Types of Blockchain (Part 4- Blockchain Series)
Welcome to the fourth part of the 100 part series on Blockchain.
Part 1: What is Blockchain technology?
Part 2: Components of a Block in the Blockchain
Part 3: Hash Functions in Blockchain
There are different types of Blockchain that are being used currently. Learning the basics of these Blockchains will give you a clear understanding of the type of Blockchain you can use for your business or for starting a new project.
Public Blockchain
Public Blockchain, as the name suggests, is public. A public blockchain is completely decentralized and does not have a single entity that controls the network. In this type of Blockchain, anyone with an internet connection can join the network and participate in reading, writing, or auditing within the Blockchain. Hence anyone can review anything at a given point of time on a public blockchain. Simply put, anyone can use public blockchain from anywhere to input data and transactions and review them as long as they are connected to the network.
Public blockchain can also be called Permissionless Blockchain because it allows any user to create a personal address and join the blockchain network, i.e., become a ‘node’ of the network. Also, the public blockchains do not restrict the rights of the nodes on the blockchain network.
Another critical point to remember is that these types of Blockchain are more transparent and secure than permissioned blockchains because there are many nodes to validate transactions. Thus, it would be difficult for bad actors to collude on the network. Also, it is not possible to modify or alter the data once it has been validated on the Blockchain.
(i) To be part of a public blockchain, one needs to download the code without needing any permission from anyone and start running a public node on their local device. Once this is done, he can then validate transactions in the network, thus participating in the consensus process — the process for determining what blocks can be added to the Blockchain.
(ii) Anyone in the world can send transactions through the network and can expect them to be included in the Blockchain if they are valid.
(iii) In a public blockchain, anyone in the world can access and read Blockchain transactions using a block explorer, which is a program or a website that allows a user to search and navigate the blocks of a Blockchain, their contents, and relevant details.
(iv) Speed of transactions in the public blockchain is slower than in the case of private blockchain.
Examples: To date, public blockchains are primarily used for exchanging and mining cryptocurrency. A few examples of cryptocurrency public blockchain platforms include Bitcoin, Ethereum, Litecoin, etc. Ethereum is actually the most popular public blockchain at present.
Limitations: One may face some challenges while using a public blockchain. For instance,
(i) Difficult Fraud Tracking: The transactions on the public blockchain can be done anonymously or pseudo anonymously and are not tied directly to the real identity of the user. These transactions are linked to an account address comprised solely of numbers and letters. With no real-world identity attached to this address, it is impossible to track the transaction’s originator. It raises a very critical concern, what if activities like fraud, hacking, or money laundering take place in this type of Blockchain. How will the guilty party or person be tracked and punished?
(ii) Lack of governance and regulations: The public blockchain being completely open and decentralized makes it susceptible to a lack of proper regulation and governance by an authorized body. Thus, there is no safe upgrade path for any protocols, and there is no one who can be held responsible for setting and maintaining the network standards. It is definitely good to keep the development of Blockchain technology as decentralized as possible; however, we still need some organization that can look after its features, upgrades, and code of conduct. For instance, if a developer designs a new standard or protocol but gets busy and forgets to respond, then the progress on that protocol halts regardless of how valuable that protocol is for everybody. You cannot hold anyone responsible for maintaining the network standard, thus making the entire system dicey and skeptical. Therefore there is a need for leadership that needs to look after all these aspects. Additionally, the public blockchains are not suitable for use in any internal system and for projects that have strict criteria to follow.
(iii) Slow speed and massive consumption of energy: Another critical area of concern while using public blockchain technology is its speed and the energy it consumes. Public blockchains are slow because it takes time for the network to reach a consensus. For instance, public blockchains like bitcoin manage to process seven transactions per second compared to Visa, which can do 1700 transactions per second. Also, public blockchains like Bitcoin rely on a consensus mechanism- Proof of Work to validate transactions and add new blocks of transactions to the network. In this process, a lot of energy gets consumed while solving complex mathematical problems to validate the transactions and create a block. As per the studies published in June 2017, each bitcoin transaction consumes 80,000 times more electricity than a Visa credit card transaction. But various other consensus mechanisms have been proposed, like Proof of Stake, which uses far less electricity.
Private Blockchain
The second type of blockchain is Private Blockchain, where the network participants have control over who can join the network and who can participate in the consensus process. This is in contrast to public blockchain which is open for anyone to participate in the network. Access controls in the network will vary for every participant, and the Regulatory Authority or central organization would decide on various activities inside the network starting from joining the network until executing any of the functionalities in this closed network. In this platform, the digital identities of the participants need to be managed and monitored by the Regulatory Authority. Therefore, it is not necessarily decentralized even among its members but is a centralized system that uses distributed ledger technology.
