Types of Blockchain

As more and more businesses are beginning to adapt the blockchain transformation, it has become vital to not only understand the varied real world applications of blockchain technology but also to prioritise and select the blockchain type that will be suitable for your needs and branches. The types of blockchain preferable for a certain task is determined by the application it will be used for.

There are roughly four main types of blockchains – public, private, hybrid and consortium but before learning about the differences and similarities, let’s try and understand the need for different types.

Need for different blockchains

The fundamental application of a blockchain is to execute transactions and exchange information through a secure network. But the way people use blockchains and Distributed ledger technology (DLTs) or networks vary from case to case. For instance, if we talk about Bitcoin, it is a digital cryptocurrency which is built and transacted through the blockchain technology. This type of blockchain network is a public network because people from all over the world can become a node, verify other nodes and trade bitcoins.

On the other hand, let us suppose that a company is using a private blockchain network. It means the network is restricted and only authorised persons will have access to confidential information. Thus, no one out of this closed network can gain access to the company database.

A private network will have limited and authorised nodes monitored by a network administrator. The information transmitted through such a private blockchain network stays within the network. Any new node that wishes to get added in a private network needs permission from the network admin. ust like these examples, there are different ways in which the blockchain network is set up depending on the use and requirements.

Types of Blockchains

Primarily there are only two main types of blockchain: Public and Private. However, recently the Consortium and the Hybrid variations of blockchain have also gained traction. Now let us first try and understand the similarities shared by these blockchains.

Every blockchain consists of a cluster of nodes functioning on a peer-to-peer (P2P) network system. Every node in a network has a copy of the shared ledger which gets updated timely. Each node can verify transactions, initiate or receive transactions and create blocks.

Now let’s have a look in detail about the four types of blockchains

1. Public Blockchain

A public blockchain is a non-restrictive, permission-less distributed ledger system. Anyone who has access to the internet can sign in on a blockchain platform to become an authorised node and be a part of the blockchain network. A node or user which is a part of the public blockchain is authorised to access current and past records, verify transactions or do proof-of-work for an incoming block, and do mining.

The most basic use of public blockchains is for mining and exchanging cryptocurrencies. Thus, the most common public blockchains are Bitcoin and Litecoin blockchains. Public blockchains are mostly secure if the users strictly follow security rules and methods. However, it is only risky when the participants don’t follow the security protocols sincerely.

Example: Bitcoin, Ethereum, Litecoin

Use cases: The most common use case for public blockchains is mining and exchanging cryptocurrencies like Bitcoin. However, it can also be used for creating a fixed record with an auditable chain of custody, such as electronic notarization of affidavits and public records of property ownership.

2. Private Blockchain

A private blockchain is a restrictive or permission-based blockchain that works only in a closed network. Private blockchains are usually used within an organisation or enterprises where only selected members are participants of a blockchain network.

The level of security, authorizations, permissions, accessibility is in the hands of the controlling organisation. Thus, private blockchains are similar in use as a public blockchain but have a small and restrictive network. Private blockchain networks are deployed for voting, supply chain management, digital identity, asset ownership, etc.

Examples of private blockchains are Multichain and Hyperledger projects (Fabric, Sawtooth), Corda, etc.

Use cases: The speed of private blockchains makes them ideal for cases where the blockchain needs to be cryptographically secure but the controlling entity doesn’t want the information to be accessed by the public.

3. Consortium Blockchain

A consortium blockchain is a semi-decentralized type where more than one organisation manages a blockchain network. This is contrary to what we saw in a private blockchain, which is managed by only a single organisation. More than one organisation can act as a node in this type of blockchain and exchange information or do mining. Consortium blockchains are typically used by banks, government organisations, etc.

Examples of consortium blockchain are Energy Web Foundation, R3, etc.

Advantages: Since hybrid blockchains work within a closed ecosystem, outside hackers cannot mount a 51% attack on the network. This also protects data privacy but allows for communication with third parties. Transactions are cheap and fast, and it offers better scalability than a public blockchain network.

Disadvantages: Hybrid blockchains aren’t completely transparent because information can be shielded. Upgrading can also be a challenge, and there is no incentive for users to participate or contribute to the network.

Use cases: Banking and payments are two uses for this type of blockchain. Different banks can band together and form a consortium, deciding which nodes will validate the transactions. Research organisations can create a similar model, as can organisations that want to track food. It’s ideal for supply chains, particularly food and medicine applications.

