Blockchain is more than just Bitcoin and other cryptocurrencies. There are four main types of blockchains, each with its own advantages, disadvantages, and use cases.
When newcomers first come across cryptocurrencies, one of the basic concepts they have to understand is the technology that enables it, blockchain. This is the easy step, as blockchain at its core is a database distributed across a network of computers. However, how that network is secured is an entire matter altogether, which is why we have different approaches to blockchain security.
Even the two largest cryptocurrencies — Bitcoin (BTC) and Ethereum (ETH) — use different blockchains. So, why would a cryptocurrency use a specific network type? There are various reasons, such as privacy or the environmental impact of securing the network. These factors, amongst many others, show the importance of understanding different types of blockchain and how they function.
Why Do We Need Different Blockchain Types?
Once you understand that a blockchain is a form of distributed ledger technology (DLT), it then follows that its primary function is to securely transmit information. In the case of Bitcoin, such a transmission is a monetary transaction. In other words, when people say they own Bitcoin, they don't own a digital file like they would own a private video on their phone.
Instead, a user owns access to the utility asset that secures and is rewarded to 'miners' who aid in verifying the blockchain network's transactions, unlockable through a Bitcoin private key or another private key format, depending on the blockchain. Therefore, this type of network offers a secure and borderless monetary foundation for the public. However, this is only one example of a blockchain application.
Different Types of Blockchain Technology
While all blockchains are effectively P2P networks, connected via nodes that execute transactions and add new blocks, the pathways to those nodes can either be permissionless or permissioned. Within that range of restriction lies the difference between four types of blockchains. On the one end of the spectrum is a public blockchain, and on the other end is a private blockchain.
Public Blockchain
To be considered public, a blockchain has to be open and accessible to all, therefore — permissionless. This means that anyone can use their computer to become a network's node. Once the software is downloaded and installed on the computer, such a blockchain node can then perform mining, verify transactions, or access the entire network's record.
What Are the Advantages?
A chain is only as strong as its weakest link. In centralized organizations, no matter how successful they are, a point of failure lies at the top and can eventually crumble. Public blockchains lack such vulnerability because they are decentralized.
If there are computers/nodes connected to form a distributed ledger, a public blockchain can continue to run regardless of the organization that initially funded it. In addition to transparency, this is the power of a permissionless distributed ledger network.
What Are the Disadvantages?
The more nodes there are on a network, the greater the time to verify transactions across all nodes. In turn, this translates to slower network speeds. Moreover, because anyone can join a public blockchain, there is a risk that hackers may as well. Then, they can perform a 51% attack and take over the network.
As of yet, this has never happened to Bitcoin's blockchain due to thousands of nodes running it. Thanks to proof-of-work consensus, a malicious party would need an immense amount of computational power to counter other nodes on the network, which is virtually impossible. With public blockchains that lack the same level of decentralization, that may not be the case.
What Are the Use Cases?
Whether public blockchain is secured with a proof-of-work (PoW) or proof-of-stake (PoS) consensus, they can be used to displace traditional financial systems. Bitcoin (BTC) is doing it by being a deflationary cryptocurrency akin to digital gold. Litecoin (LTC) and Bitcoin Cash (BCH) are creating low-fee, borderless payment systems.
On the more advanced side of blockchains, Ethereum (ETH) and Cardano (ADA) are smart contract-enabled public blockchains that support decentralized finance (DeFi) ecosystems — from NFT marketplaces to DEXs to lending platforms.
Private Blockchain
Usually run by a single entity, a private blockchain is restricted as to who can join the network to become a node or access the network. These node lists are vetted by leading organizations, which can, at will, decide whether to constrict or expand the network. Correspondingly, private blockchains are permissioned distributed ledgers, commonly referred to as enterprise blockchains.
What Are the Advantages?
Because of the low number of nodes that are allowed to join the network, they are significantly faster than public blockchains. After all, a transaction would then only have to pass through a limited number of nodes. Likewise, there is less danger for hacking attempts to be successful because the organization in charge has total control over authorization and network accessibility.
What Are the Disadvantages?
In practice, a small school or business can run a private blockchain. However, the question arises whether such a network can be trusted due to high levels of control and centralized nodes. Moreover, if a few nodes go offline, the entire blockchain can be endangered due to its low count.
What Are the Use Cases?
With proper security and maintenance, private blockchains are a great asset when organizations want to secure information flow without exposing it to the public eye. For this reason, companies use them for internal auditing, voting, asset management, logistics management, and more. Corda, Hyperledger, and Multichain are examples of a few private blockchain projects.
Hybrid Blockchain
Semi-private or hybrid blockchains combine the key elements from private and public blockchains. Correspondingly, their networks are partly permissionless and partly permissioned. This gives them a greater degree of flexibility, as some data can be made private, while other data can be opened to the public at the same time. For an example of how a hybrid blockchain could be beneficial, if one were to access a hybrid blockchain, they are anonymous until they commit to a transaction. Only then is their identity disclosed to the other end of the transaction.
What Are the Advantages?
Consisting of fewer nodes but within a closed network, hybrid blockchains are resilient to 51% attacks while simultaneously offering high network throughput. This makes them more scalable and cheaper than public blockchains.
What Are the Disadvantages?
Because it is a closed ecosystem, hybrid blockchain lacks the incentives for network participation. For the same reason, it lacks total transparency, as there is the possibility that someone can hide some information from users.
What Are the Use Cases?
By interfacing the speed and protection of private blockchains with public accessibility, hybrid networks are great solutions for the healthcare industry, government, real estate, and financial companies. Whenever there is a record that can be accessed publicly but needs to be shielded privately, they represent an optimal remedy.
Consortium Blockchain
Otherwise known as a federated blockchain, a consortium network is a type of hybrid blockchain, but with multiple organizations in charge of its semi-closed ecosystem instead of just one. This gives the network a greater degree of decentralization while retaining the advantages of both private and public blockchains.
What Are the Advantages?
Compared to public blockchains, consortium blockchain networks offer greater transaction speed and scalability while still offering accessibility control across multiple organizations.
What Are the Disadvantages?
They have the same disadvantages as hybrid blockchains — lack of transparency and greater vulnerability if a few nodes are compromised.
What Are the Use Cases?
As their moniker implies, consortium networks are in use by large businesses, primarily banks and payment processors. Banks often form groups to make them more efficient, which is why consortium blockchains come in handy. Likewise, research, medical, and food tracking organizations frequently collaborate within their sectors, making federated solutions ideal for their use.
Although Komodo is an open-source, permissionless platform, it offers a federated multi-chain blockchain-building architecture, leading to scalable, enterprise-grade solutions. You can find consortium blockchain employed in R3, Quorum, and Energy Web Foundation.
Which Blockchain Variety Should You Choose?
In order to decide on the best blockchain technology implementation, one first has to consider two critical factors:
- Does the access to the network need to be restricted or permissionless, or a combination of both?
- Does the network operate on a borderless, global level, or on an organizational level?
Within these parameters, private and public blockchains offer trade-offs in terms of scalability, transaction speed, transparency, and security. To this layer of consideration, we can then add the purpose of the blockchain, leading us to the following diagram.
So far, the most popular and successful blockchains have been public, such as Bitcoin and Ethereum, each one using different consensus mechanisms to address the problem of scalability and security. However, project-oriented private blockchains can be better suited for organizations as a result of their speed and customized access.
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