Technology, the powerful force driving innovation, keeps ecosystems evolving. For example, Blockchains are the innovation instrumental in fostering decentralization that has revolutionized the way businesses operate. The predominant and noteworthy application of blockchains has been mainly in the field of finance — the evolution of cryptocurrency.
Bitcoin is the pioneer in gaining crypto adoption, with which more businesses started incorporating the concept of blockchain into their core operations. Research studies point out the various areas by market share where the technology of blockchain finds its use cases worldwide as of 2021.
However, addressing diverse user requirements and business complexities requires different types of blockchain. There are four broad categories of blockchains: Public, Private, Hybrid, and Consortium.
In the upcoming paragraphs, let’s discuss each of these, with their advantages and limitations.
Types of Blockchain
Public Blockchains
These were the first of the various types of blockchain to emerge. One example of a public blockchain is the Bitcoin blockchain platform. Public blockchains are permissionless, essentially enabling anyone with an internet connection to access them and become an authorized node.
These blockchains offer equal rights to all nodes in the network that create and validate the transaction blocks. Public blockchains also constitute the best application of Distributed Ledger Technology (DLT), offering a high degree of decentralization, security, and transparency.
For the blockchains to operate decentrally, they require a technique to verify the authenticity of the transaction data. Participants arrive at an agreement on the current state of the network through a consensus mechanism. Examples of consensus mechanisms in public blockchains include – Proof of Work (PoW) and Proof of Stake (PoS).
The nodes in the network ‘mine’ cryptocurrency by creating blocks of transactions requested on the network by solving complex cryptographic equations. Mining involves an enormous amount of power and resources. And in return, the nodes earn small rewards as cryptocurrency.
Some examples of public blockchains are Bitcoin, Ethereum, and Litecoin.
Advantages
- The unique advantage of public blockchains is that they are independent of all organizations. The public blockchain can continue to operate even if the company that initiated it shuts down.
- They are highly secure and transparent. As long as users adhere to the methods and protocols, public blockchains guarantee absolute security.
- They offer rewards to the nodes for mining cryptocurrency and thus incentivize users to provide computing power by making the blockchain network secure.
Limitations
- Most public blockchains offer limited scope for scalability. As the number of nodes increases, the network speed goes down.
- As the network operates at an extremely slow speed,companies cannot use it. Furthermore, if the attackers gain 51% or more of the computing resources, the transaction data can be altered.
Private Blockchains
Private blockchains, also known as managed blockchains, are networks under the control of a single entity. They operate decentrally like Public blockchains on a peer-to-peer network. However, a central authority decides who can be a node. This central authority need not grant equal rights to all users.
Unlike public blockchains, where anyone can join by having an internet connection and providing computing power, private blockchains work within a small company or enterprise. In essence, the private blockchains are only partially decentralized as their public access is controlled.
Examples of private blockchains – are Ripple and Hyperledger, a project covering numerous open-source blockchain applications.
Advantages
- Private blockchains are permissioned — thus, companies can use them as the controlling entity. This entity defines the access controls, including security, authorizations, and other aspects for the member nodes.
- They work faster, processing more number of transactions per second than public blockchains, and offer better options to scale.
Limitations
- Since they operate with centralized nodes, it is often criticized that these blockchains aren’t decentralized in the true sense.
- They may be relatively less secure due to fewer nodes.
- As the source code is proprietary, it is less secure as users can’t audit it independently.
Hybrid Blockchains
Hybrid blockchains constitute certain aspects of both public and private blockchains. They are managed by a single organization, in addition to using public blockchains to validate transactions. It helps the organization build permissioned blockchains along with public blockchains. Due to this, the restrictions on who accesses specific data and which data are available publicly are handled well.
In these types of blockchain, transactions are not public. However, they can be viewed and verified when required by providing specific access through a smart contract. The ‘private’ and confidential data is maintained within the network but can be verified. No private entity can modify or edit the transactions, though they may own the Hybrid network.
Users joining the hybrid blockchain network have their identities protected from other users unless they enter into a transaction. Only then is their identity disclosed to the other party.
An example of a Hybrid blockchain is IBM Food Trust, created to enhance the efficiency of operations in the food supply chain.
Advantages
- Hybrid blockchains are cheaper and faster and offer better scalability than public blockchains.
- As they operate as a closed framework, the attack by hackers using 51% computing power is not possible.
Limitations
- Hybrid blockchains are not very transparent as data can be hidden from the users.
- There is a remote possibility of upgrading these blockchains as they do not offer any benefits to participants for contributing to the network.
Consortium Blockchains
Consortium blockchains are similar to hybrid blockchains, as they also include the features of both public and private blockchains. However, the key difference lies in the fact that consortium blockchains, as the name suggests, are formed by multiple entities coming together, similar to private blockchains.
However, in this case, the level of decentralization is higher, imparting greater security to the network. Moreover, as a group of organizations governs them, they offer limited access to a specific organization, thus eliminating the risk in private blockchains controlled by a single entity.
In consortium blockchains, member nodes can initiate and receive transactions, while a validator node performs all validations.
Advantages
As it combines the attributes of both private and public blockchains, it provides controls for specific access similar to private blockchains. Besides, it offers a greater degree of security and scalability than public blockchains.
Limitations
Consortium blockchains are less transparent as compared to public blockchains. This is because there exists the possibility that in case of a breached node, the node has to be compromised, impacting the blockchain network’s functionality.
Closing Thoughts
Blockchains offer immense potential to redefine the ways of conducting businesses. Regardless of the industry vertical, blockchains have found applications in healthcare, supply chain, human resources, finance, or manufacturing. We hope this article has helped you understand the various types of blockchain, with their benefits and drawbacks.
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