Understanding the different Blockchain types

In recent years the advent of Bitcoin has provided entirely new ways for executing financial transactions which are characterized by the absence of a trusted third party that guarantees the validity of the transaction. At the same time, Bitcoin has brought into the foreground a new disruptive technology, namely the blockchain. The disruptive power of blockchain technologies is reflected on the fact that they are nowadays considered for the implementation of a host of novel applications in sectors other than financial services such as energy, healthcare, manufacturing, e-government and supply chain management.

In principle, a blockchain functions like a secure distributed ledger i.e. a secure distributed database. People familiar with the operation of the Bitcoin technology tend to associate the blockchain with the main characteristics of the Bitcoin blockchain. Any Bitcoin holder can join the network and use cryptographic keys. Moreover, anyone is allowed to try to become a miner of Bitcoins i.e. to seek for a Bitcoin reward in exchange of validating BitCoin transactions. Likewise, anyone can read or even write new blocks in the chain.

The above-listed characteristics qualify the Bitcoin blockchain as public blockchain. A public blockchain network is completely open which means that anyone can join and participate in it. However, a public blockchain is not the sole type of blockchain infrastructure. There are also other types of blockchains like private and permissioned blockchains which are extensively used in blockchain deployments beyond Bitcoin transactions.

Motivation for Private and Permissioned Blockchains

The emergence of non-public blockchains has been motivated by the need to alleviate the limitations and drawbacks of public blockchains. These drawbacks include:

• Limited Performance: Public blockchains need a substantial amount of computational power in order to be maintained. In particular, the nodes of a public blockchain achieve consensus after solving complex cryptographic problems which are conveniently called “proof-of-work” problems. By solving such problems, the peers ensure that they are in synch. However, this incurs a significant performance penalty which is unacceptable for many decentralized applications.
• Security and Privacy Weaknesses: As a result of their openness, public blockchains offer quite limited security and privacy is almost non-existent. Both security and privacy are important for a whole range of different applications in various sectors.

Private Blockchain Characteristics

Contrary to public blockchains, in private blockchains, many functions are not open and users cannot freely read or write to the blockchain. Rather, users need permission to perform blockchain operations. Moreover, private blockchains have a radically different ownership and governance model than public ones. Specifically, private blockchains are owned by a single entity (e.g., an enterprise) which can override blockchain commands and alter the operations of a blockchain.  One may argue that this alters the decentralized nature of a blockchain as the governance model involves a ruling organization. This is true: Private blockchains correspond to a distributed ledger that is secured by proper cryptographic functions yet these functions are not fully decentralized from a governance point of view.

While private blockchain loses the openness and transparency benefits of public blockchains they are much faster and cheaper than their public counterparts. Indeed, private blockchains need not spend large amount of energy in order to reach consensus. Also, the blocks can be added faster which yields much better performance.

A prominent example of a private blockchain is the BankChain i.e. the blockchain for the banking community. BankChain is a community of banks for exploring, building and implementing blockchain solutions. It was formed in February 2017 and has already 33 members and 8 live projects. The private character of the BankChain is reflected in the fact that it’s not possible for everyone to run a full node and to execute transactions on the chain. Likewise, only members with special privileges can review and audit the BankChain.

Permissioned Blockchain Characteristics

A blockchain network is characterized as permissioned in cases where the participants of the network are able to restrict who can participate in the consensus mechanism. In a permissioned blockchain, certain actions are allowed to be performed by certain addresses (i.e. wallets) only. To this end, permissioned blockchains implement an access control layer that governs who has access to the network. Moreover, transaction validators are appointed by the owner of the blockchain and do not rely on anonymous nodes. In several contexts, permissioned blockchains are also called “consortium blockchains” as they are commonly operated by consortia or associations.

One of the main advantages of permissioned blockchains over public ones is their performance. Better performance is in general achieved by limiting the number of parameters that are managed by the blockchain. In particular, permissioned blockchains do not require every full node on the network to perform all of the computation for the network. Hence, computational requirements are segmented as they apply to certain applications only. In this way, permissioned blockchains provide decent performance that is adequate for some enterprise applications. Nevertheless, they are still significantly slower than state of the art databases.

Permissioned blockchains may or may not involve ‘proof of work’. In the latter case, the permissioned blockchain can be considered as a simple shared distributed ledger of transactions. Therefore, several in-house permissioned blockchains are not considered different from the distributed database. This is particularly the case when nodes do not compete to solve problems faster.

A prominent example of a permissioned blockchain is Ripple, which runs a blockchain for global payments. Ripple determines itself the validators of transactions in its network.

Overall, all the different types of blockchains share many common features. They are all decentralized peer-to-peer networks which allow each peer to maintain a copy of a shared, immutable and append-only ledger of digitally signed transactions. Moreover, the maintained copies are synchronized based on some consensus mechanism which makes them resistant to attacks by faulty or malicious participants. Nevertheless, the different blockchains are characterized by variation in performance, governance, operating cost and security characteristics. We hope that our primer might provide a good starting point for understanding the different blockchain types and their usage in various enterprise applications.