In the last decade, the Blockchain has been in constant evolution as we could see when we talked about Blockchain 2.0. Bitcoin uses what has been the first generation of the Blockchain and, in turn, the first type of Blockchain to exist, the public one.
Today, there are different types of Blockchains that have been designed for different types of purposes and that, in turn, solve different problems presented by the “original” Blockchain. In this module we will see why there is a need for these different types, what they are and their differences.
GOALS The objectives of unit 8 and 9 are:
– To know the different types of Blockchain and their characteristics.
– To know in which cases to implement each type of Blockchain.
– To know the advantages and disadvantages of each type of Blockchain.
– To know the term IoT or Internet of Things, what it consists of and its relationship with the Blockchain.
– To learn about the different potential applications as well as those that IoT already has today in our society.
– Learn how to create a Blockchain with free online tools.
TYPES OF BLOCKCHAIN
As we know, the first application of the Blockchain was in cryptocurrencies, which not only sparked a new economic revolution, but also paved the way for a new concept called “decentralized ledger technology” or DLT.
This new concept has given organizations a hitherto unimaginable ability to not depend on a classic or also called centralized financial entity, drastically changing the way they operate and distancing themselves from what was hitherto commonplace.
It has also helped to solve all the drawbacks that derived from centralization, but, however, not all are advantages. The Blockchain brings with it a series of problems that still need to be solved and, of which, the one that stands out above the rest, is how to apply this technology in different social spheres.
For example, PoW, the consensus algorithm that came hand in hand with Bitcoin is inefficient because the nodes need to use large amounts of energy to solve the complex mathematical calculations for the resolution of the blocks.
At the beginning, when the difficulty was low, it did not mean any problem, but as both the energy and the time needed to solve the equations went up, it increased considerably. This inefficiency makes it unsuitable for any system, more so today, where everything in our society is starting to lean towards a constant saving of energy resources.
This inefficiency is just one more of the problems to be solved that come hand in hand with the first generation of the Blockchain. Along with it come others such as lack of automation or lack of scalability.
Now, let’s approach the problem from a different perspective. Not in all cases a public Blockchain can be used because, for example, that would mean making public all aspects of a company, offering all its rivals a huge amount of critical data on the operation of its business and that they could employ to use it for their own benefit or to use it against it.
It is precisely for these cases that the private Blockchain was created, which offers a totally private network and where the organizations themselves decide who participates in them. In this way it is possible to avoid making everything public and maintain the characteristics and benefits that the use of the Blockchain brings.
Now that we have understood where the need to create other Blockchain comes from, let’s see which are the others, besides the already mentioned private Blockchain.
Mainly we can find four types of Blockchain: public, private, federated and hybrid.
This type of network is the one we have been talking about so far and, therefore, we know the most. A Blockchain with the distributed ledger without permission where anyone can join and make transactions. It is a type of network that offers no restrictions and where anyone can have a copy of the ledger in their possession and therefore access the Blockchain.
Both proof-of-work (PoW) and proof-of-stake (PoS) can be used as a consensus method to verify transactions. This verification work falls to the nodes that participate in the network, and without which, therefore, the public Blockchain would cease to function.
Some examples of public Blockchain are: Bitcoin, Ethereum, Litecoin or NEO.
Public Blockchain Advantages:
– A public Blockchain can be joined by anyone who wishes to join.
– It brings trust to all the members that make up the network.
– It encourages everyone to participate and help to improve it.
– It does not require intermediaries to function.
– They are secure depending on the number of participating nodes.
– They are transparent since the data available are so for everyone, so they can be verified by anyone.
Public Blockchain Disadvantages:
– Their transaction speed can be slow, having to wait, sometimes minutes or hours for the transaction to complete. Bitcoin is capable of performing seven transactions per second, far from the 24,000 that the VISA network is capable of. This is because it takes time to solve the mathematical problems and then complete the transaction. However, possible solutions to improve this speed deficiency are already beginning to appear in the Bitcoin community, with the most promising being Lightning Network. This new improvement has the potential to bring Bitcoin to levels close to 1 million transactions per second, although it is still under development and is not without its problems.
– Another problem we have already discussed is scalability, which is very limited due to the way it operates, becoming slower and slower as more nodes join the network. Once again Lighting network may be the solution to this problem, removing from the blockchain what makes it most cumbersome, the transactions. This would help to drastically improve, not only the speed of the network, but also in scalability.
– The Proof of Work (PoW) that Bitcoin uses is another disadvantage because, as we have seen above, it consumes large amounts of energy, being much more efficient the Proof of Stake (PoS) that makes use of much more efficient algorithms.
