Getting to Know Types of Blockchain Networks

Blockchain is considered the next big technological achievement after the advent of the Internet. That is why many companies are developing new applications based on blockchain, and many startups have been founded.

But blockchains are not all the same. On Coinmarketrate.com, you can see a lot of projects with different types of blockchain, different characteristics and features. This also means that each type has its advantages and disadvantages, and hence specific applications and potential.

In addition to Industry 4.0, suitable industries and sectors are the financial sector, insurance industry, smart infrastructures and mobility industry.

Blockchain allows companies of all sizes and industries to significantly improve technological processes. Currently, there are both simple and complex blockchains that are either based on open source code or can be used on the basis of licenses.

There is no absolute need to deploy a complete blockchain-based infrastructure. In many cases, it is enough to start with the application to get acquainted with the possibilities of the blockchain. Here, many companies also rely on cloud solutions, as this makes it easier to connect further partners.

Companies such as Amazon, Microsoft, Google, IBM and Oracle offer various functions for developing a blockchain on their cloud platforms. There are also several blockchain protocols that allow you to develop your own decentralized applications, the so-called dApps. These include, for example, Ethereum.

Differences between Bitcoin, blockchain and DLT

Bitcoin is the oldest and most successful cryptocurrency developed on the basis of blockchain. Therefore, Bitcoin is often also used as a synonym of blockchain. However, the Bitcoin blockchain today is just one example of the many ways it can be applied.

Satoshi Nakamoto used this technology to create a digital currency. The Bitcoin blockchain is the technical basis for creating coins through mining. Meanwhile, the BTC blockchain has been divided by various forks. The Bitcoin Core blockchain is considered the original Bitcoin blockchain.

Blockchain refers to DLT. DLT stands for Distributed Ledger Technology, which means “distributed ledgers”. The terms blockchain and DLT are often used without a clear distinction between them. However, it is technically correct that blockchain refers to distributed ledger technologies and is a subspecies of them.

The peculiarity of DLT is that accounting books in the classical sense are not stored centrally on one node, but are located in a decentralized manner at all nodes. Each node always has an up-to-date and complete copy of the ledger. Since the blockchain is a kind of database, there are also centralized options.

However, conventional databases are reaching their limits due to the advent of Big Data, and increasingly data-centric business models. Moreover, they cannot be enriched by artificial intelligence or machine learning, and are managed and controlled by a central authority.

DLT offers a decentralized function as a basis, and blockchain — transparency and immutability of stored data. A combination of these characteristics ensures great opportunities for using some types of blockchain in corporate networks.

Types of Blockchain at first sight

The blockchain can be divided into three corresponding groups:

1. Public Blockchains
2. Private Blockchains
3. Consortium or combined blockchains
4. Public blockchains

Public blockchains are freely available to the public, so any user can join the network. However, public blockchains may have management rules that restrict or expand the powers of individual participants.

They have a high level of overall network security because they have a large number of network nodes. The service of public blockchains is decentralized, encryption and data protection technologies guarantee high standards.

A public blockchain can, but does not necessarily have to be open source. If the provider decides to make the blockchain publicly available, he can use open source code or its own, as well as a combination of both, for programming.

To use and participate in the public blockchain, you need to download the appropriate software. Then the participant manages its own node/nodes and verifies the information, confirms transactions, and, if necessary, can add new blocks to the blockchain.

All nodes on the blockchain form a blockchain network and have a complete copy of the database. When the application is launched, the locally stored copy of the blockchain database is updated and continuously updated during operation.

Consensus in Public Blockchains

No person or group is responsible for controlling the public blockchain. Therefore, decision-making and transaction verification is carried out using various consensus mechanisms, such as proof-of-work or proof-of-stake.

Consensus plays an important role in blockchain. This mechanism guarantees that all transactions within the blockchain are valid and that all blockchain participants have access to all the data. Only valid transactions are stored in the blockchain. Validity is determined by consensus.

