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DeFi-Planet

11/13/2021

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Types of Blockchain: Pros, Limitations

A blockchain is a digital ledger of transactions or other forms of data that are duplicated and distributed across the entire network of connected computer systems called nodes. Each node has the capacity to verify and initiate transactions before...

Types of Blockchain: Pros, Limitations

A blockchain is a digital ledger of transactions or other forms of data that are duplicated and distributed across the entire network of connected computer systems called nodes.

Each node has the capacity to verify and initiate transactions before they are added to the blocks. The distribution of the ledger allows for transparency.

Private and public blockchains are the two main types of blockchain. Other forms are  the hybrid and consortium blockchain.

Each blockchain has its mode of operation. But remember that the core function of any blockchain is to share data or process transactions in a secure network.

Let’s discuss the types of blockchains, starting with the private blockchain.

1. Private Blockchain

A private blockchain is a permissioned blockchain that operates in a closed network. This simply means only selected nodes have access to the network.

This kind of blockchain is used within organizations or enterprises that act as central authorities. Permission to access and use the blockchain can only be granted by the organization that owns or controls it.

Here’s a brief example

If BANK A operates a private blockchain network to store data like customers’ information and transaction records, only authorized employees of this bank will be granted access to the network.

No ‘outsider’ has access to the blockchain and anyone who needs access must get permission from the network administrator. The number of users is usually limited. The bank may decide to give access to employees of a single branch or all other branches in the city.

Private blockchains can be used by electoral bodies, health institutions, supply management firms, and more. Examples are the Hyperledger project and Corda.

Pros of the Private Blockchain

Despite working in a restricted and permissioned manner, private blockchains have a number of advantages (aside from privacy).

Speed: Because a limited number of nodes are connected to private blockchain networks, operations occur at greater speed. The speed also applies to the addition of data on new blocks.

Private blockchains can facilitate between 1,000 to 100,000 transactions per second (TPS) typically.

Easily scalable: Private blockchains are scalable. In this context, scalability means determining the size of your blockchain, based on your needs. Let’s assume you kick-start your enterprise with 30 nodes on your private blockchain. If expansion or reduction occurs, and you need to increase or decrease the number of nodes, this can be done without much hassle.

Limitations of Private Blockchain

Below are some reasons why private blockchains may be unfavourable.

Limited trust: A private blockchain, especially one operated between multiple organizations, has limited users. This means the owner of the blockchain will grant only ‘trusted’ workers access to the network. After all, no organization wants confidential information flying around.

Less Security: Because private blockchains have a limited number of nodes, they are prone to security breaches. Assuming a rogue node gains access to the central network, accessing all other computers connected to the network becomes a walkover. This makes hacking and ransomware easy.

It is centralized: Private blockchains are centralized because they’re controlled by a sole administrator. No user can access it without permission from the owner of the network.  Therefore, they do not possess the many advantages that have made public permissionless blockchains (such as Bitcoin, Ethereum, and so on) popular.

Just like our example with BANK A above, private blockchains need a central Identity and Access Management (IAM) system that has all the monitoring and administrative rights to function optimally.

2. Public Blockchain

A public blockchain is a non-restrictive, permissionless distributed ledger system that can be accessed by any node connected to the network.

Unlike a private blockchain, every computer that is connected to the public blockchain is authorized to access present and past records, verify transactions, and mine new blocks.

At present, public blockchains are mainly used for the exchange of cryptocurrency and crypto-based assets.  Transaction validators are rewarded through a mechanism that is intrinsically linked to the consensus mechanism of a specific blockchain, for instance, ‘proof of work’ mining (and associated mining rewards) is the approach taken by the Bitcoin blockchain.  Due to the large number of participants on the network, public permissionless blockchains tend to be very secure since malicious attacks are less likely to be successful. 

Public blockchains accommodate an unlimited number of users. Notable examples are the Bitcoin and Ethereum blockchains.

