Wait, what? Now there’re even different blockchain types? Yes, there are.
Since the vast majority merely understands Bitcoin under the term Blockchain, it is of even greater importance to know the different Blockchain types and which type fits which use case. What are the different types of blockchain, how do they differ, and what are the possible advantages and disadvantages?
Blockchain is currently a dominant tech topic. We have included blockchain and its benefits in our ranking of the most important tech trends.
Are you new to blockchain? Then we recommend our Beginner’s Guide for an easy introduction to the topic. Here we explain many things such as how blockchain works, corresponding application areas such as smart contracts, cybersecurity or cryptocurrencies, and much more. We are happy to introduce you to the Blockchain.
Basically, we have to distinguish between four different Blockchain structures: Public, Private, Consortium and Hybrid. In addition, a distinction must be made between permissionless and permissioned. Permissionless blockchains allow any user to participate in the network without verification or the like, i.e. to become a node of this network. In the opposite case, the permission-required blockchain, users can be restricted upon joining or subsequently becoming part of the network. Also, one is anonymous in the permission-free blockchain, whereas this is usually not the case in the permission-required blockchain.
Permissionless vs. Permissioned Blockchains
Looking at security, permissionless blockchains tend to be more secure. This is because there are many nodes that validate transactions and the entire database. Collusion is nearly impossible in this regard, making the blockchain nearly tamper-proof. The fewer nodes there are in a blockchain, the easier it is for malicious actors to collude. Therefore, private blockchain administrators must ensure that the nodes adding and verifying blocks are highly trustworthy. In addition, it tends to be easier for third parties to join the system; this can also be beneficial.
One negative aspect of permissionless blockchains is the long transaction times that occur due to the large number of nodes and the size of the transactions, as well as the high energy consumption. Since access to the network or rights in the network are limited, there are fewer nodes, resulting in less processing time per transaction. This can make permission-based blockchains more efficient.
The 4 Types of Blockchain Types
Public blockchains can be recognized by their decentralized structure and the fact that they are permission-free by nature, meaning that anyone is allowed to join. All nodes have the same right to access the blockchain, create new data blocks and validate them. Bitcoin and Ethereum are the best-known public blockchains. Joining is possible for anyone in this case, also each node has the same number of votes.
+ Thanks to the decentralized structure, malicious actors have a hard time gaining control of the system. The network is trusted through the process of proof-of-work or proof-of-stake.
+ The ease of access compared to private blockchains allows for greater propagation of the system. This benefits the system itself as well as the users – keyword here: network effect. This allows the network to be applied more broadly and is at the same time more secure, as it is more difficult to hack.
+ Since the public blockchain has a high level of transparency, fake transactions cannot be displayed, or existing ones can be hidden.
For an excellent explanation of Proof-of-Work and Proof-of-Stake, check out this YouTube video. Moving from Proof-of-Work to Proof-of-Stake not only requires less energy, but it is also more secure and can increase TPS.
By the way, you can find a general comparison of advantages and disadvantages of blockchain here on our blog.
– One disadvantage is the low TPS (transactions per second) on public blockchains. A comparison between public blockchains such as Bitcoin or Ethereum and the VISA network shows the difference: while Bitcoin and Ethereum each come to 7 and 15 TPS, respectively, the VISA network is at 24,000 TPS.
– The slow processing rates of the public blockchains also lead to lower scalability. This is because network growth hurts the network’s ability to process transactions. More and more transactions are piling up and cannot be processed. Proof-of-stake or other algorithmic changes can be used to increase transactions/second, something the Ethereum network in particular is currently striving to do.
– Last, the high energy consumption can be seen as a negative. While public blockchains are incredibly secure, at the same time the process of proof-of-work is very energy consuming. This is not only a concern from an environmental perspective, but also from an economic perspective. A very descriptive breakdown of Bitcoin’s energy consumption with appropriate examples was published by the New York Times last year.
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In contrast to public blockchains, private blockchains are characterized by a centralized or only partially decentralized character. This means that they can be completely controlled by a single organization. This central organization determines who is allowed to be a node and who is not. In addition, the rights of each node may differ – which node has which rights to perform actions is decided by the central organization.
+ Usually faster validation times, since fewer nodes. The problems that affect the Ethereum network, among others, do not occur here, or hardly at all. TPS speeds in the four- to six-digit range are possible with private blockchains.
+ Stronger control over the system, companies in particular benefit from this. For example, if you want to be able to identify people individually or control certain things, a private network is advantageous. Rights can be assigned individually, so you retain control over the network. This also allows the network to be scaled almost arbitrarily – another advantage.
– The biggest disadvantage of a private blockchain is the possible lack of trust in it. There is usually no open ledger here, so the security and legitimacy of each user is not independently assured.
– The risk of a security breach is also higher in the case of private blockchains. In some cases, a single node can determine the rights or validation of other nodes’ transactions. This harbors risks, especially in terms of human error or malicious behavior.
This is a so-called semi-decentralized network in which not just one, but at least two organizations manage the blockchain network. In terms of advantages and disadvantages, you also have a mix of both networks here. On the one hand, there is less security because transactions are again validated by only a few nodes, but on the other hand, the system can scale better and the TPS are higher. Semi-decentralized networks are used by banks or government agencies, for example.
The hybrid approach consists of a combination of a private and a public component. Here, the characteristics of both types of blockchains are used. Basically, there are two options when building hybrid blockchains:
Private, permission-based system
Public, permission-free system.
In hybrid systems, individual users can control whether and how access rights are granted, i.e., who gets access to the data stored in the blockchain.
A key advantage of the hybrid network is flexibility. Users can connect several public blockchains with a private blockchain. This allows the advantages of the two types of networks to be used in a targeted manner. A transaction in a private network of a hybrid blockchain is usually verified within this network. However, it can also be given to a public blockchain, whereby it is verified here. Since more nodes are involved here for verification, the security and transparency of the network increases.
Why Do We Need Different Blockchain Types?
The goals of a blockchain are the execution of transactions and the exchange of information via a secure network. Nevertheless, the requirements for the network differ, which is why different blockchains are necessary. Factors that cause differences in networks:
- Control over the network
- Need for public validation
- Level of TPS
- Trustworthiness and security
A practical example is represented by the requirements for blockchain and DLT technology on the part of the Ethereum network and the network of a bank. While Ethereum wants to include the largest possible number of users across the planet in its network, a bank may have different plans. A bank may aim for a restricted network where only the authorized members of the bank have access to confidential and sensitive information. By controlling permissions and access, the bank can grant access to its network only to trusted individuals and define the scope of its private blockchain geographically. These freedoms do not exist with a public Blockchain.
In this respect, it is important not to exclude one type of Blockchain per se or to consider it “bad”. Each type has its advantages and disadvantages, as well as certain application areas in which it is the champion. It is important to understand when which type of blockchain can and should be used to provide the best possible and ideally error-free solutions.
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