The technicality and jargon associated with cryptocurrency never stops mystifying users and enthusiasts. Blockchain technology, which is the bedrock of cryptocurrency, is one such concept behind the thriving world of cryptocurrencies. Here, we decode this technology and its various types.
First, what is blockchain technology and how does it work? A blockchain is a distributed database that is shared among the nodes of a computer network. It stores information in digital format in what is called a digital ledger. A blockchain collects information clustered in groups, called blocks that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as blockchain.
Now, a look at the types of blockchains:
- Public blockchains
They represent the foundation of most of the cryptocurrencies. Public blockchains are also called permissionless, as anyone can freely join the network without prior permission. They are called public blockchain for the following reasons:
- All the network participants can see the shared ledger and take part in the consensus process, by validating transactions.
- A public blockchain offers an entirely open protocol, where anyone can contribute, giving everyone access to the ongoing activities on the blockchain, making the network self-governed.
- These blockchains are built on a proof-of-work (PoW) consensus mechanism, which is supported exclusively by decentralized network participants throughout the world, making the network immutable.
These networks operate by incentivizing network users, to validate on-chain transactions using their computational power in return for mining rewards. Bitcoin and Ethereum are two of the most popular public blockchain networks.
- The downsides are energy inefficiency and traceability of transactions through wallet ids owing to the publicly available digital ledger.
Application: Mainly used for peer-to-peer transactions and cryptocurrencies.
2. Private blockchains
Transactions operated in this blockchain are also validated by the network operators implemented by them and use consensus algorithms to validate transactions such as the public blockchain.
They differ from the public blockchain fundamentally in that there is the presence of a central entity, which carries out the following functions :
- It controls the participation of users in the network.
- It can also assign roles to participants, like giving them mining rights and allowing them to transact on the network.
This network offers high security: participants require an invite by the central entity besides the high scalability with regulated usage. However, there is a lack of censorship resistance in this blockchain as the central authority here can edit, delete and even nullify existing transactions on the chain.
- Private blockchains are most useful for big organizations that want an isolated data environment, where the transaction ledger can be restricted from the general public.
- These are generally used by supply-chain management and record-keeping for companies with limited transaction requirements.