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Recap

In our previous series,

In this article series, we will move our focus to Ethereum private chains. For developers, private blockchains are set up for testing purposes. Private chains have advantages over public blockchains in testing. For example, there is no need for nodes syncing or obtaining test ether, as you are the only user, and there are no other smart contracts. But the disadvantage is that the testing won't be as good as real scenarios in a public blockchain, in the absence of other nodes, users, and contracts.
As blockchain technology has matured, enterprises have started to adopt the technology for their own use cases. It's important for you to understand not only the public blockchains but also the private and permissioned ones. Developers should know how to set up their own blockchains.

We will have a look at the difference between public and private blockchains, and take you through the steps for setting up a private blockchain using Ethereum. We will also look at the options flags that we can use with new chains. At the end of this article series, we will provide a brief overview of popular private blockchains, including R3 Corda, Hyperledger Sawtooth, and Quorum, and their usages in the industry. The series will also explain private blockchains in production usages.

We will cover the following topics in this series:

Understanding private and permissioned blockchains
Setting up a local private blockchain
Using optional flags with new chains
Introducing the popular private blockchains in the industry
Private blockchains in production usages

Technical requirements

To set up a local blockchain network, you will need one or more local computers connected through the local network. The steps demonstrated in this series have been implemented with a Mac machine. It will work almost the same on the Ubuntu server. You will also need to decide which Ethereum client to use. We will use Go-ethereum, the popular Ethereum client from the Ethereum foundation. If you choose a different Ethereum client implementation, follow the detailed instructions on its website, even if it appears to be very similar to Go-ethereum.
There are multiple options available for you to install Go-ethereum or Geth. The simplest way is to complete the following three steps:

Download Geth directly from the Geth site: https://geth.ethereum.org/downloads.
Extract the tar file and store the executable file in your local directory.
Add the directory to your system path.

If you intend to build Go-ethereum from source, the following applications will be required. For detailed instructions, you should check the geth site: https://geth.ethereum.org/install-and-build/Installing-Geth#build-it-from-source-code:

Git Xcode
Homebrew

If you plan to create any miner nodes, make sure you have enough RAM set aside for mining. Now that we understand the concept of private and permissioned blockchains, we will introduce how to create a local private blockchain without mining and then with mining.

Understanding a private and permissioned blockchain

So far, we have extensively discussed Bitcoin and Ethereum as public blockchains. With a public blockchain, anyone can become a node of the network and access all the activities inside it. The key challenges for enterprise adoption are privacy and confidentiality.

Enterprises need both of them for legitimate reasons:

One is that privacy will be enforced by laws and regulations. In Europe, the General Data Protection Regulation (GDPR) is the core of digital privacy legislation. In the US, HIPAA in healthcare and KYC/AML in finance require the business to protect consumer privacy. More importantly, privacy and security in general are competitive advantages for enterprises to gain the trust of and retain their customers.
The second reason is that all businesses and large enterprises deal with crucial product and services information, which make them competitive on the global market. For this reason, enterprises are more likely to join the private and consortium blockchains to avoid exposing sensitive data and transactions to the public.

A private blockchain is sometimes called a permissioned blockchain, similar to the way that a public blockchain is sometimes categorized as a permissionless blockchain. It can have all the key features we discussed in the public blockchain, including a decentralized peer-to-peer network, distributed ledger, and security through cryptography. The difference between the public and private blockchain lies in who can join the network, and what rights you can get. You can think of a public blockchain as a public park. Anyone can get into the public park. And once in, you can do all kinds of activities, such as jogging or playing, as long as the policies or rules allow them. Joining a private blockchain is like going to someone's birthday party: you can only join if you've been invited.

In a public blockchain, anyone can join the network and access all transactions. Anyone can be the validator to verify the transactions and create the blocks, and the system relies on the economic perspectives (incentives in the Proof-of-Work(PoW) consensus mechanism, and the disincentives in the Proof-of-Stake(PoS) mechanism) to secure the network. On the contrary, in the private blockchain, only selected nodes can participate in the peer-to-peer network and process the transactions. The system relies on the identity of the entities, whether it is a user or a node, to secure the network.

The difference between permissionless and permissioned blockchain lies in the trust of validators. Permissionless blockchains allow everyone to validate transactions, but only selected users can do so in a permissioned blockchain. In other words, a permissioned blockchain doesn't put its trust in validators.

To help you get a clear picture of the different categories of blockchains, we can summarize the features of blockchains in the following table:

blockchain	Public permissionless	Public permissioned	Private permissionless	Private permissioned
Read/create transactions	Anyone	Anyone	Restricted	Restricted
Validate/write transactions	Anyone	Restricted	Anyone	Restricted
Validator identity	Highly Anonymous	Moderate Anonymous	Identified	Identified
Trust in validators	Yes	No	Yes	No
Consensus	PoW	PoS PoA (Goerli Testnet)	Federated Byzantine agreement	Practical Byzantine Fault Tolerance Algorithm /Multisignature
Require Token	Yes	Yes	No	No
Speed	Slower	Faster	Faster	Faster
Energy consumption	Higher	Lower	Lower	Lower
Projects	Bitcoin Ethereum Waves	Ethereum after Casper Ripple	LTO Network MONET	Hyperledger Fabric R3 Corda Quorum

Also, as mainstream blockchain categories, blockchain networks are either permissioned or permissionless. The concept of it being private or public is application specific, and not at the network level. It is based on someone’s ability to access the network and also what identification requirements there are. Within those networks, transactions and interactions may be private or public. Whether or not you need privacy or confidentiality is depending on use case. For example, Quorum has tessera nodes for private transactions, Hyperledger has channels for private interactions, and E&Y has nightfall for public Ethereum.

Although Ethereum is launched as a public permissionless blockchain, you can build a local private blockchain with Ethereum too.

In the next article, we will walk you through how to set up a private Ethereum blockchain network.

In our next article (How to Set up a Local Private Ethereum Blockchain), we discuss how to set up a local private Ethereum network.

This article is written in collaboration with Brian Wu who is a leading author of “Learn Ethereum: Build your own decentralized applications with Ethereum and smart contracts” book. He has written 7 books on blockchain development.

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Introduction to R3 Corda Blockchain Development

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Introduction to Quorum Blockchain Development

Review of Private and Permissioned blockchain