Blockchains are extraordinarily useful. Over the last decade, countless industries have begun experimenting with them to potentially replace legacy systems, and add new capabilities to their organizations. Some of the most lucrative and forward-thinking companies like Walmart, Amazon, IBM, and Microsoft have all realized that blockchain technology is the next revolution in the world.
Blockchains like Bitcoin (BTC) were designed to be public, decentralized, and accessible to anyone for any purpose they choose. The power of this concept is extensive as individuals can now transfer funds to anyone globally, without any intermediaries.
However, these blockchains also have some drawbacks due to their design. With BTC you oftentimes have expensive and lengthy transactions. Furthermore, all participating users, their associated wallets, and transactions are visible for anyone to see.
Of course, it is not in the best interest of every organization to have all of its operations completely transparent, and accessible to the world. Therefore a compromise was needed. How could these organizations take advantage of the potential of blockchain while also ensuring that it can meet their specific needs? Innovation brought to life other types of blockchains such as private, federated, and hybrids.
With public blockchains being the quintessential type that the crypto space is known for, the next most common type is the private blockchain. There are several significant differences between the way these two are structured, and in many ways, private blockchains are the antithesis of what cryptocurrencies like Bitcoin set out to be.
That being said, private blockchains exist to perform functions that a public blockchain would not be adequate for. They are centralized, directly managed by a core group, and they are not open to the average person. This means that a central authority determines who is allowed to operate a node, and rights are given individually. Not all nodes can perform the same functions on the network.
Ripple (XRP) is perhaps the most recognizable example of a private blockchain. Ripple primarily works to facilitate transactions between banks, and other financial institutions by converting different currencies into XRP for quick, and efficient transactions. With this use in mind, you can see how crucial it is to employ a private blockchain, and ensure that sensitive data is not intercepted.
The pros and cons of private blockchains
This structure brings both positives, and negatives when compared to the public version. Private blockchains tend to validate transactions much faster than public ones, because there is not a wide consensus network. For an organization that must process thousands of transactions per day, and needs them completed as fast as possible, this sort of structure may be essential. In addition to this increased efficiency, these networks are also far more scalable due to the number of nodes involved. Lower fees are standard as well.
With these benefits, some disadvantages must be taken into account. There are not as many users dedicated to the upkeep of the network, and therefore, public blockchains are also more susceptible to fraud and attacks. For these reasons, other structures were developed such as federated, and hybrid blockchains.
Notable details of private blockchains:
- Centralized, managed by a core group
- Permissions based (no unknown parties involved)
- More efficient transactions
- Easier to scale
- Lower transaction fees
- Potentially more vulnerable to fraud and attacks
Federated (consortium) blockchains
Federated or consortium blockchains have many similarities to their private counterparts. While they are not open to just anyone, there are more participants involved than traditional private blockchains. Multiple different entities all interact with the network, and together they create a more decentralized system. Notably, these networks also do not have a native token. Since there is no economic incentive, generally only corporations, and businesses utilize federated blockchains.
Proof of vote (PoV)
Bitcoin is known for its proof of work (PoW) consensus, and in recent years, we have seen the rise of proof of stake (PoS) protocols as well. However, these consensus mechanisms are unfit for the necessities of federated blockchains. Instead, they often use a proof of vote (PoV) system.
All participants on this network have equal permissions, and often work together to complete tasks. When new blocks are being created, all governing parties must vote to validate them. If even one of the validators submits a vote of denial, the block can’t be created. Each PoV structure comes with predetermined rules, such as how many votes are needed out of the total number of active nodes. This system ensures a measure of trust, and organization on the network.
But how are federated/consortium blockchains safer than public and private?
Federated blockchains expand on the capabilities of public, and private versions, and therefore they have many of the same features while also being generally safer. First, there is no single point of attack like a private blockchain, but also less of a theoretical chance for 51% attacks as in public networks. Being governed by several pre-vetted entities, federated networks split the risk among the connected nodes.
Similarly, the risk of fraudulent, or criminal behavior is also mitigated because all nodes on the network are known to the group. Since they don’t use a PoW protocol, federated blockchains are also less dependent on excessive electricity usage, and less likely to be heavily regulated as well. For corporations, and multinational systems that have millions of dollars at stake, these benefits are greatly appreciated.
Use cases and examples
Source: 101 Blockchains
On that note, some recognizable examples of federated/consortium blockchains include Corda, Quorum, Voltron, Batavia, Marco Polo, and many others. Some of the most essential use cases include banking, supply chain management, know your customer (KYC) processing, insurance, healthcare, and information registries.
Notable details of federated/consortium blockchains:
- Proof of vote protocol
- Resistant to fraud/attacks by design
- Does not use excessive energy like proof of work protocols
- All nodes on the network are known and approved
- Useful for groups of corporations, multinational companies
- No native token involved
As the name implies, hybrid blockchains are designed with a combination of the features found in public and private blockchains. The concept is to take both systems’ strengths while simultaneously removing the disadvantages. Data is often private but can be made public for transparency purposes. For example, sales data can be sent to shareholders of a company, or features can be demonstrated to customers.
Hybrid blockchains are often controlled by one individual organization, however they can also allow outside users to join the network if desired. In most scenarios, users have full access to the hybrid network but are not able to change, or add to it without the permission of the blockchain’s governing figure.
Like federated systems, hybrids do not use a native token. There is also no way to 51% attack them because they will be operated by a sole organization. Overall, hybrid blockchains aim to merge the speed of private blockchains with the security of public structures in a system that is customizable to the organization’s specific needs.
Use cases and examples
One example of a hybrid blockchain that is currently live is the IBM Food Trust. This organization revolves around food supply management, and the network is used to track goods and products from their individual origins, through processing, and all the way to their final destination. This has been said to aid in minimizing waste, increase safety and transparency, and helping companies understand where there may be inefficiencies in their systems. Further use cases include global finance, banking, and other services.
Notable details of hybrid blockchains:
- Combines elements of public and private blockchains
- Managed by one entity
- No native token
- Can provide permissionless access while remaining secure
- Fast and efficient transactions
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.