Blockchain is a decentralized ledger that records transactions such that they cannot be altered. The history of this innovation dates back to the creation of the first of its kind, Bitcoin. However, since Bitcoin went mainstream, blockchain has evolved from its primary application in the finance world. Today, many types of the technology have been developed, and they find relevance in sectors like health care, government, supply chain management, and much more. Stick with us as we explain the different types of blockchain that exist today. We’ll also take the time to explain their advantages, disadvantages, and potential use cases. Let’s get started!
KEY TAKEAWAYS:
- Blockchain has evolved from the public type since the creation of Bitcoin.
- A public blockchain is open to everyone to participate without permission.
- Other types of blockchains include private, hybrid, consortium, tokenized blockchains, and sidechains.
- Blockchain is still growing to cater to different types of use cases.
Public Blockchain
A public blockchain is a decentralized and open network where anyone can participate without permission. This blockchain is transparent because everyone on the network can see all transactions. Digital currencies like Bitcoin and Ethereum operate on public blockchains. They can also be used to create tamper-proof voting systems.
Characteristics
- Decentralized: No central authority controls the network.
- Transparent: All transactions are visible and can be verified by users on the blockchain.
- Immutable: Recorded data cannot be altered.
- Secure: Consensus mechanisms such as proof-of-work (PoW) or proof-of-stake (PoS) protect the network from fraud and tampering.
Advantages
- Trustless: A public blockchain does not need intermediaries because its consensus mechanism is the basis of trust.
Disadvantages
- Scalability issues: They often have issues with transaction speed and scalability.
- High energy consumption: Consensus mechanisms like PoW use significant computational power.
- Lack of privacy: A public record implies that transaction activities are not confidential.
Private Blockchain
This blockchain can only be accessed by authorized participants because it is restricted. Private blockchains have a level of centralization and are controlled by a single entity. They are useful in supply chain management to track goods, in healthcare for medical records management, and in the financial sector to secure transactions. Hyperledger and Corda are good examples of this type of blockchain.
Characteristics
- Permissioned network: Only authorized people can join the network.
- Centralized: A single entity controls the blockchain.
- Customizable: Features such as consensus mechanisms and governance rules can be adjusted to suit the organization’s needs.
Advantages
- Scalable: Private blockchains can handle larger transaction volumes because it is a controlled environment.
- Private: Only authorized participants can see transactions.
- Efficient: Shorter transaction processing time because of fewer nodes.
Disadvantages
- Reduced trust: Its decentralized nature can lead to trust issues.
- Vulnerable: The network is prone to attacks as a result of centralization.
Hybrid Blockchain
Hybrid blockchain merges the elements of public and private blockchains. While certain data can be public, others can be kept private to provide a balance of transparency and confidentiality. Enterprises, government services, and real estate businesses can leverage hybrid blockchains. For example, in real estate, property records can be kept public while transaction details remain private. The only downside with the blockchain is the complexity and compatibility issues that sometimes come with integrating both public and private elements.
Consortium Blockchain
A consortium or a federated blockchain functions through shared control by a group of organizations instead of a single entity. As such, only authorized persons can access the network. It is commonly used when multiple businesses, such as banks or insurance, need to collaborate and securely share information. Some pre-selected nodes within the consortium make up the consensus mechanism. Examples of this type of blockchain include IBM Food Trust and Marco Polo.
Advantages
- Smooth collaboration: It ensures secure and seamless collaboration between different organizations.
- Efficient: Transactions are processed faster because of the control and limited participation.
Disadvantages
- Trust issues: Trust may be difficult to establish if the consortium is made up of members from competitive industries.
- Complex governance: Managing the governance and decision-making process of a federated blockchain can be complex if the stakeholders have different interests.
Tokenized Blockchains
These blockchains are designed to issue, manage, and transfer tokens. These tokens can represent physical and digital assets such as real estate, artworks and collectibles, securities, bonds, NFTs, and cryptocurrencies. Tokenized blockchains leverage smart contracts to automate processes like trading settlement and ownership verification.
Characteristics
- Interoperability: They are often designed to be used with other blockchains and financial systems
Advantages
- Liquid: Tokenization enables easy transfer and fractional ownership of assets, which can increase liquidity.
- Accessible: This blockchain provides easy investment opportunities to underprivileged or underbanked individuals.
Disadvantages
- Security risks: The security of a tokenized asset depends on the robustness of its underlying blockchain and smart contracts.
- Market volatility: Assets such as cryptocurrencies are highly volatile, which poses a potential risk to investors.
Sidechain
This refers to a separate blockchain that runs in parallel to a main blockchain, thereby supporting the transfer of assets between both of them. Sidechains are often used to implement new features of a blockchain to improve scalability and efficiency. It is done separately so as not to tamper with the stability of the main chain. Examples are Polygon for Ethereum and Rootstock for Bitcoin.
Advantages
- Flexibility: Assets and data can be moved between chains, which aids flexibility and interoperability.
Disadvantages
- Security risks: If poorly implemented, sidechains may introduce vulnerabilities that could jeopardize the main chain.
- Complexity: Managing sidechains may require significant technical expertise. Also, their adoption may be limited due to compatibility issues since they are relatively new.
Conclusion
Blockchain technology has come a long way since Bitcoin was released. We now have blockchains ranging from fully decentralized public ones to more controlled private versions that cater to different needs. As the innovation keeps growing, we can expect to see many new use cases that will transform numerous industries and the world as a whole.