Private blockchains are gaining traction in various industries for their unique privacy advantages and tailored functionalities. Unlike public blockchains – which are accessible to anyone – private blockchains operate within a closed network, providing more advanced control over data and transactions.

This article explores the premise of private blockchains, including key features, how they work, distinctions from public blockchains, real-world applications, and even how to build one.

 

Key Takeaways

  • Definition: Private blockchains are restricted networks with enhanced privacy and efficiency.
  • Key Features: Controlled access, high efficiency, scalability, robust security, and regulatory compliance.
  • How They Work: Use permissioned nodes, efficient consensus algorithms (PoA, PBFT), and smart contracts.
  • Real-World Use Cases: Used in supply chain, healthcare, finance, real estate, voting, legal compliance, and identity management.

 

What Is a Private Blockchain Network?

A private blockchain is a decentralized ledger that’s restricted to a select group of individuals or organizations. Unlike public blockchains, where anyone can join and participate in the network, private blockchains operate under strict access controls managed by a single operator or a group of entities. 

This setup allows for enhanced privacy, control, and efficiency, making them an attractive option for businesses and institutions that require stringent data security and access management.

Network with padlock and global nodes, illustrating a secure private blockchain environment.

 

Key Features of Private Blockchains

By design, private blockchains host several key differences compared to public and consortium blockchain types.

1. Access and Membership

  • Invitation-Based Access: Access to a private blockchain is typically invitation only. This means that participants must verify their identity or provide necessary information in order to gain entry into the blockchain.
  • Known Identities: Unlike the anonymity of public blockchains, the identities of participants in a private blockchain are known. This transparency helps in establishing trust and accountability within the network.

2. Privacy and Confidentiality

  • A Single Operator or Entity: A private blockchain is often controlled by a single operator or a consortium of organizations. This central authority has the power to dictate who can access the network, view information, and perform transactions.
  • Permissioned Model: Only selected users are allowed to maintain the shared ledger. This central authority can override, edit, or delete entries if necessary, providing a higher level of control compared to public blockchains.

3. Transaction Processing

Simplified network diagram showing interconnected blocks and nodes, representing a private blockchain system.

  • Faster Transactions: Private blockchains offer faster transaction verification times due to fewer nodes and the absence of complex consensus mechanisms (which are required for public blockchains).
  • Controlled Validators: Instead of relying on anonymous miners, private blockchains utilize a controlled network of validators. This permissioned model reduces the risk of malicious activities and enhances trust among participants.

4. Enhanced Privacy and Security

Digital shield and padlocks symbolizing secure blockchain networks, representing enhanced security and privacy.

  • Data Confidentiality: Since access is restricted, private blockchains offer a higher degree of privacy. This is particularly useful for industries that handle sensitive information, such as finance, healthcare, and supply chain management.
  • Reduced Risk of Malicious Activities: With known participants and controlled access, the risk of malicious actors tampering with data is significantly lower. This makes private blockchains more secure than public blockchains, where anyone can participate.

5. Scalability and Customizability

Private blockchains can be tailored to the specific needs of an organization, allowing for significant flexibility in terms of scalability and functionality.

  • Customizable Protocols: Organizations can adjust blockchain protocols to fit their requirements, including transaction speed, privacy settings, and governance rules.
  • Scalable Infrastructure: Private blockchains can be scaled to handle varying transaction volumes, making them suitable for enterprise use.

 

Most Popular Real-World Private Blockchain Examples

1. IBM Blockchain

Based on Hyperledger Fabric, IBM’s Private Blockchain provides a commercial blockchain platform designed for enterprise use. It offers tools for building, governing, and operating blockchain solutions with 24/7 support and service level agreements (SLAs).

IBM Blockchain emphasizes performance, scalability, and data privacy, making it suitable for complex enterprise environments​.

  • Use-Cases: Widely used in supply chain management, trade finance, and healthcare. For example, IBM Food Trust based on IBM blockchain connects growers and consumers, providing transparency and traceability in the food supply chain.

