Following on the heels of Bitcoin's rise as first-generation blockchain technology, enterprises are beginning to move their blockchain projects into production. Gartner's 2019 CIO Survey found that 60% of CIOs expect to deploy blockchain by 2022, but only 5% saw it as a game changer. But that's changing as Bitcoin and other cryptocurrencies mature, investors demand supply chain accountability and middleware is developed.
According to Gartner, enterprise production use cases are expected to grow by double-digit percentages in 2021. However, different use cases require different types of blockchain.
There are four main types of blockchain networks: public blockchains, private blockchains, consortium blockchains and hybrid blockchains. Each one of these platforms has its benefits, drawbacks and ideal uses.
"While the blockchain technology behind projects is the same, the target end users of the different types of blockchain may differ," said Espae Hong, head of CBDC Blockchain Research Institute. Public blockchains target the general public as end users, but private blockchains are geared toward invitation-only users and their networks, she added.
1. Public blockchain
How it works. The first type of blockchain technology is public blockchain. This is where cryptocurrency like Bitcoin originated and helped to popularize distributed ledger technology (DLT). It removes the problems that come with centralization, including less security and transparency. DLT doesn't store information in any one place, instead distributing it across a peer-to-peer network. Its decentralized nature requires some method for verifying the authenticity of data. That method is a consensus algorithm whereby participants in the blockchain reach agreement on the current state of the ledger. Proof of work (PoW) and proof of stake (PoS) are two common consensus methods.
Public blockchain is non-restrictive and permissionless, and anyone with internet access can sign on to a blockchain platform to become an authorized node. This user can access current and past records and conduct mining activities, the complex computations used to verify transactions and add them to the ledger. No valid record or transaction can be changed on the network, and anyone can verify the transactions, find bugs or propose changes because the source code is usually open source.
Advantages. One of the advantages of public blockchains is that they are completely independent of organizations, so if the organization that started it ceases to exist the public blockchain will still be able to run, as long as there are computers still connected to it. "Some blockchains incentivize users to commit computer power to securing the network by providing a reward," noted James Godefroy, a senior manager at Rouse, an intellectual property services provider.
Another advantage of public blockchains is the network's transparency. As long as the users follow security protocols and methods fastidiously, public blockchains are mostly secure.
Disadvantages. The network can be slow, and companies can't restrict access or use. If hackers gain 51% or more of the computing power of a public blockchain network, they can unilaterally alter it, Godefroy said.
Public blockchains also don't scale well. The network slows down as more nodes join the network.
Use cases. The most common use case for public blockchains is mining and exchanging cryptocurrencies like Bitcoin. However, it can also be used for creating a fixed record with an auditable chain of custody, such as electronic notarization of affidavits and public records of property ownership.
This type of blockchain is ideal for organizations that are built on transparency and trust, such as social support groups or non-governmental organizations. Because of the public nature of the network, private businesses will likely want to steer clear.
2. Private blockchain
How it works. A blockchain network that works in a restrictive environment like a closed network, or that is under the control of a single entity, is a private blockchain. While it operates like a public blockchain network in the sense that it uses peer-to-peer connections and decentralization, this type of blockchain is on a much smaller scale. Instead of just anyone being able to join and provide computing power, private blockchains typically are operated on a small network inside a company or organization. They're also known as permissioned blockchains or enterprise blockchains.
Advantages. The controlling organization sets permission levels, security, authorizations and accessibility. For example, an organization setting up a private blockchain network can determine which nodes can view, add or change data. It can also prevent third parties from accessing certain information.
"You can think of private blockchains as being the intranet, while the public blockchains are more like the internet," Godefroy said.
Because they're limited in size, private blockchains can be very fast and can process transactions much more quickly than public blockchains.
Disadvantages. The disadvantages of private blockchains include the controversial claim that they aren't true blockchains, since the core philosophy of blockchain is decentralization. It's also more difficult to fully achieve trust in the information, since centralized nodes determine what is valid. The small number of nodes can also mean less security. If a few nodes go rogue, the consensus method can be compromised.
