At first, blockchain was presented as a completely decentralized electronic payment system that would let people move money without the help of a centralized bank. It was first used as a way to keep track of Bitcoin transactions.
Since Bitcoin’s ability to work without a central authority has attracted much attention, many companies have started looking into how blockchain technology could be used in many different fields. In this blog, you’ll learn about the different kinds of blockchain networks, along with their pros, cons, and possible uses.
What is blockchain?
Blockchain technology is a type of technical infrastructure that allows a network of computers to access a digital ledger and the functions of smart contracts.
Almost anything of value can be stored and traded on a blockchain network. However, the record and the transaction cannot be changed in any way. Also, because the code is often open-source, anyone can check the transactions, detect errors, or suggest changes.
Companies, organizations, and other types of entities can keep track of orders, accounts, payments, and other data by using blockchain technology. This makes it much easier to record transactions and keep track of assets (both tangible and intangible).
Get to know more about how the blockchain works and what it can be used for through this comprehensive guide to blockchain technology and its uses.
Classification of blockchains
If you plan to use blockchain technology, you have to decide which type of chain would work best for your project. Not all blockchain technologies can be used to handle the management of specific information.
Thus, it is crucial to know everything there is to know about the different kinds of blockchains. They can be either permissionless, which means anyone can use them, or permissioned, meaning only certain people can use them.
Any user or node can join the network anonymously if there are no permissions on a blockchain. This way, the rights of the nodes in the chain network are not limited. Permissionless blockchains are known to process transactions slowly. This is mainly because there are so many nodes and transactions in the network.
A permissioned blockchain only lets a specific group of users, or nodes, connect to the network. Because of this, it is also possible that the privileges these nodes have in the network will be limited. People who use this type of network may be able to see who else uses it.
A permissioned blockchain is more likely to work faster because it has fewer nodes. They are also safer than public ones since access to the network has been limited.
However, permissioned blockchains have a central authority, a government, a company, or any other institution or group. Since permissionless blockchains have more nodes to validate transactions, they are often safer than permissioned networks.
Types of Blockchains
There are four different kinds of structures that can be found on a blockchain.
No special permission is needed to use a public blockchain. Anyone can use them, and they can work without the help of a central authority. Each node has the same permissions on a public chain to access the network, upload new data blocks, and verify existing data blocks.
Even today, the most common things on public blockchains are trading and mining cryptocurrencies, such as in the case of Bitcoin and Ethereum public chains. Nodes “mine” for cryptocurrency on public blockchains by solving cryptographic equations and building transaction blocks.
As payment for their work, the miner nodes are given a small amount of the cryptocurrency being mined. The miners work similarly to bank tellers today since they are in charge of processing transactions.
How does public blockchain work?
The first kind of blockchain to be made was the public blockchain. It was here that the first Bitcoin was mined, which helped make the technology more popular.
The public blockchain spreads information across the peer-to-peer network instead of keeping everything in one place. Since it is decentralized, there needs to be a system used to figure out if the data can be trusted.
People who are part of a blockchain can agree on the current state of the distributed ledger through a consensus algorithm. Two common approaches are proof of Work (PoW) and Proof of Stake (PoS).
Since public blockchains don’t need permission to operate, anyone with internet access can join a public chain and become an authorized node. Each node can see the most recent transactions and records from the past.
Advantages of using a public blockchain
One of the best things about public blockchains is that anyone can use them without being controlled by a single organization. This means that the public chain would still work even if the organization went out of business as long as there were still nodes connecting. Another benefit of using them is that the network is transparent.
Disadvantages of using a public blockchain
Access to public blockchains is not something that a central government or private company can control. Thus, if hackers take over more than 51% of a public chain’s processing power, they can make changes to the network without consensus. Also, when there are more nodes in the network, the speed of the network as a whole slows down.
Applications for public blockchains
- Cryptocurrency mining and trading
- Electronic notarization of records of property ownership
- Storage of permanent records that can be used for investigations
Private blockchains can only be used by people with permission and are managed by a single entity. These kinds of distributed ledgers are also sometimes called “managed blockchains.” In a private blockchain, the governing body decides who can be a node on the blockchain.