Public Blockchain Use cases:
There are a multitude of cases in which this type of public Blockchain could be applied. Let’s look at a couple of examples:
– Voting. Countries can make use of the public Blockchain to make voting much more reliable.
– Fundraising. Any company or organization could make use of the public Blockchain to gain the trust of potential patrons.
A private blockchain, unlike the public ones, works in a closed environment where whoever wishes to join and participate directly in it cannot do so without the authorization or permission of the network manager.
This makes the nature of the private Blockchain from being decentralized to centralized due to that existing authority that controls the network.
And these are the only differences between the public and private Blockchain, since the rest of the functions that characterize it, such as transparency and security, remain intact.
This type of Blockchain is especially useful when we talk about companies or any other private entity that wants or needs to have an extremely secure and reliable working environment. By using the private Blockchain, the manager also ensures the control of accessibility to it and the network configuration itself, being able to adapt it to their needs.
Some examples of private Blockchain are: Multichain, Hyperledger, Fabric, Hyperledger Sawtooth or Corda.
Private Blockchain Advantages:
– Private Blockchains are faster. The speed in a Blockchain is given by the number of nodes that compose the network. These nodes have to reach a consensus, so the more nodes that compose it, the longer it will take to reach such consensus. A private Blockchain is composed of few nodes and as a consequence they reach an agreement much earlier, giving the network a faster transaction speed.
– Private Blockchains are more scalable. In this type of network only a few nodes are authorized to validate transactions. This allows new nodes to be added without reducing the speed of the network and therefore maintaining its same efficiency.
Private Blockchain Disadvantages:
– The biggest disadvantage is that they are centralized Blockchains, even going against the very philosophy of the Blockchain.
– With a central authority, it is difficult to gain the trust of the other members of the network, since they will always be at the mercy of the decisions of the central authority.
– Although security is one of the main characteristics of the Blockchain, the fact that the private networks are made up of a reduced number of nodes means that security is ostensibly reduced. This is because it would be much easier to get to take control of 51% of all of them and, therefore, take control of the entire network.
Private Blockchain Use cases:
There are multiple use cases for private Blockchain: supply chain management, asset ownership and internal voting.
Federated or consortium blockchain.
A federated blockchain is used to solve the requirements of organizations where there is a need for public and private blockchain features, being able to choose which parts of the organization will belong to one domain or the other.
Consensus in this type of Blockchain is achieved thanks to a series of pre-established nodes that are specifically in charge of this function. Although it is not open to individuals, it still retains the decentralized nature. This is possible since this type of Blockchain is managed by more than one organization, so no one is in control.
Another feature that this type of network has with respect to the others is the existence of a validator node. This type of node performs two different functions: sending and receiving transactions and also validating them. This last characteristic, that of validation, is what distinguishes it from the rest of the member nodes of the network, since these can only send or receive transactions.
Some examples of this type of network are: Marco Polo, Energy Web Foundation, IBM Food Trust and Voltron.
Federated or consortium blockchain Advantages:
– They offer greater control over network resources.
– They are more customizable.
– Higher level of security and access control.
– They have greater scalability.
– They are more efficient compared to public networks.
– They have a well-defined organizational structure.
Federated or consortium blockchain Disadvantages:
– Despite its high security, it does not cease to depend on the members that compose it to maintain its integrity.
– It is less transparent.
– All the configurations and/or regulations that are applied can generate various problems in the network functionality.
– It is also less anonymous compared to other types of Blockchain.
Federated or consortium blockchain Use cases:
– Banks: consortia of banks can be created that decide which of the nodes belonging to the network will validate transactions.
– Research: A consortium blockchain can be used to share data and results of a research.
– Food tracking.
Hybrid blockchains may appear to be the same as federated blockchains, and while they are not, they do share some characteristics.
Hybrid blockchain is best defined as a combination of a public and private blockchain, and where the best features of one and the other are often chosen to make up the network.
Some examples of hybrid blockchain are: Dragonchain or XinFin.
Hybrid blockchain Advantages:
– In case privacy is needed, these can work without everything having to be published.
– They have greater scalability than public networks.
– Rules can be adjusted as needed.
– 51% attacks do not affect them.
Hybrid blockchain Disadvantages:
– It is not easy to transit to such a Blockchain due to its complexity.
– It is not completely transparent.
– No incentives to participate and contribute to the network.
Hybrid blockchain Use cases:
– Real estate market such as real estate companies can benefit from this type of network, as it would allow them to work internally and, in turn, be able to publish the information they want for their potential customers.
– Retail sector: They can be especially useful for this type of sector as they allow them to optimize all their processes.
– Heavily regulated markets: In markets such as electricity, finance or health, they can be a great step forward, allowing a high level of privacy and transparency at the same time.