As blockchain technology becomes increasingly popular, it’s finding more and more applications. More and more enterprises are finding the technology attractive, and blockchain startups are also gaining traction. But at the same time, there are concerns that blockchain technologies are failing to deliver. According to Gartner, blockchain is in the trough of disillusionment in the Gartner hype cycle. This is when the initial hype starts to wane for a technology. Experts predict that Blockchain may get out of this trough by the end of 2021, as new technologies and experiments start showing results. And while blockchain technology started out as a public proof-of-work blockchain (Bitcoin), new types of blockchain have evolved to meet specific needs.
Based on who can become a node in a blockchain network, we have public blockchain, private blockchain, hybrid blockchain, and consortium blockchain. Based on how transactions are validated, there is proof-of-work and proof-of-stake blockchain. Let’s explore what these are and how they work.
What is a public blockchain?
Public blockchains are the first and the most common type of blockchain. Anyone with an internet connection can join this network, make transactions or validate them. The security of a public blockchain is in the number of its users and transactions. As more and more users join the network, the ledger is distributed among more nodes, and a potential hacker will have to make changes in all of these networks. As we discussed above, this is the most common type of blockchain and is mostly used for cryptocurrencies and payments.
The problem here is that a public blockchain is difficult to scale up. As the number of users increases, the number of transactions per second(TPS) goes down. For example, bitcoin can handle only 7 transactions per second, while Ethereum can handle only up to 15 transactions per second.
What is a proof-of-work blockchain?
Proof-of-work is a consensus mechanism in a public blockchain to validate transactions and add a new block. Here the miners validate a transaction by using their computational resources to solve a mathematical puzzle to add a block to the chain. The first one to solve the puzzle will get cryptocurrency as a reward.
In the case of proof-of-work public blockchains, there’s a risk of a 51% attack. Here an entity that has more than 51% of computational power in a network can manipulate the network and conduct fraudulent transactions. Mining also takes a lot of computational power and energy. And at this point, the return on investment for miners is very low. The environmental cost from the pollution due to mining is also too high.
Proof-of-stake was proposed as an alternate to proof-of-work
What is a proof-of-stake blockchain?
In a proof-of-stake blockchain, only people with cryptocurrency from the same blockchain can act as validators. Ethereum was a proof-of-work blockchain but is now shifting to proof-of-stake.
The idea here is that, for example, for validating a transaction on Ethereum, you have to own some Ethereum. And theoretically, if you own 5% of the total Ehtereum coins available, you can only validate up to 5% of the blocks. The proof of stake chooses validators at random. The exact implementation of proof-of-stake varies by different blockchain, but this is a general concept.
The advantage of proof-of-stake is that the computational power doesn’t come into play here, reducing the cost to take part. This approach reduces the possibility of a 51% attack since for someone owning 51% of all cryptocurrency in the blockchain, attacking the blockchain doesn’t serve any purpose.
What is a Private blockchain?
Here the organization using the blockchain controls access to it. The organization decides who all will be the nodes, and who can make or validate transactions. And as such, only selected members can take part in the consensus process.
Here, the trust is in the members of the blockchain, and less in the number of nodes within the blockchain. There has to be trust between every member of the blockchain for this to work. In the case of a public blockchain, the sheer number of nodes ensure that unless a large number of nodes collude, the blockchain is safe.
Organizations use private blockchains when privacy is of the utmost importance. And unlike a public blockchain, a private blockchain is easy to scale. Since the access to the blockchain is controlled by the organization, they can decide who can make a transaction request and who can validate them. So even when the blockchain grows, it will not lose its speed and the number of transactions per second remains consistent.
The organization can also set rules for the blockchain which the nodes have to follow. And since there’s a single organization that has control over the blockchain, it is not exactly decentralized like a public blockchain. The immutability of the ledger is not guaranteed in a private blockchain, as the organization can delete a block if they want(this is much debated).
Hyperledger fabric developed by the Linux Foundation is an example of a private blockchain.
Hybrid blockchains, as the name suggests, is a combination of both private and public blockchains. A hybrid blockchain brings the scalability and speed of a private blockchain and the privacy and security of a public blockchain. The implementations of hybrid blockchains vary, but generally, in a hybrid blockchain, a part of the chain acts as a private blockchain. This private blockchain has its own centralized authority that decides who can take join the network or validate the transactions. Anyone in the public can access the public blockchain. If needed, the controlling organization can make parts of the private chain public for verification.
A hybrid blockchain is useful for storing information for which some aspects have to be private and others have to be public. For example, let’s say you want to store COVID vaccination data. You have the right to privacy, but you also want to share this data with some entities, say for example, for travel purposes.
Since only verified users are there, the hybrid blockchain is usually safe from a 51% attack. And the transaction cost is low since the number of participants is low.
A consortium blockchain is similar to a private blockchain. The difference is that instead of a single organization, multiple organizations control it. The consortium blockchain improves the decentralized nature of a private blockchain. As you can imagine, a single organization controlling the entire network goes against the decentralized nature of the blockchain. But by dividing the authority over multiple entities, the consortium decentralizes the power over the blockchain. The different organizations will keep a check over each other.