However, private blockchain offers several advantages over public blockchain:
(i) In the case of the public blockchain, the credentials of nodes are not known; therefore, nobody can decipher who these validators are, which increases the risk of malicious activities. But in the case of a private blockchain, the credentials of participating nodes are present on the blockchain; therefore, it is much easier to track where the fraud happened.
(ii) Additionally, since private blockchains are generally smaller than public blockchains and have far fewer participants, therefore it takes less time for the network to reach a consensus. As a result, more transactions can take place. Private blockchains can process thousands of transactions per second. Also, they take up a lot less energy and power to validate transactions. On the contrary public blockchain networks, which usually have thousands of computers to verify transactions, consume tons of energy.
(iii) Private blockchain provides exciting opportunities for businesses to leverage trustless and transparent activities for internal and business-to-business use cases. For instance, banks and financial institutions can use private blockchain as they are regulated entities that cannot operate over open protocols or public blockchain without performing due diligence of the parties involved in the transaction. Additionally, with the advent of smart contracts, this technology could eventually replace many centralized businesses.
Limitations: There are certain challenges associated with the private blockchain. For instance,
(i) Centralization of private blockchain is one of its biggest disadvantages. Blockchain was built to avoid centralization, and private blockchain inherently becomes centralized due to its private network.
(ii) The second disadvantage of using private blockchain is trust. The credibility of a private blockchain network relies on the credibility of the authorized nodes. They need to be trustworthy as they are verifying and validating transactions.
(iii) Security is another concern while using a private blockchain. With fewer nodes, it is easier for malicious hackers to gain control of the network. Thus, compared to the public blockchain, a private blockchain is far more at risk of being hacked or having data manipulated.
Consortium or Federated Blockchain
The third type of blockchain is consortium blockchain that tries to remove the sole autonomy which gets vested in just one entity as in private blockchain. In the case of consortium blockchain, unlike private blockchain, more than one entity is present on the network. Since there is no single authority governing the control, it maintains decentralized nature. There is a group of companies or representative individuals making decisions in the best interest of the whole network. Such groups are called consortiums or federations; that’s why this blockchain got its name consortium or federated blockchain. For example, let’s assume there is a consortium of 20 financial institutes on the blockchain network. From these 20 institutes, the nodes will be pre-selected to make changes on the network.
These nodes have the authority to read or write transactions, and they can also allow or restrict participants on the network. But none of the nodes alone can add a block to the Blockchain. To add a block, every single node has to approve the block. The mechanism of reaching a decision to add a block is based on the voting system, also referred to as the Proof of Vote mechanism. The purpose of this mechanism is to follow up on the selected nodes. Here every node will need to vote in order to validate a block. The number of votes required will be pre-determined in order to reach a decision of adding the block to the Blockchain. This means that it has been decided in the code that for fifteen selected nodes, it might take ten nodes’ votes or even fifteen nodes’ votes to validate a block. By using the Proof of Vote mechanism, the network helps to ensure that no one is misusing their power.
Let’s understand consortium blockchain by taking a real-world example of insurance claims. People have to deal with a lot of paperwork when it comes to claiming insurance. Also, in specific scenarios, the whole process of claim submission and approval takes a lot of time. Suppose a patient visits a hospital because of a health issue and needs emergency surgery. But claiming the insurance and waiting for approval can delay his treatment, putting his life at risk. If the hospital and insurance companies can unite in a Federated Blockchain network, where they can exchange the information without any hassle, then it would be much easier to manage this process. This type of network also ensures safety as they are dealing with sensitive, confidential records of the patient. Thus, the Federated blockchain can unite these two institutions and give them the security they need. Not only healthcare but other insurances claims can also be streamlined using Federated Blockchain.
Permissioned Blockchain: Both Private and Federal Blockchains are types of Permissioned blockchain. Permissioned blockchain maintains an access control layer to allow certain actions to be performed only by certain identifiable participants. On such Blockchain platforms, there is a need of special permissions to read, access, and write information on them. The platform will allow anyone to join the Blockchain network after suitable verification of their identity, and then permissions are allocated and designated to perform only certain activities on the network. The roles of each participant who can access and contribute to the blockchain are defined.
Let’s understand permissioned blockchain through an example. Say a farmer in the USA cultivates a medicinal plant that he ships to multiple markets across the globe. The supply chain involves multiple stakeholders like the customs department who gives clearance for the product to enter their respective nation, shipping companies, and warehouse operators who need to maintain the product within a specified temperature range. The farmer finalizes a particular price and quantity for selling his produce to a buyer in India and another price and quantity to another buyer in Australia. The information about the agreed prices between the farmer and buyers should not be revealed to other entities involved, like the customs department, the shipping company, and the warehouse operator. They simply need access to limited information, like quality specifications and quantity, to perform their necessary function in supporting such deals. This is a perfect use case for the application of a permissioned blockchain, that can allow such restricted implementation and limited permission to the various participants.
