After the unprecedented rise and fall of Bitcoin in the last few years, the idea took birth that Bitcoin blockchain can be, in fact, used for various types of value transactions or any type of agreement like P2P insurance, P2P ride-sharing, P2P energy trading, etc. For that, the Ethereum project developed their blockchain and kept its properties quite different than Bitcoin. They decoupled the smart contract layer from the core blockchain protocol. This offered a radical new method to form online markets and programmable transactions called Smart Contracts.
Private entities like banks thought that they could utilize the core idea of blockchain as a DLT (Distributed Ledger Technology), and form a permission (private or federated) blockchain. In a permissioned blockchain, the validator would be a member of a consortium of the same organization. The term blockchain when used within the context of permissioned, private ledgers can be referred to as highly controversial. Thus, the term DLT (distributed ledger technology) became a more general title.
As a matter of fact, public blockchains hold more potential than private blockchains to reform the cumbersome functions of traditional financial entities with software, essentially reforming the way the financial system works.
Based on Proof of Work (PoW), state of the art public blockchain protocols are open source and not permissioned. It means that anyone can participate without requiring any permission to join it. They are also one of the most used types of the blockchain.
1- Anyone can download the source code and run a public node on their local device, thus verifying transactions in the network as well as participating in the consensus process- the method used for determining what blocks got added to the chain and what the current state is.
2- Anyone in the world can send transactions through the network as well as expect those to be included in the blockchain upon being valid.
3- Anyone who wants to read transactions can use the public book explorer. Transactions will be transparent, anonymous though.
Examples: Bitcoin, Monero, Dash, Litecoin, Dogecoin, etc.
Impacts: Power to bring disruption in existing business models through disintermediation. Requires no infrastructure costs: eliminates the need to maintain systems or servers admins, thus, radically reducing the costs involved in developing and running DApps (decentralized applications).
Consortium or federated blockchain are mainly operated under the leadership of a group. Contrary to public Blockchains, they don’t permit anyone to join the process of verifying transactions. Consortium blockchains are quicker and offer increased transaction privacy.
These blockchains are mostly used to disrupt the banking industry. A pre-selected set of nodes controls the consensus process; for instance, there’s a consortium of 15 financial institutions, each of which runs a node and of which 10 must sign every block of information in order for the block to be verified. The permission to read the blockchain can be public, or limited to participants.
Examples: EWF (Energy), R3 (Banks), B3i (Insurance), Corda
Impacts: Lowers transaction costs and data anomalies, and replaces the traditional systems, streamlining document management and eliminating the need for semi-manual compliance mechanisms. In this sense, it can be considered equivalent to SAP in the 1990’s; lowers costs, but doesn’t cause disruption.
In a private blockchain, one central organization allows Write permissions. Example applications include auditing, database management, etc., which are internal to a single company, therefore, public readability may not be necessary in many cases.
Private blockchains are one of the important types of blockchains that take advantage of blockchain technology by setting up groups and participants who can validate transactions internally.
This increases the risk of security concerns alike a centralized system, as opposed to public blockchains; they’re secured by game-theoretic incentive methods. However, private blockchains are preferred when it comes to scalability and state compliance of data privacy regulations and other regulatory matters.
Effects: Alike Consortium blockchain, a private blockchain can help reduce transaction costs and data anomalies and replace the traditional systems, streamlining document management and eliminating the need for semi-manual compliance mechanisms. In that sense, it can be considered equivalent to SAP in the 1990’s; lowers costs, but doesn’t cause disruption.
Note: this blog was only a brief overview of DLT and types of blockchains.