2. R3 Corda

R3 Corda is an open-source blockchain platform specifically designed for financial services. It supports interoperability and high availability, focusing on regulatory compliance and enterprise integration.

Corda supports various consensus mechanisms and ensures data privacy by sharing information only with involved parties. It also offers Corda Enterprise for additional features like 24/7 support and corporate firewalls​. 

  • Use-Cases: Primarily used in the financial industry for applications such as central bank digital currencies (CBDCs), cross-border payments, and trade finance. Deployed by institutions like the Central Bank of UAE and SIX Digital Exchange (SDX).

3. Hyperledger Fabric

As mentioned in the IBM example, Hyperledger Fabric is a modular and flexible blockchain framework designed for enterprise-grade applications. It supports permissioned networks, ensuring that only authorized participants can access the blockchain.

Fabric’s architecture separates transaction processing from ordering services, enhancing scalability and performance. It also supports multiple consensus algorithms like Raft and Kafka​.

  • Use-Cases: Suitable for a wide range of industries, including finance, supply chain, healthcare, and manufacturing. It supports complex business processes through smart contracts.

4. Hyperledger Sawtooth

Hyperledger Sawtooth is a modular blockchain platform that supports both permissioned and permissionless networks. It offers a variety of consensus algorithms, including Proof of Elapsed Time (PoET) and Practical Byzantine Fault Tolerance (PBFT).

Sawtooth’s modular architecture allows for easy integration of new features and consensus mechanisms. This makes it highly adaptable to various enterprise needs​. 

  • Use-Cases: Used in industries such as IoT, supply chain, and digital identity. Its flexibility allows for diverse applications across different sectors.

Quick Comparison Between 4 Popular Private Blockchains

  • IBM Blockchain vs. Hyperledger Fabric: The IBM Blockchain is a commercial implementation of Hyperledger Fabric with added support and tools, while Hyperledger Fabric is the open-source framework.
  • R3 Corda vs. Hyperledger Platforms: R3 Corda is tailored for financial services with strong privacy features and regulatory compliance, whereas Hyperledger Fabric and Sawtooth are more versatile, supporting a wider range of industries.
  • Hyperledger Fabric vs. Sawtooth: Fabric is more focused on permissioned networks and high transaction throughput, while Sawtooth offers greater flexibility with its support for both permissioned and permissionless networks and multiple consensus algorithms.

 

How Do Private Blockchains Work?

Below is a detailed look into the inner workings of private blockchains:

Node Onboarding

In a private blockchain, nodes – which are the integral computers that allow blockchain transactions to take place – are pre-selected by a central authority or consortium. Here, node participants must go through an onboarding process that includes identity verification and the issuance of cryptographic keys.

This process occurs because private blockchains operate as permissioned networks, meaning only authorized participants can read, write, or validate transactions. This control is enforced through the usual cryptographic methods such as SHA-256 or SHA-3 and blockchain-specific network protocols.

For instance, Hyperledger Fabric uses “Apache Kafka” to order a new transaction on the network.

Consensus Mechanisms

Private blockchains often use more efficient consensus mechanisms, as opposed to using Proof-of-Work (PoW) or Proof-of-Stake (PoS) systems. 

For instance, IBM’s Hyperledger Fabric-based private blockchain primarily uses the Raft consensus algorithm. It also supports Practical Byzantine Fault Tolerance (PBFT) as an optional consensus mechanism, making it a more versatile option in different applications.

In general, these specialized protocols are designed for high availability and consistency in distributed systems, meaning they can help maintain a reliable ledger even when some nodes fail.

Smart Contracts and Automated Processes

Smart contracts in private blockchains work just like public blockchains – they automate processes and enforce rules without human intervention, ensuring efficiency and reducing the risk of errors.

When a transaction is initiated, smart contracts automatically verify the details against predefined criteria. This includes checking the legitimacy of the transaction and ensuring it complies with the preset network rules.

Transaction Workflow

The transaction flow in private blockchains closely mirrors that of their public counterparts.

