Blockchain is the technology that underpins virtually ever type of cryptocurrency, the alternative asset class that is synonymous with wild price swings and feisty debates over the future of money.
While associated with decentralization and anonymity, not all blockchains are alike, and the recent move by JPMorgan Chase & Co. JPM, -0.35% into the nascent sector is a prime example of a key difference within the often misunderstood industry.
The level of anonymity and decentralization is dependent on the type of blockchain — public or private — that is housing the digital coin.
Public blockchains
A public blockchain is one that is usually open-sourced and available for anyone to use. Those willing to participate simply set up an account — commonly referred to as an address— and begin to upload transactions to the ledger. Because it is public, no single entity can alter transactions that are input and validated on the blockchain, making the transactions immutable.
Public blockchains are often referred to as permissionless, simply because users don’t need permission to join the network.
The most famous public blockchain is the bitcoin ledger, which houses the largest digital currency BTCUSD, +0.28%
However, the most popular public blockchain is ethereum, which hosts more than 80% of all initial coin offerings, or ICOs,—a popular crowdfunding strategy for crypto-related ventures. On the ethereum blockchain, those raising money issue tokens in exchange for Ether, ETHUSD, -0.54% the native currency of that blockchain.
For further reading on permissionless blockchains see this report from Coin Center, a nonprofit research firm focusing on decentralized technology.
Private blockchains
A private blockchain is similar to a public network in that transactions are uploaded to a ledger. However, access to the blockchain network is restricted and governed by one or more entities, therefore transactions on a private blockchain aren’t public. These characteristics make private blockchains “permissioned.” It also means they are centralized, as opposed to public blockchains, which are decentralized.
The JPM Coin runs on a private blockchain, which is permissioned by JPMorgan.
Private blockchains are popular with companies that conduct and log in-house transactions and are said to improve supply-chain transparency and efficiency in fields such as finance, health care and manufacturing. Furthermore they have the ability to be customized.
A consortium blockchain is hybrid form, in which more than one enterprise has the ability to verify transactions.
Key differences
The key differences between the two types of blockchain include governance and anonymity:
On a private blockchain, one single party governs decision making and sets the rules for the ledger. This means it is easy for the blockchain to be configured to address or improve use cases, including potential issues such as security and more recently, the issue of scalability — the ability of a network to process transactions quickly and efficiently.
As for anonymity, early crypto adopters tend to gravitate to decentralized technology and public blockchains because it offers a tool to conduct and transact value without a third party. However, that inherent anonymity has engendered the perception of cryptocurrencies as a hotbed for money laundering and illegal transactions.