Additionally, the source code from private blockchains is often proprietary and closed. Users can't independently audit or confirm it, which can lead to less security. There is no anonymity on a private blockchain, either.
Use cases. The speed of private blockchains makes them ideal for cases where the blockchain needs to be cryptographically secure but the controlling entity doesn't want the information to be accessed by the public.
"For example, companies may choose to take advantage of blockchain technology while not giving up their competitive advantage to third parties. They can use private blockchains for trade secret management, for auditing," Godefroy said.
Other use cases for private blockchain include supply chain management, asset ownership and internal voting.
3. Hybrid blockchain
How it works. Sometimes, organizations will want the best of both worlds, and they'll use hybrid blockchain, a type of blockchain technology that combines elements of both private and public blockchain. It lets organizations set up a private, permission-based system alongside a public permissionless system, allowing them to control who can access specific data stored in the blockchain, and what data will be opened up publicly.
Typically, transactions and records in a hybrid blockchain are not made public but can be verified when needed, such as by allowing access through a smart contract. Confidential information is kept inside the network but is still verifiable. Even though a private entity may own the hybrid blockchain, it cannot alter transactions.
When a user joins a hybrid blockchain, they have full access to the network. The user's identity is protected from other users, unless they engage in a transaction. Then, their identity is revealed to the other party.
Advantages. One of the big advantages of hybrid blockchain is that, because it works within a closed ecosystem, outside hackers can't mount a 51% attack on the network. It also protects privacy but allows for communication with third parties. Transactions are cheap and fast, and it offers better scalability than a public blockchain network.
Disadvantages. This type of blockchain isn't completely transparent because information can be shielded. Upgrading can also be a challenge, and there is no incentive for users to participate or contribute to the network.
Use cases. Hybrid blockchain has several strong use cases, including real estate. Companies can use a hybrid blockchain to run systems privately but show certain information, such as listings, to the public. Retail can also streamline its processes with hybrid blockchain, and highly regulated markets like financial services can also see benefits from using it.
Medical records can be stored in a hybrid blockchain, according to Godefroy. The record can't be viewed by random third parties, but users can access their information through a smart contract. Governments could also use it to store citizen data privately but share the information securely between institutions.
4. Consortium blockchain
How it works. The fourth type of blockchain, consortium blockchain, also known as a federated blockchain, is similar to a hybrid blockchain in that it has private and public blockchain features. But it's different in that multiple organizational members collaborate on a decentralized network. Essentially, a consortium blockchain is a private blockchain with limited access to a particular group, eliminating the risks that come with just one entity controlling the network on a private blockchain.
In a consortium blockchain, the consensus procedures are controlled by preset nodes. It has a validator node that initiates, receives and validates transactions. Member nodes can receive or initiate transactions.
Advantages. A consortium blockchain tends to be more secure, scalable and efficient than a public blockchain network. Like private and hybrid blockchain, it also offers access controls.
Disadvantages. Consortium blockchain is less transparent than public blockchain. It can still be compromised if a member node is breached, the blockchain's own regulations can impair the network's functionality.
Use cases. Banking and payments are two uses for this type of blockchain. Different banks can band together and form a consortium, deciding which nodes will validate the transactions. Research organizations can create a similar model, as can organizations that want to track food. It's ideal for supply chains, particularly food and medicine applications.
While these are the four main types of blockchain, there are also consensus algorithms to consider. In addition to PoW and PoS, anyone planning to set up a network will also want to consider the other types, available on different platforms like Wave and Burstcoin. For example, leased proof of stake allows users to earn money from mining, without the node needing to mine itself. Proof of importance uses both balance and transactions to assign significance to each user.
Ultimately, blockchain technology is becoming more popular and rapidly gaining enterprise support. Every one of these types of blockchain has potential application that can improve trust and transparency and create a better record of transactions.