The Different Types of Blockchains
By Vladimir DENIS on ALTCOIN MAGAZINE
Quite often, I hear that the very controversial crypto-currency XRP or Ripple is centralized that it belongs to banks, etc….
Nothing could be further from the truth!
Ripple’s blockchain is definitely decentralized. Because it is often difficult to understand the different blockchains, here is a little reminder of the different ways of building this type of architecture.
There are different kinds of blockchains:
- Public or distributed blockchain: like Bitcoin for example, these are large distributed networks that are executed via a token (a digital asset that can be exchanged on a decentralized network).
These blockchains have the particularity of being open to everyone because their source code is public and the community can modify it at will.
- Authorized or decentralized blockchain: so-called “authorized” blockchains, such as RIPPLE, control the roles that individuals can play within the network. They also work with a token and can be open source or not.
- Private or centralized blockchain: the latter tend to be smaller and do not necessarily use tokens. Access to these blockchains is controlled and it is therefore often the choice of certain companies which, for obvious reasons, do not want to publicly disseminate their information.
The blockchain, in its decentralized version, is secure, allows to store, exchange and even authenticate information at a lower cost but what are the possible fields of application?
The opposition between centralization and decentralization has a long history. And this is not a concept inherent to the Bitcoin blockchain. Centralization versus decentralization is a concept that arises in many areas. The Internet, for example, is a decentralized system, but the applications we make of it are often centralized. The best example is social networks: Facebook, Linkedin and others, all act in centralized ways although it is necessary to use the Internet — decentralized system — to use it.
Thus, the concept of blockchain can be applied to a field of application that is almost too wide to cover. Many companies are interested in this technology but, for obvious reasons of confidentiality, wish to take it over in a closed or centralized way.
To understand this, let’s first look at the different blockchains that can be developed.
There are 3 main types of blockchains
- Public or distributed blockchains such as Bitcoin or Ethereum
- Private blockchains
- The sidechains
The open blockchains
→ The Bitcoin blockchain
The basic model, which introduced the word blockchain to the planet, is the Bitcoin: anyone can download this blockchain to their computer, check transactions and even become a participant (called a node) by providing the computing power of their computer to mine blocks. The proof of work process, which, as we have seen, secures the entire network, has never been compromised since its creation. Hence the great trust in the Bitcoin network. There are many nodes on this blockchain, which allows an optimal level of security; the smaller the network, the easier it is to attack because of the small number of computers. The age of the network, therefore, allows a very long chain of blocks, which in itself is another guarantee of safety.
But the counterpart of this increased security is obvious: the validation system is slow — a block is only validated every 10 minutes — and requires a lot of energy (electricity).
The money supply for Bitcoin will be limited, as its creator wanted 21 million Bitcoins to ever exist. “They are distributed to the different nodes as they validate the blocks and the amount is divided in 2 every 4 years which mechanically leads to a scarcity of cryptocurrency,” said Satoshi Nakamoto at the launch of the most famous cryptocurrency in January 2009.
→ The Ethereum blockchain
Ethereum’s blockchain was largely inspired by that of its Bitcoin counterpart. However, the latter is better seen by companies. First, it does not have this libertarian connotation and ‘’outside any system’’ as Bitcoin can convey. Secondly, it allows far more applications than the simple value transfer reserved for the Bitcoin blockchain. Its founder, a genius who was barely 17 years old at the time and passionate about cryptography, founded Bitcoin Magazine in 2011, one of the first specialized magazines on crypto-currencies.
It was only two years later that he published his research on the Internet in an article entitled “A new generation of platform for smarts contracts and decentralized applications”.
He was far from imagining, after having written the white paper (a document containing all the characteristics of his invention) the enthusiasm that would result from it.
In 2014, a fundraising event was organized to raise nearly $18 million in Ethers, the cryptocurrency of the Ethereum blockchain.
The Ether, which was worth less than $1 in 2015, is worth $700 at the time of writing. It is not surprising that its creator, Vitalik Buterin, has enjoyed growing success over the years that followed. In 2016, he will even be ranked the 31st most influential person under 40 in the world by Fortune magazine. A dazzling success story.
But what are the reasons for this?
The purely fundamental aspects of the ethereum network are the same as bitcoin: public network and validation mechanism in proof of work (although the transition to proof of stake is envisaged by its creator). However, some aspects are modified such as the speed of block validation: it only takes a few seconds for the ethereum blockchain (whereas it takes almost 10 minutes for the Bitcoin blockchain). Ethers are created after validation of a block but no quantity limit of ethers has been imposed.
The second difference with the Bitcoin network and this is the great strength of ethereum, is the computer language used: it is what is called turing-complete. This refers to the British cryptologist Alan Mathison Turing who, during the Second World War, helped greatly through his work on cryptography to break the code of the Enigma machine used by the Germans. According to some historians, this shortened the war.
Without going into the technical details, let us simply say that the turing-complete language gives the possibility of writing intelligent contracts (called smarts contracts) which are the description in computer language of the different rules that are imposed on the contracting parties. These smarts contracts provide the opportunity to create decentralized (or D-App) applications in many fields such as health, energy, finance, insurance, banking, or for administrations, as we will see in a later part.
