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Blockchain Explained: A Deeper Look Inside

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We’ve already explored what a blockchain is in a previous article, but now we’re going to go into a bit more detail, explaining the different types of blockchains and how they work to give you even more insight into this world.

How Does a Blockchain Work?

We already defined a blockchain in our last article, so let’s look a little closer at what blockchains do and what their aim is.

The goal of a blockchain is to allow digital information to be recorded and distributed but not edited. Because of this, blockchains form the foundation for immutable ledgers, or records of transactions that cannot be deleted, altered, or even destroyed. That is why they are known as “distributed ledger technology” (DLT).

To start with, a new transaction will be entered, which will then be transmitted to a network of peer-to-peer computers scattered across the world. All of these computers will then solve various equations to confirm that the transaction is valid.

Once confirmed to be legitimate, transactions are clustered together in blocks. These blocks are then all chained together, creating a long history of permanent transactions, and then it is complete.

Key Features of the Blockchain

Because blockchain relies on a decentralised network of users to validate instead of a single authority it provides it with some key characteristics that make blockchain transactions preferable:

Speed: Transactions go straight from sender to receiver, making it unnecessary for intermediaries and speeding up the process.

Economical: The lack of intermediaries also makes blockchain networks less expensive.

Consistent: Blockchain networks operate around the clock, 24 hours a day, seven days a week.

Secure: A blockchain’s distributed network of nodes provides collective protection against attacks and outages.

Security: Data is transparent and cannot be changed once it is time stamped into the ledger, making it impenetrable to fraud or other types of criminal tampering. Similarly, everyone with access to a public blockchain network can see the transactions that have been created, so everyone can see changes that are made, making it easier to spot someone trying to do something illicit.

Permissionless vs. Permissioned Blockchains

All blockchains can be categorised as permissionless, permissioned or both.

Permissionless blockchains allow any user to pseudo-anonymously join the blockchain network (that is, to become “nodes” of the network) and do not restrict the rights of the nodes on the blockchain network.

Permissioned blockchains restrict network access to certain nodes and can also restrict the rights of those nodes on that network. The identities of the users of a permissioned blockchain are known to other users of the blockchain.

The Four Types of Blockchain

Public Blockchain

Public blockchains are permissionless in nature; anyone is allowed to join and they are completely decentralised. Public blockchains allow all nodes of the blockchain to have equal rights to access it, create new blocks of data, and validate blocks of data.

Public blockchains are primarily used for exchanging and mining cryptocurrencies. This includes popular blockchains such as Bitcoin, Ethereum, and Litecoin. On these public blockchains, the nodes “mine” for cryptocurrency by solving cryptographic equations to create blocks for the transactions requested on the network. In return for this hard work, the miner nodes earn a small amount of cryptocurrency.

Private Blockchains

Private or “managed” blockchains, are permissioned blockchains controlled by a single organization, where a central authority determines who can be a node. That authority may also not grant each node the same rights to perform functions. Private blockchains are not fully decentralised because public access to them is restricted. Famous examples of private blockchains are the B2B virtual currency exchange network Ripple.

There are drawbacks to both public and private blockchains. Public blockchains tend to have longer validation times for new data, and private blockchains are more vulnerable to fraud and bad actors. To try and address issues like these, two other types of blockchain were developed.

Consortium Blockchains

Consortium blockchains are permissioned like private blockchains, but they are governed by a group of organisations as opposed to the one entity of a private blockchain. This gives them more decentralisation than private blockchains, which means a higher level of security.

The drawback to this is that setting one up can be a difficult process as it requires cooperation between several organisations, presenting logistical challenges as well as potential antitrust risk. It has been done successfully, though, with CargoSmart having developed the Global Shipping Business Network Consortium, a not-for-profit blockchain consortium which aims to digitalize the shipping industry and allow maritime industry operators to work more collaboratively.

Hybrid Blockchains

Hybrid blockchains are blockchains that are controlled by a single organization but with a level of oversight from the public blockchain, which is needed to perform certain transaction validations. Like the Global Shipping Business Network Consortium, the hybrid blockchain model has found success in the supply chain industry with IBM Foo Trust, a hybrid blockchain developed to improve efficiency throughout the whole food supply chain.

Blockchain continues to develop and evolve as the world of DeFi becomes stronger and stronger. We don’t know what the future holds, but blockchain looks like it will be a large part of the overhaul of the finance industry.

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