4. Hybrid Blockchain

A hybrid blockchain is a combination of the private and public blockchain. It uses the features of both types of blockchains, that is one can have a private permission-based system as well as a public permission-less system. With such a hybrid network, users can control who gets access to which data stored in the blockchain. Only a selected section of data or records from the blockchain can be allowed to go public, keeping the rest as confidential in the private network.

The hybrid system of blockchain is flexible so that users can easily join a private blockchain with multiple public blockchains. A transaction in a private network of a hybrid blockchain is usually verified within that network. But users can also release it in the public blockchain to get verified. The public blockchains increase the hashing and involve more nodes for verification. This enhances the security and transparency of the blockchain network.

Example of a hybrid blockchain is Dragonchain.

Advantages: Consortium blockchain offers considerably more security, scalability and efficiency than public blockchain networks. Like private and hybrid blockchains, it also offers access controls.

Disadvantages: Consortium blockchains, however, are less transparent than public blockchains. They can still be compromised if a member node is breached, the blockchain’s own regulations can impair the network’s functionality.

Use cases: Hybrid blockchain has several strong use cases, including real estate. Companies can use a hybrid blockchain to run systems privately but show certain information, such as listings, to the public. Retail can also streamline its processes with hybrid blockchain, and highly regulated markets like financial services.

Private vs Public Blockchain

Private blockchains are a restricted network of authorised nodes. No one outside the private network can access information exchanged between two nodes. As impressive as private blockchains are, they have their own pros and cons.

Contrary to a private blockchain, the public blockchain is an unrestricted open ledger system. It can have as many numbers of nodes as there can be from all over the world. The data recorded on a blockchain in a public network is equally accessible by any node.

Advantages of Private Blockchain

1. Speed: Private blockchains’ transactions occur at greater speed as compared to public blockchains. That means the transactions per second (TPS) rate is higher in the case of private blockchains. This is because there is a limited number of nodes in a private network as opposed to a public network. This fastens the consensus or verification process of a transaction by all the nodes in a network. Also, the rate of adding new transactions in a block is fast. Private blockchains can facilitate the transactions at a rate of up to thousands or hundred thousand TPS at a time.

2. Scalability: Private blockchains are pretty scalable. That is, you can choose the size of your private blockchain as per your needs. For instance, if there is an organisation that needs a blockchain of only 20 nodes, they can easily deploy one. Then after expansion, if they need to add more nodes, they can easily do so. This makes private blockchains very scalable as it gives an organisation the flexibility to increase or decrease the size of their network without much effort.

Advantages of Public Blockchain

1. Reliable: Unlike in private blockchain, two nodes or participants do not need to worry about the authenticity of the other. In other words, they don’t need to personally know or mutually trust the other nodes as the process of proof-of-work makes sure there can be no fraud in transactions. So, one can trust public blockchains blindly without feeling the need to trust individual nodes.

2. Secure: There can be as many participants or nodes in a public network which makes it a secure network. The larger the network, greater the distribution of records and harder it is for hackers to hack the entire network. In addition to this, every node will verify transactions and perform proof-of-work which makes every transaction and block legitimate. Due to these practices and thoughtful cryptogenic encrypting methods, a public blockchain is much safer than the private one.

3. Transparent : Public blockchain is open and the data is transparent to all the participant nodes. A copy of the blockchain records or digital ledger is available at every authorised node. This makes the entire blockchain system completely open and transparent. No one shows a fake transaction or hides an existing one as every node has an updated copy of the database at any given point of time.

Disadvantages of Private Blockchain

1. Needs Trust-building – As far as a public blockchain is concerned, it is an open ledger. This ensures the security and legitimacy of every user. Whereas, in a private network, there are limited participants in a restricted network. Especially within an organisation, where colleagues know each other. They need to build trust to transmit confidential information within a network.

2. Lower Security – As a private blockchain network has a lesser number of nodes or participants, it runs a higher risk of a security breach. If any of the nodes gains access to the central management system, it can gain access to all the nodes in the network. This makes it easier for a node to hack the entire private blockchain and misuse the information.

3. Centralization – Private blockchains are restricted, that is they need a central Identity and Access Management (IAM) system for functioning properly. This system has all the monitoring and administrative rights. It gives permissions to add a new node in the network or decide the level of access they get for the information stored in the blockchain. This whole system contradicts the idea of decentralisation which is one of the pillars of blockchain technology.

