A Beginner’s Guide to the Main Types of Blockchain Systems

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A Beginner’s Guide to the Main Types of Blockchain Systems

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Summary

  • As the name gives it away, public blockchains are open to the public, and everyone with an internet connection can use it while private or permissioned blockchains are closed to the public and are only accessible to specific verified users.

  • Consortium blockchain systems are a combination of public and private blockchains. Federated or consortium blockchains limit the verification process to a group of nodes. In other words, they are like a private blockchain with multiple verified admins and the consensus mechanism is controlled by a preselected set of system nodes or stakeholders.

Table of Contents

How Does a Blockchain System Work?

Simply put, a blockchain system is a distributed database that allows for secure and transparent data recording and sharing without a central entity. This is done through transactions that are recorded in a specific structure.

In a blockchain network, members are responsible for maintaining the system as there is no main authority in charge. They need to communicate with each other properly to be able to verify system transactions. These transactions are then grouped together in Blocks which are linked together cryptographically.

The way blockchain nodes communicate with each other is called the consensus mechanism. The main purpose of the consensus mechanism is to put in place a procedure for transaction verification, recording, and sharing. It also defines rewards and punishments for the system members to ensure they behave honestly and in favour of the system.

Proof of Work (PoW), for instance, is one of the main consensus mechanisms that was adopted by Bitcoin. In the Bitcoin blockchain, nodes are rewarded with newly minted Bitcoin tokens for their contributions to the system (the reward).

On the other hand, members need to pay for expensive hardware, and electricity and maintenance fees to be able to verify transactions. This ensures their honest behaviour because if they behave dishonestly, they will be banned from the network and all their investments will go to waste (the punishment).

As you can see, blockchain technology offers an intricate yet straightforward solution that can be cheap, fast, and efficient by removing unnecessary intermediaries.

What Makes Blockchain Systems Special?

As we explained in the previous section, blockchain technology works in an interesting way. This unique design adds some features to the system that make blockchain systems quite special.

Distributed

Blockchain technology sets a procedure in place that enables the members of the system to maintain it without the need for a central authority. This removes the single point of failure.

In other words, unlike centralised systems, a blockchain network will always be up and running as it doesn’t rely on only one point whose failure would bring down the whole system.

Transparent

All the authorised system members will be able to view the record of transactions or the blockchain ledger. In public blockchains, which we will discuss in the next section, the ledger is open to everyone with an internet connection.

This feature is quite valuable, specifically in industries where transparency plays an important role. In supply chain management, for example, the transparency of blockchain technology can make it quite easier for end users to verify the authenticity of products.

Immutable

In a blockchain system, transactions are recorded in batches called Blocks. The details of the transactions in each block are stored in the block header in the form of a hash.

A hash is created through a hash function that takes an input with any size and turns it into an alpha-numeric fixed-size coded output. The interesting fact about hash functions is that a small change in the input will change the output completely.

The hash of each block is created using the hash of the previous block which links the blocks through immutable values. 

In other words, if someone wants to change a transaction in a block, they need to change the hash of that block and every other block that comes after it as they are all linked together. This is a very complicated process that can be quite expensive and almost impossible to perform in a highly secure system like Bitcoin.

That is why we call blockchain systems immutable.

Anonymity

Public blockchains (see the next section) don’t require their users to verify their identity.

This means that even though the transactions are open to everyone, you don’t need to submit identity documents or go through a KYC process to be able to transact in a public blockchain like Bitcoin.

You only need a crypto wallet and its public address, a very long text that doesn’t give away anything about the owner.

Different Types of Blockchain Systems

Blockchain systems come in different types that make them suitable for different setups and applications.

Public Blockchain Systems

As the name gives it away, public blockchains are open to the public, and everyone with an internet connection can use it.

Let’s consider the Bitcoin blockchain; based on your interest, you can either become a node operator and participate in the system maintenance or simply hold bitcoins. In both scenarios, you’re a member of the system and your membership is completely open and borderless.

Public blockchains also offer a higher level of privacy compared to other types. 

To interact with a public blockchain, you only need to have a compatible crypto wallet like MetaMask. To open a crypto wallet account, you won’t need to verify your identity. You can simply have your account opened in minutes and interact with your selected public blockchain.

The records of a public blockchain are also available to everyone. You can simply use a blockchain explorer to review recent transactions or look up a specific wallet address to see its balance, transaction history, and other information. However, you won’t be able to see the identity of the wallet owner as public blockchains are anonymous.

Over the years, some businesses and entities have disclosed their crypto wallet addresses for different purposes such as charity, fundraising, or transparency. That is the reason why the owners of some crypto addresses are known today.

Private Blockchain Systems

Unlike public blockchains, private or permissioned blockchains are closed to the public and are only accessible to specific verified users.

An admin in a private blockchain is responsible for membership management and access controls. The admin will verify new users who want to join the network and will assign them a username and password. Each user will have a role that has defined access controls. The admin can revoke these privileges or even remove a node from the network.

As you can see, decentralisation is quite low in private blockchains, however, they offer more privacy and have a higher performance than public blockchains. The blockchain ledger is only accessible to authorised members, making private blockchains a very suitable choice for handling sensitive corporate transactions.

Hyperledger is a good example of a private blockchain. First released in 2015, Hyperledger is an enterprise blockchain solution that is suitable for business operations. Led by the Linux Foundation and IBM, Hyperledger is open-source and free to use.

Consortium Blockchain Systems

Consortium blockchain systems are a combination of public and private blockchains. Federated or consortium blockchains limit the verification process to a group of nodes. 

In other words, they are like a private blockchain with multiple verified admins and the consensus mechanism is controlled by a preselected set of system nodes or stakeholders.

Consortium blockchain systems are quite useful for operations where multiple businesses need to work together. A consortium blockchain will offer a highly secure and private environment for business transactions where the record of data is immutable unless all parties agree to the change.

Hyperledger can be utilised as a consortium blockchain as well. Corda is another example of a consortium blockchain. R3 launched the first version of the Corda distributed ledger platform back in 2017.

Public Blockchains

Private Blockchains

Consortium Blockchains

Distribution

High

Low

Flexible

Privacy

High

High

Flexible

Performance

Low

High

High

Risks

Fraud, attacks

Bad actors

Bad actors

Closing Remarks

Blockchain systems are revolutionising different industries; they offer an immutable, distributed, and trustless way of handling transactions between different entities. More importantly, a blockchain’s privacy and decentralisation levels are flexible enough to be customised based on the business needs.

While public blockchains are trying to offer a more open and accessible financial system to the public, private and consortium blockchains are providing businesses in various sectors with a new solution to streamline their everyday processes.

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