A blockchain refers to a list of records known as blocks, where each block is secured and linked to the next by cryptographic algorithms. Each block in the chain contains transaction data, a timestamp and a link to the previous block (called a hash).
Transactions are validated by full nodes and the order of the transactions is achieved through a decentralized proof of work. At its core, a blockchain is a decentralized digital database that keeps an unalterable record of transactions.
The Bitcoin protocol was the first successful application of blockchain's distributed public ledger for peer-topeer transactions. In recent years, enterprises have begun to apply blockchain technology in use cases other than p2p financial transactions.
However, a thorough understanding of the different types of blockchain is needed to facilitate such use cases. Let's take a look at the two categories of blockchain protocols, their similarities, differences and their various applications.
Public blockchains are permissionless and open source - meaning that anyone can join the network and participate/benefit from the technology. Since no one controls the network, anyone can input data into the network. Its decentralized nature ensures that all data that has been validated on the blockchain remains immutable.
Each data operation is recorded and confirmed anonymously, forming a record of events that is shared between several parties.
Bitcoin and Ethereum are prominent examples of public blockchain networks. Ethereum also functions as an open software platform enabling developers to build and deploy decentralized applications.
A private blockchain is a permissioned network where access is restricted to invited persons or entities who conform to a set of rules specified by the network starter. Unlike decentralized public chains, a private blockchain acts like a centralized database system that limits access to certain users. The network is controlled by one or more entities and all transactions must be validated by these entities before they are added to the chain
Federated or consortium blockchains are a subset of private blockchains. For these networks, the leaders predefine the consensus mechanism used in authorizing transactions. For instance, a group of financial institutions may create and maintain a consortium blockchain to facilitate transactions between participants. If there are 10 participating banks in the network, the consensus mechanism could be that 7 of the 10 banks must authenticate a transaction for it to be considered valid by the network.
Public and private blockchains are both decentralized peer-to-peer networks where all participants maintain replicas of digitally signed transactions on a shared ledger. These replicas are maintained in sync through protocols known as "consensus." In both blockchains, the immutability of the ledger is guaranteed, although false information can be entered into the network by malicious or mistaken participants.
Public and private blockchain differ in the category of persons allowed to join the network, maintain the shared ledger and execute the consensus protocol.
Unlike private blockchains, public blockchains are completely open networks where anyone can join and participate. To encourage more participants to join the network, public blockchains usually employ an incentivizing mechanism. Public blockchains are maintained by participants who have sufficient computing power to do so while allowing for full transparency of the information contained within
Due to the large-scale nature of the network, public blockchains require a substantial amount of computational power to maintain its distributed ledger. Achieving consensus requires each node in the network to solve a complex and resource-intensive cryptographic problem. This problem, referred to as a proof of work, ensures that each node is in sync
Admittance into a private network is governed by a set of rules set out by the network starter. Enterprises that set up private blockchain networks usually set up permissioned networks. This restricts the entities allowed to join the network. In most cases, these entities are given access only for certain transactions. A prominent example of a permissioned blockchain is The Linux Foundation Hyperledger Fabric.
Access control mechanisms for private blockchains vary. Existing participants may decide how future entrants gain access to the network or licenses for participation may be issued by regulatory authorities. Once an entity is allowed into the network, it must play a decentralized role in maintaining the network.
Permissioned blockchains offer enterprises the ability to facilitate security-rich data exchanges for most industry use cases especially in health care and the financial industry. Private blockchains rely on their participants to authenticate transactions and maintain the integrity of the blockchain protocol.
As such, private blockchains are more efficient in terms of compliance with regulatory requirements and scalability. However, they are more open to manipulation due to centralized governance. The blockchain can be altered or hacked by participants within the network. This is especially true for consortium blockchains where conspiring banks may alter information (such as debt obligations) in their internal networks.