Types of Blockchains – Decide which one is better for your Investment Needs

In this article, we are going to learn about the four different types of blockchains and their significance. Once we are thorough with the basic understanding of the types, we will find out which type of blockchain is best suited with most benefits. So, let’s get started.

Why do we need different blockchains?

The most basic need or application of a blockchain is to carry out transactions or exchange of information through a secure network. But the way people use blockchain and distributed ledger technology or network vary from case to case. For instance, if we talk about Bitcoin, which is how blockchain got introduced in the mainstream. Bitcoin is a digital cryptocurrency which gets transacted through the blockchain and DLT technologies. This type of blockchain network is a public network because people from all over the world can become a node, verify other node and trade bitcoins.

On the other hand, let us suppose that a bank is using a private blockchain network. It will be a restricted network where only the authorized members of the bank can access confidential information. Thus, no one out of this closed network can gain access to bank data. A private network will have limited and authorized 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. The bank gets to decide the scale of their private blockchain for all the branches of a city or all their branches in a country. Just like these examples, there are different ways in which the blockchain network is set up depending on the use and requirements.

Types of Blockchains

There are primarily two types of blockchains; Private and Public blockchain. However, there are several variations too, like Consortium and Hybrid blockchains. Before we get into details of the different types of blockchains, let us first learn what similarities do they share. 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 that are possible.

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 authorized node and be a part of the blockchain network. A node or user which is a part of the public blockchain is authorized 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

2. Private Blockchain

A private blockchain is a restrictive or permission blockchain operative only in a closed network. Private blockchains are usually used within an organization 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 organization. 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

3. Consortium Blockchain

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

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

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.

Private Blockchain

Private blockchains are a restricted network of authorized 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.

Advantages of Private Blockchain

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.

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 organization 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 organization the flexibility to increase or decrease the size of their network without much effort.

Disadvantages of Private Blockchain

Needs Trust-building – As far as a public blockchain is concerned, it is like an open book or as we call it, 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 organization, where colleagues know each other. They need to build trust to transmit confidential information within a network.

Lower Security – As a private blockchain network has lesser number of nodes or participants, it runs a higher risk of a security breach. If anyone 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.

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 decentralization which is one of the pillars of blockchain technology.

Public Blockchain

After discussing the pros and cons of a private blockchain, let us turn our heads to the other side, that is, public blockchain. As opposed 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 Public Blockchain

Trustable – 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 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 needing to trust individual nodes.

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 do verification of transactions and 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.

Open and 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 authorized 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

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.

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.

High Energy Consumption – The process of proof-of-work is highly energy consuming as it needs specialized 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.

Private or Public Blockchain, which one is better?

Well, before passing a final verdict, we have thoroughly studied two main types of blockchains i.e. private and public blockchains. Both of them have certain distinctions from one another. However, the main differences lie in terms of security, scalability, and transparency. On one hand, where a private network might not seem very trustworthy, you can completely rely on a public network for its intact consensus (proof-of-work) system.

So, in a nutshell, every instance or case of a successful blockchain use that we have seen till date is of a public blockchain. Public blockchain guarantees security as hacking the entire network is almost impossible. In addition to this, it offers data transparency as every node has equal access to the record stored in the blockchain. One of the very successful examples of a public blockchain is the Bitcoin system.

Summary

In conclusion, we would want you to use your comprehension and decide which blockchain will serve your purpose better. If you are part of a public blockchain network, all you need to do is have thorough knowledge on how a public blockchain works to make smart moves in the future.