Types of Blockchain
As people began to understand how blockchain works, they started using it for other purposes: including valuables, identities, agreements, property rights, and a host of other things. After Bitcoin, Ethereum is the most comprehensive blockchain innovation. Like cloud computing implementations, different types or categories of blockchain have emerged. Analogous to the cloud, you have public blockchains that everyone can access and update, you have private blockchains for just a limited group within an organization to be able to access and update, and you have a third kind, a consortium of blockchains that are used in collaboration with others.
A public blockchain is one that its creators intend to be: a blockchain that anyone can access and transact with; a blockchain where transactions are only included if they are valid; and a blockchain where everyone can contribute to the consensus process. What blocks are added to the chain and what the current state is are determined by the consensus process. Instead of using a central server, the public blockchain is protected by cryptographic verification backed by incentives for the miners. To aggregate and publish those transactions, anyone can be a miner. Because no user is implicitly trusted to verify transactions in the public blockchain, all users follow an algorithm that verifies transactions by committing software and hardware resources to solve a problem by brute — force (i.e., by solving the cryptographic puzzle). The miner who reaches the solution first is rewarded. Each new answer, combined with the transactions that were used to verify it, forms the basis for the next problem to be solved. Proof-of-work and proof-of-stake are two verification concepts.
A fully private blockchain is one in which write permissions are centralized to a single organization. Read permissions may be public or restricted to an arbitrary extent. Database administration and internal auditing are two likely applications, so public readability may not be necessary in many cases at all, though in other cases, public auditability is desired. Private blockchains could provide solutions to financial enterprise problems, including compliance agents for regulations such as the Health Insurance Portability and Accountability Act (HIPAA), anti–money laundering (AML), and know-your-customer (KYC) legislation. The Linux Foundation’s Hyperledger project and the Gem Health Network are two private blockchain projects in development.
A consortium blockchain, such as R3, is a distributed ledger in which the consensus process is controlled by a pre-selected set of nodes — for example, a consortium of nine financial institutions, each of which operates a node, and of which five (such as the Supreme Court) must sign every block for the block to be valid. The right to read the blockchain can be open to the public or restricted to participants, and there are also hybrid options, such as making the root hashes of the blocks public while also providing an API that allows members of the public to make a limited number of queries and receive cryptographic proofs of some aspects of the blockchain state. These sorts of blockchains are distributed ledgers that may be considered “partially decentralized.”
It’s important to understand the differences between public, private, and consortium blockchains. Even “old school” distributed ledger adopters who prefer a traditional centralized system would benefit from the cryptographic auditability. Private blockchains provide several advantages over public blockchains. The rules of a blockchain can be changed by a private blockchain operator. If there is a blockchain among financial partners, they will be able to change transactions if errors are identified. They will also have the capacity to modify balances and undo anything. There is, however, a trail. This feature is necessary in some cases, such as property registry, when a wrong transaction has been issued or a malicious type has gained access and declared themselves the new owner. This is also true on a public blockchain if the government has backdoor access keys, as they did in the Clinton era. Transactions on the private blockchain are less expensive since they only need to be verified by a few trusted nodes with a lot of processing power. Public blockchains have higher transaction fees, but this will change when scaling technologies emerge, lowering public blockchain costs and allowing for the creation of a more efficient blockchain system.
Nodes can be trusted to be extremely well-connected, and errors can be quickly fixed with user intervention, allowing for the use of consensus algorithms with much shorter block times. Although improvements in public blockchain technology, such as Ethereum’s proof-of-stake, can bring public blockchains closer to the “instant confirmation” ideal, private blockchains will always be faster, and the latency difference will never disappear because, unfortunately, the speed of light does not increase by 2x every two years as Moore’s law predicts. Private blockchains can give better privacy if read permissions are controlled.
Given this, private blockchains may appear to be an unquestionably better choice for institutions. Public blockchains, on the other hand, offer a lot of value even in an institutional context. Most of this value is based on the philosophical principles that advocates of public blockchains have been promoting all along, the most important of which are freedom, neutrality, and openness. The benefits of public blockchains can be divided into two categories:
- Public blockchains provide a way to protect the users of an application from the developers, establishing that there are certain things that even the developers of an application have no authority to do.
- Public blockchains are open and therefore used by many entities. This has some networking issues. We can lower costs to near-zero with a smart contract if we have asset holding systems on a blockchain and a currency on the same blockchain: Party A can send the asset to a programme, which then sends it to Party B, which sends the programme money, and the programme is trusted since it operates on the public blockchain. Note that two entirely diverse asset classes from completely different industries must be in the same database for this to operate efficiently. Other asset holders, such as land registries and title insurance, can also use this.