The blockchain technology implies tremendous opportunities for a variety of industries, not only financial ones. To better understand how networks with different levels of access function, ROKKEX have prepared a classification representing the main types of blockchains.
Why There Are Two Types of Blockchain
In 2014, database based on blockchains began to gain popularity in the financial sector. Banks are engaged in the development of concepts and prototypes based on this technology. For example, the NASDAQ Stock Exchange planned to use the Open Assets Protocol to provide a full cycle of control over customers’ securities.
The largest French bank, BNP Paribas introduced BTC into the monetary system. Australian banks, Commonwealth Bank of Australia (CBA), Westpac Banking Corporation and Australia and New Zealand Banking Group are also experimenting with payments based on the Ripple protocol.
In addition to working on the introduction of publicly available protocols, organizations are exploring the possibility of building their own private blockchains. Citigroup has built three blockchains and an internal currency based on them to minimize risks when interacting with other banks. It turns out that both public and private blockchains find application in the financial sector. Today we will see what the difference between public and private blockchains and what advantages and disadvantages they possess is.
Classification of Blockchains
Classification of blockchain types will help to understand the principle of operation and availability of the Blockchain technology.
Blockchain is a technology that ensures the security of information from unauthorized changes to prevent fraud.
The distributed blockchain database, where data is stored, does not allow unwanted viewing or substitution of information. Cryptographically encrypted and secure blocks are stored on a PC with pre-installed specialized software.
First, it is necessary to decide based on what criteria blockchain will be classified. Usually, technology changes affect only one factor — the availability of a distributed base for network participants. According to this criterion, blockchain is classified into public and private.
- Both blockchain types are decentralized P2P networks, where each member participant saves a copy of the shared register, adding only digital signature transactions.
- Both support copies synchronically via a protocol called consensus.
- Both provide certain guarantees that the register is immutable, even if some participants make random or intentional mistakes.
So what is the difference?
Public and Private Blockchain Types: The Classification According to the Degree of Availability of Information
- Public — open to a wide range of individuals;
- Private — open to a limited number of individuals.
When it comes to public systems, most often it is the open blockchain database that is meant. In it, any participant is able to record information in the blockchain chain, and another read them. The most famous open blockchain networks are BTC, LTC, ETH. They are also called blockchain platforms that do not require permissions, which means that their task is to improve security and anonymity for conducting transactions.
Advantages of Public Blockchain
- Openness to add and read information — all participants are equally capable of viewing and conducting operations;
- Decentralization — all nodes participate in the confirmation of operations without the involvement of third parties;
- Immutability — data that cannot be changed is stored in the blockchain;
- Security — by mining, information is encrypted and attached to the blockchain. The system is protected from attacks and less likely to be hacked.
Disadvantages of Public Blockchain
The main disadvantage of this type of blockchain is slow transactions compared to the private one. Also, the number of transactions in each block is limited, and a huge computational power is spent on their execution.
Excessive openness of a public blockchain may be a disadvantage for some companies, as there is no privacy due to the available transaction history.
Closed or Private Blockchain
A blockchain of a closed type is also called “requiring permission” or corporate. Blockchain technology in business is able to provide organizations with the necessary level of data confidentiality, security, performance, as well as other essential parameters for setting up various business projects. A closed blockchain may have an open-source, and be a consortium or a private software.
Advantages of Private Blockchain
- Requiring permission from the organization — it is the organization that controls access to the network and its resources;
- Fast transactions — the number of locally distributed nodes that add blocks to the chain is smaller, which increases performance for operations;
- Improved scalability — a weighty plus is the ability to add nodes and necessary services;
- Monitoring the infrastructure of the organization will allow you to comply with the requirements for carrying out certain business processes;
- A private or corporate blockchain has a smaller number of nodes, and also uses a more efficient algorithm.
Disadvantages of Private Blockchain
- A private blockchain does not have a high level of trust due to proprietary information that is difficult to access. Thus, fraudulent transactions may go unnoticed, and some data may be changed.
- Also, in such a blockchain, there may be a security problem, as the number of participants increases the risk of attacks on the registry.
- Centralized control is a huge disadvantage from one side since the rules are established by one person or a group of persons.
Public and Private Blockchain Comparison
As we see, both types of blockchain have their advantages and disadvantages. Thus, the person or a company should opt for the one that suits their needs most. Let’s determine the distinctive features and spheres of application of each of them.
The public network is suitable for those situations where anonymity is the most critical component for users, which can also affect the value of decisions. When it comes to cryptocurrency, the user does not want permissions or role-based access. Everyone should equally have the right to own a cryptocurrency and trade it with other users. As a result, users have access to a fully open, transparent, and permissionless network.
For corporations, anonymity is undesirable. An organization needs
- To know who are members of the corporate network;
- To provide process data only to certain groups of participants;
- To control who sees this or that information, and who is allowed to make changes to the database.
The use of a closed type blockchain is an excellent solution for companies and suppliers, where only they see information on prices for certain goods. So you adjust the display of data for specific suppliers, but not for all at once. Each of them will be able to view information only on their transaction.
A closed network is not available for public use; you can only become a node by receiving its address and an invitation or permission. Most often, it is based on medical, legal, or financial structures (small banks, accounting, etc.). The network allows you to store such closed information:
- state registries;
- patient case histories;
- payment documents, financial statements;
- supply chain;
- logistics information;
- digital signatures.
Considering the differences between private and public blockchain, it is worth noting that the B2B model works well for the former, and B2C for the latter. Public and private networks do not compete with each other and in many situations, use similar components. The difference lies only in the principle of management and control of personal data.
Types of Blockchains
Such a network does not have a supervisory or governing body confirming and conducting operations. These are well-known cryptocurrency platforms. Transactions in such networks are not confirmed by any particular person, but by random ones. The meaning of such data processing is the absence of advantages for any participant to conduct operations.
The use of open-type blockchain technology can serve to create a truly democratic system. Everyone will be able to create smart contracts, transfer assets, or add new information to the chain. An open system protects sensitive data and provides participants with the desired anonymity.
Public Permissioned Blockchain — Open Network with Different Level of Permissions
This type is also called Hybrid Blockchain as it combines the features of both private and public types. This kind of blockchain assumes confirmation of transactions by certain persons, which may be an employee, organization, state, etc. Participants have the opportunity to read data, but some information may be hidden.
Private Permissioned Blockchain — Close Network with Different Level of Permissions
This type assumes partial data availability. This allows you to create transactions, information about which not all users can see, but only participants in the transaction. In this case, the data on the operation is permanently recorded in the blockchain. When project participants interact with each other, they do not need to use a separate registry — each transaction is considered instantly.
Again, Why There Are Different Types of Blockchain
Today, public and private blockchains have enough problems, and while another one covers issues of one type, there is still the place for improvement. The public blockchains gradually solve the issue of confidentiality, and, probably, in time, the need for private blockchains will disappear. Another problem affecting both public and private blockchains is compatibility between platforms, that is, the ability to share values for users of different networks.
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