Pros of public blockchains

Public blockchains operate an unrestricted open ledger. They can be accessed by all nodes connected to the network.

Here are some of the positives  of public blockchains:

  • Trusted: With public blockchains, users don’t need to know the identity behind a connected node. Rather, transactions are shared as an open ledger across the ‘unlimited’ computers connected to the network. Each node has the complete ledger of transactions at all times.
  • More security: Public blockchains can be accessed by many nodes around the globe. The decentralized nature of the public blockchains makes it difficult for hackers to manipulate the whole network.

Assume that 100,000 nodes are connected to a public blockchain, a hacker can successfully hack the network only if he manipulates the data on 51% (that’s 51,000) of the connected nodes. This is quite an expensive and daunting mission.

With every node participating in the verification process, each added block is legitimate, making public blockchains more secure than private ones.

  • Transparency: Public blockchains make a copy of the ledger and distribute it across all connected nodes. This makes the network transparent. 

All connected nodes get to see when the ledger is updated. Thus, no nodes can hide or show manipulated transactions.

Limitations of Public Blockchains

  • Less speed: Because an unlimited number of nodes are connected to a given network, the number of transactions per second is usually lower compared to private blockchains. This explains why the Ethereum blockchain processes around 15 TPS and the Bitcoin process a maximum of 7.
  • Less Scalable: Because the processing speed is slow, it is difficult to drastically increase the number of transactions on a network, thus the scalability problem. However, to overcome this problem, various solutions are being developed.  For instance, a number of alternative public permissionless blockchains are being developed which use ‘proof of stake’ consensus mechanisms.  Proof of stake system aims to reduce the computational burden required in a proof of work system, thereby increasing the speed of the network.  Examples include Cardano, Polkadot, and Algorand.  

These examples provide entirely new blockchain networks in the hope of transactions migrating to them from existing ones, or of capturing new use cases for blockchain technology.  However, there are other solutions being created for existing blockchains to enable them to scale better. These so-called “Layer 2” solutions create additional protocols that are built on top of existing blockchain platforms. Examples include Bitcoin’s Lightning Network and the Ethereum Layer 2 solution, Polygon (formerly known as Matic).

  • High Energy Consumption and Emission: Mining Bitcoin is energy-consuming. Due to increased competition amongst miners and the involvement of corporate mining, the process requires specialized computers and hardware components to solve complex mathematical algorithms.

This poses a threat economically to the viability of mining in the long run; and in any case, the computational burden of bitcoin really affects its scalability.  It may also potentially pose an environmental threat depending on the source of miners’ electricity supply at any point in time.  It is worth noting, however, that the economic incentive to source increasingly cheaper sources of electricity has led miners towards environmentally friendly sources such as geothermal, solar, etc. 

3. Hybrid Blockchain

Hybrid blockchains are flexible networks that combine the features of both private and public blockchains. It has a permissioned and permissionless system in the same network.

Here, users determine who can access the different categories of stored data. In the hybrid network, not all data goes to the public blockchain. Confidential data is restricted to the private network.

An advantage of this type of blockchain is transactions that need to be verified privately are done in the private network. However, the transaction can also be made available to the public space for verification.

This gives more security and transparency. Dragonchain is an example of a hybrid blockchain.

4. Consortium Blockchain

A consortium blockchain is managed by multiple organizations. It can be viewed as a partially decentralized network.

More than one organization can act as a core node.  For instance, a bank and an insurance company can run as a consortium on the same blockchain network. And both organizations can exchange information with each other. 

Quorum, R3, and Corda are examples of consortium blockchain.

In conclusion…

  • Although private and public blockchains are the two main types of blockchain, there are variations  such as consortium and hybrid blockchains.  A private blockchain is a restrictive or permissioned blockchain that operates in a closed network.  Whereas a public blockchain is a non-restrictive, permissionless system that can be accessed by any node connected to the network.

Both the private and public blockchains have distinctive features, however, the main differences relate to security, scalability, transparency, and energy consumption.

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