Private blockchain

“Our virtues are generally but disguised vices” — La Rochefoucauld

Why at all do we need a private blockchain?

One of the blockchain types supported by Amazon is HyperLedger Fabric. There is a special Amazon Managed Blockchain service for Hyperledger Fabric on the AWS platform, that simplifies the work related to setting up blockchain networks and reduces the time to deploy solutions based on it. Hyperledger Fabric is a private blockchain, so let’s first look closer: what tasks can a private blockchain perform in general?

As you know, a public blockchain has three main properties:

– Decentralization — there is no single node or a dedicated group of nodes that store any information separately — information is duplicated in an amount equal to the number of users in the system.

– Transparency — every user has access to the entire database and can track all changes.

– Reliability — all the records form a chain, and each new record is linked to previous ones by a special mathematical function that depends on the data in the previous elements of the chain. This ensures that the data cannot be changed retroactively.

All these components together allow you to build an information storage system where each individual element (user) is untrusted, but in combination, they form a trustworthy repository.

Why is this concept not suitable for an enterprise environment?

First of all, the lack of user identification. This is especially critical when performing financial transactions in an enterprise environment. In 2016, the concept of KYC (Know Your Customer) appeared in the official documents of the Department of the Treasury to combat financial crime FinCEN USA, which requires financial institutions to identify their customers before allowing them to conduct financial transactions.

In addition, in 1989, the FATF introduced the principles of AML (Anti-Money Laundering) — measures to combat money laundering. And these principles require user identification. Thus, there are powerful arguments why an enterprise blockchain should be private but not public.

Is this the only difference? If we create a blockchain network with access to only authenticated users, then is it possible to use other items available in the public blockchain architecture for an enterprise system? No, it is not.

On a public blockchain, we use various consensus mechanisms to validate a transaction that adds a new block of data to the chain. All of these mechanisms rely on all network users participating in the validation process and receiving reward for this participation in one way or another.

And to pay this reward, each public blockchain invents its own cryptocurrency. Cryptocurrencies and public blockchains cannot exist without each other. Currently, there are over 10,000 different cryptocurrencies in the world. This amount significantly exceeds the number of fiat currencies, the value of which is guaranteed by the states that issue them. It is quite difficult to release a new cryptocurrency that has at least some value to the public.

This idea is not suitable for a corporate network. For two reasons:

– First, keeping a complete copy of the entire database on the computers of every employee with access to the corporate network in order to participate in the consensus will not cause enthusiasm among the security services in any corporation, no matter how powerful encryption algorithms are protecting information.

– Second, the idea of ​​introducing an internal cryptocurrency in the corporate network also seems strange.

This leads to the conclusion that a private blockchain needs a consensus mechanism based on a centralized algorithm.

So, what is left of the original idea? First, we consistently abandoned decentralization, although the decentralization level of public blockchains based on the Proof-of-Stake consensus mechanism is very doubtful, and then transparency was dropped. In the end, only “all records form a chain and each new record is linked to the previous through a special mathematical function that depends on the data in the previous elements of the chain. This ensures that the data cannot be changed retrospectively.

In fact, this is really not so few. We have obtained reliable data storage located in the corporate network and the information in it cannot be faked, no matter what the access rights of the person who wants to do it. And due to the fact that there is a central node or a set of nodes responsible for confirming transactions, the recording of information is significantly accelerated compared to public blockchains. There are many applications for such reliable storage with fast access in corporate networks. We will look closer at some of them soon, and will talk about how Hyperledger Fabric solves this problem.

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