a centralized database. It's a simple setup having one location. Every time a transaction occurs, it must clear and subtle through this intermediary. This prevents one party from selling the same asset or spending the same dollar twice. So let's take an example. Think about a bank account. Axel can't send the same dollar to both Patina and Tommy. Axel also can't use the same asset as collateral into transaction. The centralization of data storage by the banks solve this double-spend problem. For all its simplicity, concerns with central database remain the same with security at the forefront. The centralized database is the modern version of the ledger of old though it has worked okay for millennia, it has some significant drawbacks. Anything that is centralized is vulnerable to hacking, attack or fraud. The upshot is, data goes missing or personal information gets stolen. So, keepers of central database is always make backups. A backup model is one step closer to a distributed database in this one sense. Keepers need to update their backups continuously to avoid losing data. So we need some sort of backup protocol to ensure the data's accuracy. A decentralized or distributed database goes one step further. In a distributed database, there's no single primary location where all changes can originate. Instead, each site can make changes to the data but all stakeholders must agree through consensus. There are several advantages to this setting. One, there's no single point of failure. Two, all data are available locally and three, the system can be set up so that the different locations need not trust one another, even as they agree on the content of the database. A major side effect of distributed ledgers is this. Others in the network can see some of your information. This raises some red flags for executives. So, let's say a set of banks organizes a distributed ledger where each bank is a network node. In this type of situation every bank could hold some of the information about others bank accounts. To ease this fear, we need to understand what the information reveals. Remember, and this is an important point. Storing information is not equal to accessing it. We can choose from two types of distributed ledgers, the public ledger and the private ledger. A public ledger is permissionless. Permissionless means that anyone can become a network node or participant and anyone can in principle enter records in the ledger. That makes them inclusive. The bitcoin and Ethereum blockchains are the best-known public ledgers. Becoming a network node is just part of using blockchain. The first step to using say the Ethereum blockchain, is to get a wallet address typically through some kind of wallet software. These wallets monitor the ethereum blockchain to find transactions that are sent to this wallet. A private distributed ledger, on the flip side, is built by either an individual enterprise or by a consortium of organizations. It differs from public distributed ledgers in several key ways. First, a private network requires permission. Thus it restricts who can use it to record transactions and who can see the flow of information and assets. For financial institutions, this is an important feature. It allows them to comply with know-your-customer rules along with Anti-Money Laundering rules. These networks also don't need a trust-less protocol. This is a downside in one way because a consortium solution raises the threat of collusion as well as rent extraction typical of a trust. For instance, network members may restrict entry or fixed prices or even collude on fees. From a competition policy perspective it may be desirable to mandate a trust-less protocol to remove a barrier for new entrance wishing to join a consortium network. Now that you've learned some of the pros and cons of public versus private blockchains, you may be wondering which is best. The answer depends on the user's intent. Public blockchains record all transactions with the addresses of buyers and sellers. This information is kept at each node and shared across this wide network. This transparency prevents data loss and encourages consensus among parties. Public blockchains are open innovation. Anyone can push a change to the code base and if the network participants agree, that change can be integrated. But we can't assume that private distributed ledger guarantees privacy, it can't. A private blockchain has some of the same features as a public one. The network can still see information and transaction records. It's just a matter of deciding who should be included as a member. We write about public and private blockchains and the new preface to our updated edition of blockchain revolution. Please check it out. If you have any questions about the ideas we discussed here, please post them on the discussion forum. We're very happy to hear from you.