  1. Initiation: A participant submits a transaction to the network, creating a digital signature with their cryptographic key to ensure authenticity.
  2. Validation: Pre-selected validators check the transaction for accuracy and compliance with network rules, ensuring no conflicts with existing entries.
  3. Consensus: Validators use the chosen consensus algorithm (e.g., BFT, PoA, Raft) to approve the transaction.
  4. Block Formation: Validated transactions are grouped into blocks, each containing a cryptographic hash of the previous block.
  5. Appending to Blockchain: The new block is then added to the blockchain, with all network nodes updating their ledgers to reflect the latest state/addition.

Data Privacy and Security Measures

Private Blockchains carry a copy of Access Control Lists (ACLs). These ACLs define who can access, modify, or validate transactions, therefore bolstering the overall security of networks. 

Private blockchains also support confidential transactions, wherein transaction details are only visible to the parties involved. For instance, Hyperledger Fabric uses channels and private data collections to ensure confidentiality, whilst R3 Corda utilizes notary services and confidential identities to ensure transactions remain a secret.

Governance and Management

As you should know by now, private blockchains are managed by central authorities or consortiums, who make decisions regarding network policies, access controls, and updates. This centralized governance contrasts with the decentralized nature of public blockchains.

These same central authorities enforce network policies through smart contracts and automated systems, including rules for participant behavior, transaction validation, and data management.

 

Advantages and Disadvantages of Private Blockchains

Advantages:

More Secure

For companies, using private blockchains means sensitive data and transactions remain secure from competitors. 

For instance, by leveraging private blockchains, healthcare patient records can remain confidential and only accessible to authorized medical personnel. In turn, this enhances patient trust, as well as compliance with regulations like HIPAA.

Highly Efficient and Fast

Private blockchains can validate transactions quicker than its public counterparts, due to having fewer nodes. This is critical for industries like finance, where split-second delays can affect important market decisions.

As a practical example, Hyperledger Fabric’s 2-3 second verification time is significantly faster than Bitcoin’s (often) 10 minute timeframe, or even Ethereum’s typical 13-15 second delay.

As a consequence, higher efficiency reduces operational costs related to transaction processing and record-keeping.

Highly Scalable

With public blockchains, organizations can scale their blockchain operations to match their growth. Whether it’s a small enterprise or a large multinational corporation, they can tailor the blockchain’s capacity and performance to their specific needs. These companies can also add more nodes or increase transaction capacity if necessary, without compromising performance.

Simplified Compliance

Private blockchains can simplify compliance by integrating built-in features that ensure regulatory adherence. 

Unlike public blockchains, private blockchains provide controlled access, ensuring that only authorized participants can join and view transactions. This controlled environment enhances data privacy and security, which is crucial for compliance with regulations such as GDPR and HIPAA. 

What’s more, private blockchains can be customized to include specific compliance features tailored to an organization’s regulatory needs. For example, they can enforce AML (Anti-Money Laundering) and KYC (Know Your Customer) procedures through smart contracts that automatically verify compliance before processing transactions.

Disadvantages:

Here’s a rundown of some of the disadvantages of private blockchains:

  1. Private Blockchains can have single points of failure.
  2. As private blockchains are managed by a single authority, if they get compromised, it can lead to widespread issues, including data breaches and operational disruptions.
  3. The central authority’s power to modify or delete records can cause data integrity and misuse issues, reducing trust among participants.
  4. Whilst being able to boost transparency, restricted access can also lead to reduced transparency, which might be problematic in environments where openness is crucial.
  5. Integrating private blockchains with other blockchain systems and legacy IT infrastructures can be technically challenging and costly.
  6. Regular maintenance, security updates, and infrastructure management require continuous investment, which can be a financial burden for some organizations.
  7. Significant resources are needed for private blockchain audits, compliance checks, and system updates – which therefore diverts time and money away from other business activities.

 

World Leading Private Blockchain Companies

Let’s take a look at some of the pros and cons of the world’s leading private blockchain innovators.

