A lot of noise has been made around the idea of private block chains. The idea behind the buzzword doesn’t really make sense. The point of a block chain is the censorship resistance which is achieved through the decentralization. The decentralization which is touted as the holy Grail is actually only the means to an end, the end being the censorship resistance.

If a block chain is private by definition it’s not really decentralized and so by definition it’s not really censorship resistant meaning that the controlling authority could change the data at any time. So private block chains are mostly glorified databases. If there is no decentralization you don’t need blocks and you don’t need a chain so you have no block chain.

A public block chain on the other hand must have a way to ensure its token will be valuable. This is extremely important as the value of the token is directly related to the incentive of securing the chain.

Decentralization is a very expensive and inefficient operation. However just like democracy which is also very expensive and inefficient it offers some guarantees that people are not willing to abandon whatever the price or the inefficiency is.

Bitcoin for example works well because the token is itself a unit of exchange. A block chain about smart contracts would also work because in order to operate the smart contract (let’s say you want to make a bet, you need to buy the token in order to lock it into the smart contract at least until the event that decides the winner happens) you must buy the token and this would create some upward price pressure.

This model works well when the token has no intrinsic value which the paradox is that when the token has no intrinsic value it actually acquires intrinsic value because of the applied price pressure that happens when people need to use the network.

If the token is backed by something or is simply information it won’t have value because of any sort of price pressure. This is also because when the token is information or is backed by something the supply cannot be limited which means that the value of the token is not created because of artificial scarcity.

Enterprises need private block chains usually in order to represent real assets. For example a good use case of private block chains in the press is to perform settlements. Of course those corporations don’t care about settling tokens but rather stocks, bonds, rights, or other assets

This means that the corporation would be faced with a dilemma. Either they use a database like they have been doing so far but then they would have no decentralization and no censorship resistance or they must find a way to give value to the token which is highly unlikely if the token is actually representing something else and so doesn’t have intrinsic value derived by artificial scarcity.

There is however a 3rd way. It’s called Polka or web 3.

It’s basically a layer that allows to build block chains on top of it. Building a block chain from scratch requires all the things I described before and on top of that ensuring that you have a proper distribution of the nodes that will guarantee the good health of the network.

If you could however build a block chain on top of another block chain that is already decentralized then you would have solved your problem. The idea is that the lower level block chain is not really a block chain but more like a decentralization engine. Basically you run your private block chain on that decentralization engine.

Let’s look at an example. Let’s say that Microsoft wants to distribute some licenses or rights in a way which is censorship resistant. Clearly the tokens or the information won’t have any intrinsic value so you cannot have the standard POW/POS model at the private block chain level. Even worse you couldn’t have any sort of inflation anyway as those tokens are basically backed by something else so they cannot be inflated. And in any way even the POS model couldn’t work because in the beginning Microsoft would have let say 99% of the tokens and you may have just 1% (the license you just bought)

Now imagine that this private block chain runs on the decentralization engine. It doesn’t matter that Microsoft owns 99% of the tokens and you have only 1%. That information is still decentralized and censorship resistant.

Imagine now that many corporations will run their private block chains on this decentralization engine. The token on which the engine will run will have to become very valuable over time as it represents power. The only way to guarantee the security of the information (or alternatively to try to control the decentralization engine) is to buy up the tokens. As people buy up the tokens trying to control the decentralization engine or the security of the system the price will go up. The price of the token will end up reflecting the importance of the information that is stored on the decentralization engine.