The Proof of work (PoW) algorithm is used, for example, in the Bitcoin blockchain. Blockchains such as Ethereum also relied on PoW, but now use other technologies. PoW works by solving a computational problem when creating a consensus, that is, confirming a transaction in the blockchain. This approach requires high computational and resource performance of nodes, which increases the cost of electricity and hardware.

The Proof-of-Stake (PoS) consensus is used, in particular, in Ethereum 2.0. Unlike PoW, PoS should cause significantly lower energy and resource costs, since nodes do not require high power.

When using PoS, it is not the performance of the node that determines who calculates the consensus, but random selection combined with a weighting factor decides who is allowed to solve the calculation puzzle. In order for certain blockchain nodes to confirm a transaction, they must have a certain number of tokens or coins.

Another consensus mechanism is the “delegated proof of stake” DPoS. Here, nodes elect a delegate to perform consensus tasks. This delegate does not necessarily have to have the largest number of coins/tokens, it is selected by nodes randomly, as it happens on the Decimal Chain (DEL). Innovative consensus mechanisms can also be found in the market, including Yet Another Consensus (YAC) and Delegated Byzantine Fault Tolerance (dBFT).

2. Private blockchains

Private blockchains are available only to a certain group of individuals. Unlike public blockchains, one person or a group of people are responsible for maintaining the blockchain. Thus, they determine, for example, who is allowed to perform certain actions, and who gets access to certain data on the blockchain.

In this process, consensus is reached by voting of central responsible persons, i.e. authorized nodes that grant or revoke mining rights for users on the network. This makes private blockchains more centralized, but at the same time cryptographically secure.

The centralization aspect makes it generally debatable whether this option can be called a blockchain, since it contradicts the basic idea of Bitcoin — a distributed ledger without a central authority. Well-known private blockchains include R3, Hyperledger and Ripple.

Private blockchains are well suited for implementation in companies and for the corporate context. In cases where data should not be freely available to everyone, such as when used in supply chains, companies rely heavily on private blockchains.

If different authorities with different powers have access to the information and data network, private blockchains offer suitable methods, such as authentication through identity management systems that control entry into the private environment.

Private blockchains are also often called permitted blockchains, since access to them is not available for everyone, only on the condition of authorization.

Advantages of private Blockchains

When using a private blockchain, companies and organizations benefit from the efficiency of transactions and retain control over information about the internal activities of the company. A public blockchain is not suitable for a company, since competitors can theoretically get information about private transactions.

Besides, the company’s management are able to choose who of the network employees is authorized to perform a specific task.

As a private blockchain operator, he should clearly understand that this is not a decentralized approach. This is due to the fact that the network participants, at least at the initial stage, must agree that one of them possesses control of the situation. If the network is large enough, it can be agreed that the rules of the game, the so-called management, will be decentralized.

3. Consortium or combined blockchains

This type of blockchain is an extension of private blockchains. It is aimed at eliminating the exclusive autonomy of the private blockchain. Thus, more than one person or company is responsible for the network here.

There is a group of companies or representative individuals who work together and make decisions in concert for the best benefit of the entire network. Such groups are also called consortia or federations, hence their name.

The functioning of a federated blockchain can be explained by the following example: let us consider a consortium consists of 20 financial institutions. They defined in the code that a transaction, block or decision on the network can be accepted as true only if they are confirmed by more than 15 participating institutions. Thus, a consensus is reached within the consortium.

This type of blockchain allows you to process transactions quickly without relying on the decision of an individual, as in the case of a private blockchain. Voting within the consortium also prevents inappropriate decisions or fraudulent actions on the part of individual participants, since the decision is made by a certain majority of votes.

Summing up

Thanks to innovative developments, there is now a suitable type of blockchain for every problem and every application. Digital transformation has led to an increase in the importance of DLT, such as blockchain, and has generated many new application opportunities.

Each company is free to decide whether the individually required solution will be open or closed, allowed or unresolved, or whether it will be a consortium blockchain.

Numerous types of blockchain with different consensus procedures and new dApps are appearing in the market, which increase the general recognition of the corresponding types of blockchain.

There are already some ready-made structures and infrastructures, but it is also possible to create your own blockchain using open source code or your own knowledge.