1. IBM

IBM is a leading player in the blockchain space, offering solutions through its IBM Blockchain platform, which leverages Hyperledger Fabric.

Pros:

  • Strong enterprise-grade solutions tailored for complex business environments.
  • Extensive support and resources for implementation and maintenance.

Cons:

  • High cost of implementation and ongoing support.
  • Complexity of integration with existing systems.

2. JPMorgan Chase

JPMorgan Chase is the developer behind Quorum, which is an enterprise-focused private blockchain platform based on Ethereum.

Pros:

  • Enhanced security and privacy features suitable for financial transactions.
  • Integration with existing banking infrastructure.

Cons:

  • Primarily tailored for large financial institutions, limiting accessibility for smaller enterprises.
  • Governance and control concentrated within the bank, potentially reducing transparency.

3. R3 Corda

R3 – developed by Corda – is a blockchain platform designed specifically for regulated financial institutions.

Pros:

  • Strong focus on regulatory compliance and data privacy.
  • Optimized for complex financial applications, ensuring high efficiency and security.

Cons:

  • High implementation costs.
  • Requires specialized knowledge and skills for effective deployment and maintenance.

4. Hyperledger

Hyperledger is an open-source collaborative effort created to advance cross-industry blockchain technologies, hosted by the Linux Foundation.

Pros:

  • Strong support from a diverse range of industry leaders and contributors.
  • Highly customizable and suitable for a wide range of applications.

Cons:

  • Requires significant technical expertise to customize and implement effectively.
  • Ongoing support and development can be resource-intensive.

5. ConsenSys

ConsenSys is a blockchain technology company that develops decentralized applications (dApps) and enterprise solutions on Ethereum.

Pros:

  • Strong focus on decentralized applications and interoperability with public blockchains.
  • Comprehensive suite of tools for blockchain development and deployment.

Cons:

  • Primarily built on Ethereum, which may pose scalability challenges.
  • High cost of proprietary solutions and ongoing support.

 

Use Cases of Private Blockchains

Illustration of various industries connected by a private blockchain network.

1. Supply Chain Management

Private blockchains enhance transparency, traceability, and efficiency in supply chain operations by enabling secure, real-time sharing of data among authorized participants.This is because companies can use private blockchains to trace the origin of products, ensuring authenticity and quality. 

For example, the world’s leading diamond company De Beers uses a private blockchain to track the journey of diamonds from mines to retailers, ensuring conflict-free sourcing.

Similarly, Walmart employs private blockchain technology to improve inventory management and track the movement of goods, therefore reducing discrepancies and optimizing stock levels.

2. Healthcare

Private blockchains provide a secure platform for storing and sharing medical records, to improve patient data privacy and facilitate better communication between healthcare providers.

Medrec is a prime example of this, as the US ‘e-health record’ company uses blockchain technology to manage patient data across multiple providers. Similarly, the FDA is now exploring private blockchain solutions for tracking pharmaceuticals through the supply chain, ensuring drug safety and compliance with regulations.

3. Financial Services

Private blockchains streamline financial transactions, improve security, and reduce costs associated with intermediaries.

For instance, the Marco Polo Network – an Irish software solutions company – utilizes private blockchain technology to automate processes and reduce paperwork.

4. Voting Systems

Private blockchains can be used to develop secure and transparent voting systems, ensuring the integrity of election processes.

For example, Broadridge Financial Solutions used an Amazon-managed private blockchain for proxy voting in corporate governance in 2023, ensuring better transparency and accuracy within shareholder voting.

5. Identity Management

Private blockchains provide a secure platform for managing digital identities, improving authentication processes and reducing identity fraud.

For example, SecureKey’s Verified.Me platform uses a private blockchain to streamline identity verification processes, allowing for the secure sharing of verified identity information. Upon its launch, this system was adopted by Canada’s top five banks – CIBC, Desjardins, RBC, Scotiabank, and TD – in order to efficiently verify client identities.