The possibilities seem endless, unlike the Bitcoin blockchain, which is only used to exchange bitcoins, a kind of stock exchange.
But this blockchain also has its detractors. They consider that the security of transactions is lower than on bitcoin because the code is not turing-complete. They include the resounding hacking of The DAO in 2016: a decentralized organization on ethereum that raised more than $160 million before being diverted a significant portion of it by malware. This type of piracy has never happened on Bitcoin before.
Private blockchains
Many companies see in public blockchains have a major flaw: precisely the fact that they are public! Transparency is not to the liking of companies that want to keep secrets and anonymity in the business world.
If these public blockchains work under a pseudonym (you don’t know directly who is behind the transaction, you just have a series of numbers and letters, the public key), it is possible to trace the different activities performed by the different public keys. And that is the very problem. The simple and relatively effective solution exists: the private (or consortium) blockchain. It is a centralized or closed network, to which only network members have access, and which can only be reached with the authorization of senior members or administrators.
At present, banks favour the establishment of private blockchains or consortia (distributed by several members of the network rather than a single one).
Of course, one may be led to doubt the interest of such a blockchain. What would be their interest compared to a shared private database?
Disintermediation (through decentralization) disappears in favour of an administrator who would be placed above the others in a centralized hierarchy and therefore similar in every respect to an enterprise.
Some strongly criticize the concept of “privatizing” a blockchain. These critics argue two negative and even prohibitive points.
First, centralization: if a hacker or a malicious person manages to enter the network, he can infiltrate it and obtain all the information he wants. It could even modify the code or parameters of the blockchain, which would be a disaster and brings us to the second negative point.
In private blockchains, the code is precisely private, hidden, unlike public blockchains whose code is open source. As a result, we eliminate decentralization, we eliminate disintermediation: we must once again trust someone, a person who is “hierarchically superior”: even if that is what Satoshi Nakamoto was trying to avoid, that is precisely what companies are looking for with the famous “business secret”. The latter have no interest in disintermediating a system that pays a high price for them, a system in which they are often judges and parties.
Blockchains of sidechain types
Some companies, anxious to accelerate transaction speeds, have developed ’’Sidechains’’, blockchains parallel to a main blockchain (many emanate from the Bitcoin blockchain). How does it work?
This protocol is in a way a second blockchain but attached to the first one in order to know all the information. This makes it possible, for example, to increase the volume of transactions and the validation speed of blocks that can be processed by the main blockchain (normally limited volume) while remaining on this main blockchain.
Blockstream, a Canadian company in which AXA has invested, is a pioneer in this field. Unblocking the Bitcoin blockchain by registering transactions on a “secondary blockchain” would have a double interest: speed, but above all — and this is indeed one of the crucial points for financial players — transactions would remain anonymous.
We may then have to ask ourselves an essential question: what will be the blockchain that will revolutionize decentralization?
What blockchain represents the future of blockchains?
Even if we are only at the beginning of the essential concept of decentralization through blockchains, we can already get an idea of the future evolution of blockchains.
On the one hand, the purists for whom there is only the Bitcoin blockchain that is viable as a true decentralized network, since it is the first and that it is known to be extremely secure (it has, until today, still not been damaged). But it is limited by its source code to the simple transfer of its cryptocurrency: Bitcoin.
On the other side, there are strong supporters of the Ethereum blockchain thanks to its many possibilities of applications in smarts contracts. This is much more appealing to large companies and the business world as a whole.
The world of finance is particularly interested in the key concept of the blockchain but not just anyone: the private blockchain mainly. Is this proof that closed blockchains will dominate the world of finance and technology in the coming decades?
The internationally renowned audit and consulting firm Deloitte has studied the subject (1).
And a relatively unsurprising figure emerges from this study: for more than half of the institutions and companies surveyed, it is the so-called private or consortium blockchain that will enable the global adoption of this technology. Thus, according to this study, only 11% rely on public blockchains…
Is privatization the future of the blockchain? This is not unlike the Minitel’s choice at the end of the 1970s to move towards private access when the Internet had chosen public access. It should, therefore, be recalled that privatisation is not always a guarantee of sustainability…
Bitcoin, the first decentralized currency, made a new kind of contribution: a 100% decentralized system in which no central authority has to validate our daily operations: the blockchain. But while this technology is on the rise, not everyone recognizes the technological advances that cryptocurrencies bring.
They pose many problems, on the control of money, on decentralization, on all the aspects that make modern finance what it is. And that is where they are dangerous: it is too easy to recognize the extraordinary potential of their underlying technology by forgetting a little quickly that they were created in response to the manipulations of our governments and the speculative techniques of our banks.
From my point of view, there is no doubt that the mastodons of contemporary finance will hasten to develop this highly profitable concept of blockchain in the coming years but will certainly not leave — for obvious reasons — architectures of open and decentralized types…
Feel free in the comments to give me your opinion on the issue…
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