The technology behind Bitcoin, Ether & Co. in focus: What is the difference between private and public blockchains?

• Blockchain: Basic requirement for Bitcoin & Co.
• Private blockchains require access rights and are mostly used for internal purposes
• Public blockchains offer high decentralization and transparency

Crypto developers have the choice of whether they want to make their blockchain public or private. While the private blockchain ensures greater control and better data protection, public blockchains offer decentralization and greater transparency. It’s worth taking a closer look.

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What is a Blockchain?

Without the blockchain, there would be no cryptocurrencies – this statement may seem succinct, but it goes to the heart of the blockchain’s character. In fact, the vast majority of cryptocurrencies – most notably Bitcoin and Ether – would not exist, at least in their current form, without the digital databases that store information or transactions in blocks. Each of these blocks contains a list of transactions and a reference to the previous block, creating a chain of blocks – hence the internationally common name “blockchain”. The stored data is protected by cryptographic hash functions and verified and managed by a network of computers, also known as knods. These hash functions are special algorithms that produce a fixed output for a given input value.

But how are Bitcoin, Ether and Co. anchored on the blockchain? Cryptocurrencies are stored on the blockchain by recording transactions. Each transaction is summarized in a block, and that block is then anchored on the blockchain. The transactions contain information about the sender, the recipient and the amount of cryptocurrency being transferred. Blockchain uses cryptography to ensure the security and integrity of these transactions. This decentralized and transparent method makes it possible to track cryptocurrency ownership and ensure that no double spending occurs – thus each token can be assigned to an individual wallet.

The application of this technology can result in private or public blockchains, depending on the requirements. The two forms have major differences.

Private Blockchain: Greater control with less transparency

Private blockchains represent the exclusive form of the technology as they limit access to a limited group of users. Unlike public blockchains, they require access rights to access the stored data. This type of blockchain is typically used internally within companies or organizations to secure sensitive information. For example, private chains are ideal for use in the insurance industry or healthcare, for example for managing patient records. In private chains, the security of participant data is much easier to ensure and secret information can be protected from public view, which can, however, also encourage criminal activity.

Public blockchain: decentralized, transparent and democratic?

Public blockchains are probably more familiar to most crypto enthusiasts, as the most important cryptocurrencies such as Bitcoin and Ether run using this technology. In contrast to private blockchains, a public blockchain offers greater transparency and decentralization. Theoretically, every user has access to the network and can validate transactions. However, there are certain limitations. For example, in proof-of-stake systems like Ethereum, you need a certain amount of coins to validate transactions, while in proof-of-work systems like Bitcoin, special, expensive mining equipment is required.

The most common use case for public blockchains is cryptocurrencies. Anyone with the necessary technical and cognitive skills can set up a wallet and send cryptocurrencies; the blockchains are not password protected or access restricted by other mechanisms. Examples of public blockchains include Bitcoin, Ethereum and Litecoin; these are also referred to as Layer 1 solutions. Non-Fungible Tokens (NFTs) are also usually secured in public blockchains.

Editorial team finanzen.net