 

How to Build a Private Blockchain

Below is a step-by-step guide on how to build a private blockchain.

1. Define the Purpose

Defining its purpose is the foundational step in developing a private blockchain. This involves identifying the specific use case and setting clear objectives.

  • Identify Business Requirements: Determine the business problems the blockchain will solve. For example, if the purpose is to enhance supply chain transparency, focus on tracking and verifying the provenance of goods.
  • Stakeholder Analysis: Engage with all stakeholders and relevant parties to understand their needs and expectations. This helps in defining the scope and ensuring that the blockchain solution addresses all relevant concerns.
  • Document Objectives: Clearly document the objectives, such as improving transaction speed, enhancing data security, or ensuring regulatory compliance. This provides a clear roadmap for the development process.

2. Select the Consensus Algorithm

Selecting the most fitting consensus algorithm is crucial for the security and performance of a private blockchain, as a small oversight during this stage can lead to catastrophic consequences for your project/business. 

This step therefore involves evaluation different algorithm types:

  • Proof of Authority (PoA): Suitable for private blockchains where a few trusted nodes validate transactions (offers high efficiency and low latency).
  • Practical Byzantine Fault Tolerance (PBFT): Ideal for environments requiring high fault tolerance and where the network can tolerate some malicious nodes (PBFT ensures consistency and reliability).
  • Delegated Proof of Stake (DPoS): Provides scalability and efficiency by delegating transaction validation to a few elected nodes, making it suitable for networks with a larger number of participants.

It’s also important to consider network requirements in this step, by assessing the number of nodes, transaction throughput, and fault tolerance needed for your use case. For instance, if high throughput is critical, DPoS might be the best choice.

3. Set Up the Network

The next step is to establish a permissioned network. This involves configuring the nodes and defining participant roles. Here’s what you need to do during this stage: 

  • Node Configuration: Determine the number of nodes and their roles (e.g., validators, peers, clients). Nodes can be set up on-premises or in the cloud, depending on the organization’s infrastructure.
  • Permission Management: Implement role-based access control (RBAC) to ensure that only authorized parties have access to the network.
  • Network Topology: Define the network topology, including how nodes will communicate with each other. This involves setting up secure communication channels and ensuring redundancy to prevent single points of failure.
  • Identity Management: Implement a robust identity management system to authenticate and verify participants. Here, use digital certificates and cryptographic keys to manage identities securely.

4. Choose a Suitable Blockchain Platform

Your chosen blockchain platform should align with your business needs and offer the necessary features to fulfill your needs.

  • Platform Evaluation: Assess various blockchain platforms based on criteria such as scalability, security, and flexibility. Common platforms include:

Hyperledger Fabric: Known for its modular architecture and support for private transactions. Ideal for complex business processes.

R3 Corda: Designed specifically for financial institutions, focusing on privacy and interoperability.

Quorum: An enterprise-focused version of Ethereum, suitable for financial applications requiring high privacy and performance.

  • Feature Alignment: Ensure the chosen platform supports the features you need, such as smart contract functionality, encryption, and compliance with regulatory standards.
  • Community and Support: Consider the platform’s community support and availability of development resources. A strong community can provide valuable insights and troubleshooting assistance.

5. Smart Contract Design

Smart contracts are essential for executing agreements and transactions securely and efficiently. Therefore, at this stage, you should:

  • Define Contract Logic: Clearly define the logic and conditions under which the smart contracts will operate. This includes specifying the rules for transactions, penalties for breaches, and conditions for contract execution.
  • Develop and Test: Write the smart contracts using the programming language supported by your blockchain platform (e.g., Solidity for Ethereum-based platforms, Go or Java for Hyperledger Fabric). Rigorously test the contracts to ensure they function as intended and are free of vulnerabilities.
  • Deployment: Deploy the smart contracts to the blockchain network. Ensure they are securely integrated and accessible only to authorized participants.

6. Data Encryption Implementation and Blockchain Testing

This step is vital to identify and rectify any vulnerabilities in the logic or code.