Only authorized users can access private blockchains. Moreover, it is easier for hackers and those with malicious intentions to take advantage of flaws. On the brighter side, the processes for validating new data on private blockchains usually take shorter than on public blockchains.
How does private blockchain work?
A private blockchain network works similarly to a public blockchain network. However, this type of blockchain is much less scalable even if it uses peer-to-peer networks and decentralization. For instance, it doesn’t let just anyone who wants to donate processing power join.
Advantages of using a private blockchain
When a private blockchain network is made, each node in the network can read, change, and add information. On top of that, it can stop people who should not be able to access specific data from doing so.
In addition, private blockchains can process transactions much faster. This is because private blockchains are usually much smaller than public blockchains.
Disadvantages of using a private blockchain
There is a controversial claim that private blockchains are not real blockchains. This is because blockchain technology is based on the idea of decentralization. Since centralized nodes decide what information is authentic, it becomes harder to reach a state of trust in the data over time.
Because there are only a few nodes, there is a greater security risk. Even if only a small number of nodes decide to act maliciously, it is still possible to stop the consensus process.
Also, the source code that private blockchains use is almost always kept secret and isn’t available to the public. Users can’t do independent audits or confirmations, making the system less secure.
Applications for private blockchains
- Keeping information that can’t be seen or used by the general public
- Internal voting
- Faster auditing and transactional process
- Management of supply chains
- Control of ownership of assets
A single company also owns hybrid blockchains. But for certain transaction checks to be done, there must be enough oversight on the public blockchain. They also let organizations control who can access specific data stored in the network and what information will be shared with the public.
How does hybrid blockchain work?
A hybrid blockchain makes it possible for businesses to reach their goal of getting the benefits of both kinds of blockchains. It lets businesses build both a public permissionless and a private permission-based system.
After joining a hybrid blockchain, a user can access all of the system’s resources. If a transaction doesn’t take place between two users, both users will remain anonymous.
Most of the time, the transactions and records on a hybrid blockchain are not made public. But if it becomes necessary to check them, a smart contract can be used to give them access and make the verification process possible.
Advantages of using a hybrid blockchain
A hybrid blockchain protects users’ privacy while keeping their ability to talk to other people or organizations. On most hybrid blockchains, transactions can be done faster and cheaper. In addition, the network scalability is much better than that of a public blockchain.
Disadvantages of using a hybrid blockchain
A hybrid blockchain isn’t transparent since data could be hidden in its network.
Applications for hybrid blockchains
- Real estate: Sharing information about real estate with the public while keeping some data private.
- Retail industry: Streamlining of processes in retail stores
- Financial services industry: Digitizing the finance lifecycle to make it more efficient, reduce counterparty risk, and shorten the time it takes to settle and issue money
- Medicinal industry: Storing medical records securely
- Government: Storing citizens’ data confidentially while enabling institutions to share information securely
Consortium blockchains are permissioned blockchains managed by a group of organizations instead of a single company. These different kinds of networks are safer than private blockchains because they are less centralized.
On the other hand, putting together a consortium can be tricky because it requires the cooperation of many different businesses. There’s also a chance that some supply chains don’t have the technology or infrastructure to use blockchain solutions.
How does consortium blockchain work?
The consortium blockchain acts like a hybrid blockchain because it has private and public blockchain features. But what makes this type of network different from others is that various people from the same company work together on a decentralized network.
A consortium blockchain only lets specific organizations use its network. Specific nodes will work to reach a consensus when a consortium is in charge of a blockchain. For instance, there is a validator node whose job is to verify transactions, and there are member nodes who accept transactions.
Advantages of using a consortium blockchain
The security, scalability, and efficiency of a consortium blockchain are usually higher than those of a public blockchain network. Access controls are also available, just like private and hybrid blockchains.
Disadvantages of using a consortium blockchain
The consortium blockchain has much less transparency than the public blockchain. Because of this, it can still be attacked if one of the nodes in the network is hacked.
Applications for consortium blockchains
- Banking and payment systems: Several banks can work together to form a consortium to figure out which nodes will be responsible for confirming financial transactions
- Supply chains: Useful in applications that deal with the management and administration of food and medicines
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