Blockchain is a decentralized way of storing data using distributed ledger technology. Because it is decentralized, cryptography is used to anonymize data while also making it publicly verifiable.
When most people think of blockchains they think of public networks, such as Bitcoin or Ethereum. The technology can also be adapted for private enterprises.
A private blockchain can help organizations streamline decision-making and simplify internal processes.
What is a Private Blockchain
A private blockchain is not connected to a public blockchain network like Bitcoin. It is instead a restricted-access blockchain that only grants access to certain individuals. Data is processed by those individuals with access to the network rather than a public pool of anonymous miners.
This gives organizations the same benefits of a public blockchain with restricted access to approved users. To join a private blockchain someone must be invited by the blockchain’s administrator or meet pre-determined criteria established in the blockchain’s governing protocol.
This isn’t all too different from how most organizations already manage their internal networks. File drives, for example, are typically compartmentalized. A user is given access by a systems administrator and the files they have access to are determined by their job function.
When you are hired, your in-house IT team probably programmed your computer to access only the drives or folders you needed to do your job, rather than all the files within your company’s network. A private blockchain serves a similar role in the sense that it delineates who can access it and how they can use it.
A private blockchain also allows you to connect with users outside of your organization, fully integrating them into your operations. Up until now, third-party web-based platforms like Slack or Zoom have solved communication challenges facing matrixed teams.
These platforms work but they aren’t able to automate decision-making or facilitate transactions requiring one party to remit payment to another. Private blockchains attempt to solve this and could help streamline operations across companies and even countries.
How a Private Blockchain Is Different
A private blockchain is the same as a public blockchain in the sense that it uses distributed ledger technology to store data and a consensus mechanism to validate entries. A private blockchain is different in that it restricts who can use it and depending on how it’s built, whether or not entries can be changed.
Roles, tasks, and functions are clearly defined in a private blockchain and encoded in the blockchain’s protocol. This makes it efficient to operate, not solely from a technical perspective, but also when it comes to human capital. It reduces the need for administrative paper pushers and bureaucratic red tape.
Blockchain-based automation for specific business use cases makes internal processes quicker to complete, reducing overhead. When a private blockchain is built it includes governing rules that define its purpose and how it will operate. This essentially enables automated decision-making for administrative tasks such as reimbursing travel expenses or paying vendor invoices.
For example, a company could build a custom blockchain to process travel expenses and receipts. Approved users, such as those with a corporate credit card, could have access only to enter expense totals and upload receipts.
If the entry meets pre-approved criteria then the blockchain could initiate an automatic payment reimbursement. If it doesn’t – say for example because a receipt includes a prohibited alcohol purchase – then it would be rejected and returned to a human administrator for review.
Even though a private blockchain uses distributed ledger technology to manage how data is stored, a private blockchain is centralized. This means a single entity administers how the blockchain works and who has access to it. Because of this, a private blockchain is best used when it can be deployed to complete a specific task or automate a process.
For example, the finance department of a company may create different private blockchains for different functions, such as payroll and accounts receivable. Each blockchain will have specific roles and users based on what the blockchain is intended to do. This has the potential to increase accuracy, decrease human errors, and as a result, decrease operating costs.
(Private blockchains also have the potential to eliminate administrative jobs too, which is why understanding how private blockchains work is important).
Examples of Private Blockchains
There are a handful of companies and organizations working to build the infrastructure required to deploy private blockchains. Here are two of them:
Ripple is an enterprise-level crypto solution for businesses and governments. Companies use Ripple to process payments faster, especially for things like cross-border payments from international suppliers.
Ripple is also positioning itself to become the backbone of central bank digital currencies (CBDCs). A private blockchain can manage a country’s monetary policy. It can also automate bureaucratic government functions. For example, a private blockchain can enable government tax authorities to collect sales tax at the point of sale rather than relying on merchants to remit taxes to the government.
In the United States, this could look like an income tax payment after each pay period rather than a tax withholding. Instead of filing income taxes every year, a private government-managed blockchain could automate all of that. Countries like Bhutan are already working with Ripple to pilot their own in-country CBDC programs.
Hyperledger Fabric was launched by the Linux Foundation and its distributed ledger technology was created by IBM. It allows business to build their own private blockchain networks using a modular, “plug-and-play” architecture.
Walmart Canada is an example of a company using a private blockchain to improve information and payment management with third-party freight carriers. Walmart Canada uses Hyperledger Fabric to reduce the need for reconciling data discrepancies and thus the delays in remitting payment to service providers.
A private blockchain allows Walmart Canada and all of its different freight carriers to record and process data in real time. Parameters for specific data points, such as fuel usage, are specified in the blockchain protocol. When all the parameters are satisfied, the private blockchain can initiate invoice payments.
Hyperledger Fabric increases efficiencies in data entry while reducing the number of errors requiring human intervention. This results in timely payments with less overhead. It’s a win-win for everyone involved.
Big Takeaway
A private blockchain is segregated from other public blockchains. It is permissioned and limits who has access to it. As an enterprise-level solution, it is similar to an internal intranet or a compartmentalized file system, although it is best used for specific tasks, such as processing invoices.
The successful deployment of private blockchains may make many jobs redundant, especially for individuals tasked with doing data entry or approving invoices. Where project managers and auditors were once needed to manage human errors, a private blockchain has the potential to eliminate errors in the first place.
A private blockchain is not limited to making large corporations more efficient. At the government level it can streamline the functions of public sector bureaucracies – and dare I say – make them more efficient.
The creation of digital IDs and CBDCs may automate processes like applying for unemployment benefits or receiving Social Security disbursements. While this may eliminate many public sector jobs, it could also enable the governments to run more efficiently with fewer resources.