Disadvantages of Public Blockchain

1. Lower TPS – The rate of transactions per second in a public blockchain is very low. This is because it is a huge network with a lot of nodes and for every node to verify a transaction and do proof-of-work is time-consuming. This is why public blockchains like Bitcoin can process only 7 transactions per second or Ethereum Network has a rate of 15 TPS. On the other hand, a private network such as Visa has a rate of 24,000 TPS indicating a huge difference in speed of transaction processing and execution.

2. Scalability Issues – Like we just saw in the point above, that public blockchain have a slow rate of processing and completing transactions. This causes issues in scalability as well. Because the more we try to increase the size of the network, the slower it will get. However, solutions like Bitcoin’s Lightning Network helps in overcoming this problem. It maintains a rate of the transaction as we increase the size of the network.

3. High Energy Consumption – The process of proof-of-work is highly energy consuming as it needs specialised systems (hardware components) to run a special algorithm. It is a matter of concern from both an environmental and economical standpoint. The apparatus to do proof-of-work is costly and consumes as much energy as the country of Ireland! The technology definitely needs to come up with energy-efficient consensus mechanisms.

Permissionless vs Permissioned Blockchains

All types of blockchains can be characterized as permissionless, permissioned, or both. Permissionless blockchain are designed to allow any user to join the blockchain network as a node in a pseudo-anonymous manner and does not restrict the rights of the nodes on the blockchain network.

However, on the contrary, Permissioned blockchains restrict the access of some nodes to the network and may also restrict the rights of those nodes on that network. Also permissioned blockchains are not anonymous in any way and the identities of the users are known to the other users of that permissioned blockchain.

Also, in terms of security permissionless blockchains are more secure because there are a lot of nodes to validate transactions which makes it incredibly tough for manipulators to collude on the network but this also makes the transaction processing unnecessarily long. Thus, in comparison, permissioned blockchains are more efficient since network access is restricted, and there are fewer nodes on a blockchain resulting in less processing time per transaction.

Blockchain Types for Supply Chain Use

Supply chain members have to ensure certain data privacy and competition standards, hence blockchain for supply chain demands some extent of permissioned functionality, which exists in private, consortium and hybrid models of blockchain. It is thus, not surprising that recent research suggests that consortium and hybrid blockchain types are expected to grow at the highest rate in the supply chain market from 2020-2026.

Let us review some decisions made by the central authority of a permissioned blockchain :

1. Permission to Join the blockchain:

The central authority of a permissioned blockchain has the power to limit who has access to the blockchain.

2. Setting the rules of the blockchain:

A permissioned blockchain allows for the central authority of the blockchain to establish a basic set of rules like which set of users can see which data, which users can add blocks to the blockchain, and how many users are needed to validate blocks.

3. Deciding how the governance will be funded:

Permissionless blockchains charge small transaction fees from the users which is their main source of funding. The miner nodes get paid virtually for their work, but in permissioned blockchains since the parties are known, personalised funding structures can be implemented. This involves deciding how fees will be allocated and charged for financing the creation and validation operations as well as for the labour performed by the central authority.

Chain terminologies

1. Mainchain:

The chain that contains the block headers of all blocks that are digitally signed and contains the immutable validated records of ownership.

2. Blockchain:

It refers to the main chain that is implemented according to the bitcoin codebase.

3. Altchain:

It refers to the main chain that is implemented according to the alternative codebase.

4. Sidechain:

The chain that allows transfer of assets to the main chain and vice versa. Sidechains help in increasing the transaction speed significantly by using pre-mined main chain addresses.

5. Drive Chain:

The sidechain which provides a two way peg for transfer of cryptocurrency from a mainchain to another mainchain requiring low third party trust.

6. Pegged Sidechain:

This sidechain allows assets to be moved between multiple main chains, and thus cancelling counterparty risk, enabling atomic transactions and making chains independent from each other.

Which one is better: private or public blockchain?

After carefully weighing the differences between the two kinds of blockchains which majorly lie in terms of security, scalability, and transparency. We realise that on one hand, a private network might not seem very trustworthy, but you can completely rely on a public network for its intact consensus (proof-of-work) system.

Similarly, for a lot of factors pubic blockchain sounds like a better and more popular option however, for databases requiring security and encapsulation private blockchain is the best way to go. Hence, the essential end to the debate can be decided only on the basis of a need. Public and private blockchains both offer different services for a completely different set of needs., and hence must be selected on that basis only.

Conclusion

In this article, we discussed the importance of blockchain, its types, and the actual need for having different types of blockchains. After understanding each kind of blockchain in detail we further compared the advantages and disadvantages of public and private blockchains. The article concluded with an open ended discussion about which of the two is better, wherein we realised that both are suitable for different needs.