Blockchain technology is poised to change how we do things in nearly every area of our lives. It solves an array of problems related to security and validation of data and it’s essential for anybody who may be impacted by the adoption of blockchain technologies to be informed about them.
At Addition Financial, we’ve been getting a lot of questions about the various types of blockchain technology and how they may be used in finance and other areas. With that in mind, here are the four different types of blockchain technology and some examples of how they can be used.
Blockchain technology might sound complicated (and it is complicated, mathematically speaking) but it’s not that difficult to understand once you know the basics.
Let’s start with what every blockchain network has in common. A blockchain is a distributed ledger, meaning that it’s a record of transactions or data that is held not by the users in the chain, which are called nodes. Data may be added to the chain only once it is verified and accepted by consensus, which means that 51% of the nodes must agree that the data is valid.
The verification process is done by taking the data in any given block and using a hash function, a mathematical formula that takes strings of data of varying lengths and converts them into a standard length. A peer node works to “solve” the hash, and the first to do it wins a reward, typically a unit of cryptocurrency. That’s the hash, and the hash for each block contains the hash in the previous block, thus establishing its proper place in the chain.
The key thing to remember here is that blockchains are secure by design. It would be both difficult and expensive to falsify information or attempt to change data. There are four basic types of blockchain technology:
Now that you understand the four types of blockchain technology, let’s talk about each in more depth and explore some blockchain platform uses.
The most famous and oldest example of a public blockchain also happens to be the first blockchain ever created, the Bitcoin blockchain. It was created in 2009 by a person using the pseudonym Natoshi Sakamoto, who also created Bitcoin, the world’s first digital currency.
As we mentioned above, a public blockchain is accessible to anybody and anybody can attempt to solve a hash for a block of data to add it to the chain. However, a public blockchain is still secure because it would require an enormous amount of time and energy to attack it. Any would-be attacker would need to control 51% of the nodes on the chain. This type of blockchain technology is also called permissionless blockchain networks.
Given that the first public blockchain was used for digital currency, it will come as no surprise that the most common use for public blockchain technology is the trading and recording of cryptocurrency transactions. Bitcoin was the first cryptocurrency, but it was soon joined by Litecoin, Dogecoin, and hundreds of other cryptocurrencies, each operating within its own blockchain.
Another potential use for a public blockchain would be to notarize documents or track public property ownership records. The key is that a public blockchain is ideal for any data that needs to be public and secure at the same time.
An advantage of a public blockchain is that it would still exist even if the individual or organization that created it ceased to function. The main disadvantage is that public blockchains aren’t scalable. As more nodes join the network, the network’s speed decreases accordingly and it takes longer to add new blocks to the chain as a result.
A private blockchain is a blockchain that is either controlled by a single entity, such as a business, or one that operates in a closed environment. In other words, it is smaller than a public blockchain in most cases.
In a private blockchain, which may also be referred to as a permissioned blockchain or an enterprise blockchain, the controlling entity decides who may have access to the blockchain and who will verify any information before it is added to the chain.
Some of the uses of private blockchains include maintaining trade secrets, conducting audits and functions such as supply chain management or private voting.
In a private blockchain, there are limits on who can access the data and add data to the chain. No third party can access the information. They tend to be faster than public blockchains because there are fewer nodes, so information can be verified and added to the blockchain far more quickly than it would in a public blockchain.
The downside of a private blockchain is that, ironically, it may be less secure than a public blockchain because there are fewer nodes to verify data and it may be easier for a potential bad actor to corrupt 51% of the nodes. There are some who argue that a private blockchain is not a blockchain at all, since it is centralized.
A hybrid blockchain offers its creators the combined functions and advantages of public and private blockchains. In most cases, a hybrid blockchain involves a private, permissioned system that sits alongside a public and permissionless system. The organization can control who can add data to the blockchain and who can access it.
A private entity owns the hybrid blockchain but cannot alter transactions. That makes it more secure than a private blockchain because it is more difficult to corrupt or control 51% of the nodes.
The records and transactions added to a hybrid blockchain are not public in the same way as with a public blockchain. However, they can be publicly verified as needed. One example would be with the creation of a smart contract, which is a piece of code stored in a block that can trigger an agreed-upon event when a contract milestone is reached.
Another key characteristic of a hybrid blockchain is that any user’s identity is protected from other users until they engage in a transaction.
There are a lot of uses for hybrid blockchains. One of the areas where there is a lot of focus is in real estate, where certain information must be kept private but listings and sales must be public. It may also have applications in financial services and in retail.
Another potential use is for storing medical records, where users could get access to their own records via a smart contract while keeping them private from third parties. The same logic would apply to certain government records, and some governments are already using it.
The advantages of hybrid blockchain technology are that because it is in a closed system, no outside hackers can successfully attack it. It protects privacy while allowing access to data where needed, and it is fast and scalable.
The biggest disadvantage of a hybrid blockchain is that it lacks the transparency of a public blockchain. There is no incentive for users to participate and that can limit its functionality, as well.
Consortium blockchains have a lot in common with hybrid blockchains. The biggest difference is that instead of being controlled by a single entity, it is controlled by a group of entities. It may also be referred to as a federated blockchain.
Access to the blockchain is confined to members of a known group, which eliminates some of the potential risks of having a centralized authority control the network, as it would in a private blockchain.
Instead of consensus being reached by any node that wants to participate, as would be the case in a public blockchain, the process of consensus in a consortium blockchain is controlled by preset nodes, including a validator node that can initiate, receive and validate any transaction. Member nodes can also initiate or receive transactions, but they may not validate them.
The primary uses of a consortium blockchain are in the world of banking and payments. Banks could, in theory, form a consortium and decide which node would be responsible for validating any transactions. The technology might also be useful for research and supply chains.
The advantages of creating a consortium blockchain is that it’s more secure and scalable than a public blockchain, while offering the access control of a private or hybrid blockchain.
On the flip side, a consortium blockchain is not as transparent as a public one and could, in theory, be compromised if someone were to hack a member node. There’s also the possibility that the regulations imposed on the blockchain by the consortium could impair or slow the network’s speed.
Understanding the four types of blockchain technology and their uses will, we hope, allow our members to see the potential of how these emerging technologies can be used to make their lives easier – and to see the potential of investing in them, as well.
Do you need help diving into the world of blockchain investments or cryptocurrency? Click here to read about our MEMBERS Financial Services Program and book an appointment with one of our financial professionals.