Permissioned Blockchain has many other applications like payments, KYC validation, escrow, insurance claims, charity, music publishing, and much more. In a nutshell, the permissioned blockchain offers a secure business environment with customization that allows wider industry adoption across multiple enterprises.
Hybrid Blockchain
The fourth type of Blockchain is Hybrid Blockchain, the blockchain which combines the best of both private and public blockchains. Simply put, a hybrid blockchain provides controlled access and freedom simultaneously. In other words, the hybrid blockchain lets organizations set up a private, permission-based system alongside a public permissionless system.
With such a system, organizations can control -
- who can access what data on the blockchain,
- what data can be opened up publicly,
- what data needs to be kept confidential on the private network?
Fusing different features from private and public blockchains ensures that an organization can work with its stakeholders in the best possible way.
- Like a consortium blockchain, a hybrid blockchain has the privacy benefits of a permissioned blockchain.
- But, unlike a consortium blockchain with multiple participants collectively helping to maintain the network, a hybrid blockchain can have a single entity network administrator.
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 it verified. Even though transactions and records in a hybrid blockchain are kept private and not made public, they are always open for verifiability on the public blockchain whenever required.
In the hybrid blockchain, there are two different types of users/nodes based on the level of information that they access:
(i) The first type of users/nodes are those who are part of the private blockchain and have all the control over the blockchain and can decide the level of security permissions for a particular user.
(ii) And the other type of users/nodes are those who are part of the public blockchain and can just access the data released on the blockchain.
Even though a set of individuals control the hybrid blockchain network, they cannot change the transactions’ immutability and security. They can only control which transactions are made public and which are not.
How can a user join the private network of a hybrid blockchain?
(i) A user is required to get permission to join the hybrid blockchain network and become a node on the private network. Once he joins the network, he can fully participate in the blockchain’s activities, like the rights to do transactions, view them, or even append or modify them.
(ii) The identity of the user is kept secret from other participating users to protect that user’s privacy. His identity is only revealed to the party/user he is dealing with.
(iii) To ensure that the identification process of a user is done correctly, companies and organizations carry out KYC (Know Your Customer) to make it work. Financial institutes, especially, need to handle the KYC process correctly as they cannot allow the transaction to be carried out by a user who is anonymous or not entirely known to the blockchain. Thus the hybrid blockchain has limited anonymity for the users who take part in the network, though public anonymity is still maintained. This leads to an intersection of both the public and private systems.
Advantages of Hybrid Blockchain:
(i) The hybrid network offers all the critical features of a public blockchain, such as security, transparency, immutability, and decentralization, but also restricts the ability to access transactions, view, or change transactions like in a private blockchain. Moreover, not everyone can use the network, ensuring that confidential information doesn’t go out of the network. Thus, a hybrid blockchain provides security and privacy but allows communication with third parties.
(ii) Since a hybrid blockchain provides the ability to work in a closed ecosystem, thus, organizations don’t have to worry about getting their information leaked or hacked.
(iii) Another benefit of using a hybrid blockchain is the low transaction cost as it requires few nodes to verify the transactions. Therefore it also takes less time for the network to reach a consensus.
Here are a few examples where Hybrid Blockchain can be used:
(i) An area where hybrid blockchain technology can be implemented is the Hybrid IoT (Internet of Things). It is not secure to manage the IoT on public blockchains as it will give hackers free access to data to map nodes and hack them. But with a hybrid blockchain, the IoT devices can be placed in a private network with selective access to people who need them. Conversely, the managing authority decides which aspects of the network should be made public depending on what data needs to be shared.
(ii) The second application of hybrid blockchain is in government activities like voting, creating public identification databases, automating acquisitions, providing social/ humanitarian assistance, etc. The hybrid blockchain offers the government the necessary control and enables the public to access it. Totally private or public blockchains will not work as they either hinder users’ access or reveal too much data. The hybrid blockchain can ensure that the government stays in control of the data and, at the same time, gives access of data to the public. Thus, maintaining transparency in government operations.
(iii) The third application of hybrid blockchain is in real estate. Companies can use a hybrid blockchain to run systems privately but show certain information, such as listings, to the public.
(iv) Hybrid blockchains have applications in various other sectors like supply chains, banking, finance, trade, enterprise services, etc.
To decide on the type of blockchain technology implementation for your organization or project, you have to consider the following two critical factors:
(a) Does the access to the network need to be restricted or permissionless, or a combination of both?
(b) Does the network operate on a global level or an organizational level?
Different blockchains offer trade-offs in terms of scalability, transaction speed, transparency, and security within these parameters. After considering all the parameters, you can decide which type of Blockchain technology is best suitable for your business or project.
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