  • Data Encryption: Implement strong encryption algorithms to protect data at rest and in transit. Use advanced encryption standards (AES) and public key infrastructure (PKI) to secure communications and data storage.
  • Security Audits: Conduct comprehensive security audits to identify potential vulnerabilities, including asking third-party security experts to perform penetration testing and code reviews.
  • Functional Testing: Perform extensive functional testing to ensure the blockchain operates as expected. This includes testing transaction workflows, smart contract execution, and network performance under various conditions.
  • Compliance Checks: Verify that the blockchain complies with relevant regulatory requirements and industry standards. Ensure that data protection measures meet GDPR, HIPAA, or other applicable regulations.

7. Deploy and Maintain the Network

Finally, you have to deploy and maintain the network infrastructure. This involves the following sub-steps.

  • Network Deployment: Launch the blockchain network in a live environment. Ensure all nodes are properly configured and connected. Implement monitoring tools to track network performance and health.
  • Maintenance Protocols: Establish protocols for regular maintenance, including software updates, security patches, and performance optimization. Schedule periodic reviews to assess network health and address any issues promptly.Backup Procedures: Implement robust backup procedures to protect data against loss or corruption. Ensure that backups are stored securely and can be restored quickly in case of a failure.
  • User Training: Provide training for network participants to ensure they understand how to use the blockchain effectively and securely. Offer ongoing support and resources to help users troubleshoot issues and maximize the benefits of the blockchain.

 

Future Projections of Private Blockchains

Enhanced Interoperability

Interoperability between different blockchain networks, including private and public blockchains, is an area that needs a lot of improvement. 

Here, industry leaders predict that private blockchains will increasingly help support cross-chain communication protocols, enabling seamless data exchange and transaction processing across diverse blockchain networks.

The Rise of Integrated Blockchain Solutions

Enhanced interoperability will foster collaborative ecosystems where private and public blockchains coexist, allowing enterprises to leverage the strengths of both types of networks. This will reduce data silos and enable more comprehensive and integrated blockchain solutions.

Confidential Computing In Private Blockchains

Techniques such as confidential computing, which encrypts data in use, will be integrated into private blockchain platforms to enhance data security and privacy. This will enable secure data sharing between parties without revealing sensitive information, making private blockchains more attractive for industries such as healthcare and finance.

Increased Adoption in Enterprises

Private blockchains are poised for increased adoption across various industries due to their ability to offer secure, efficient, and scalable solutions. Gartner (a US-based tech research firm) predicts that by 2025, 50% of businesses will have integrated blockchain technology into their operations, with a significant portion using private blockchains.

Integration with the Internet of Things (IoT) and Artificial Intelligence (AI)

Blockchain tech can provide a secure ledger for IoT devices to record transactions and share data in real-time. Similarly, AI can be used to analyze blockchain data, optimize smart contracts, and enhance decision-making processes within private blockchain networks.

The integration of private blockchains with IoT and AI will therefore enable smart automation, where devices can autonomously execute transactions and manage operations based on predefined conditions.

 

 

Private Blockchains – FAQs

Very secure. Private blockchains offer high security through restricted access, strong encryption, and robust identity verification. However, their centralized control can pose a risk if the managing entity is compromised.

Main challenges include high initial setup costs, complex integration with existing systems, and ongoing maintenance requirements.

Industries like finance, healthcare, supply chain, and real estate benefit the most due to the need for enhanced privacy, security, and efficient transaction processing.

Yes, private blockchains can interact with public blockchains through interoperability protocols. For instance, Polkadot’s parachains can be used by enterprises running private blockchains to interact with public blockchains, such as Bitcoin and Ethereum, facilitating cross-chain transfers and communication.

Private blockchains ensure privacy through encryption, restricted access, and permissioned participation, where only authorized users can view and interact with the data.

Yes. Private blockchains are generally more scalable than public blockchains due to their controlled environment and optimized consensus mechanisms, allowing for higher transaction throughput.