You know you’re right smack in the middle of the digital age when performing a banking transaction doesn’t involve physically going to a bank and handing over your passbook to a teller. All you have to do now is whip out your smartphone, go through biometric authentication, and make a few taps on the screen to complete your transfer or bills payment. Modern technology has been introducing us to more convenient ways to perform everyday activities.
Going digital has opened a lot of doors for new technology to emerge and revolutionize processes across various industries. One of the groundbreaking techs introduced to the world at large is blockchain. Unless you’ve been living under a rock these past few years, you’ve probably heard of it being thrown around here and there. It’s one of the buzzwords that has captured everyone’s attention, so it’s time to know the facts on what it is, how it works, and why it’s important.
The Low-Down on Blockchain
Let’s focus on the financial application of blockchain since it’s the sector where it’s most popularly utilized through cryptocurrency. Let’s say a friend needs to transfer money from his account to yours. He would first have to go through his bank and request to move the money to your account.
After the transfer, the banks keep an entry of the recorded transaction on both sides. It needs to be updated on both the sender and receiver’s accounts. However, there is one problem: the records can be tampered with, and the entries can be easily manipulated or changed. This is where blockchain comes in.
To put it simply, blockchain is a distributed ledger where its data is spread across all peers in said network, with each peer holding a portion of the complete ledger. Anyone can have access to it (read) but nobody can edit it.
A block in a blockchain is a collection of data. The data is added to the block and the block is linked to other blocks, forming a chain of data that cannot be changed. Essentially, this collection of indelible data serves as proof of any transaction, which is the reason why it’s utilized by cryptocurrencies and other intangible assets. Any transaction involving such will need recorded proof that it happened, thus blockchain was born.
The application of this kind of technology presents endless possibilities. In fact, blockchain has already gone beyond cryptocurrency and is currently finding its way to different industries, improving processes and bolstering security. It appears that the future is looking bright with blockchain technology.
The 3 Different Blockchain Types
When Bitcoin became popular and introduced blockchain to the world, three types of the technology emerged:
As the name suggests, public blockchain is open to anyone. No one is in charge and anybody can participate in reading, writing, or auditing the blockchain. This type is open and transparent, so anyone can review the data in the block at any given point of time.
Since nobody’s in charge, decisions are made by various decentralized consensus mechanisms such as proof of work (PoW) and proof of stake (PoS).
This type of blockchain is owned by an individual or an organization, making it private property. Unlike public blockchain, there’s a person in charge who looks after important activities such as reading and writing data, or selectively giving access to those who wish to do so.
In a private blockchain, a consensus is achieved based on the decisions of central command who can either give mining rights to anyone or no one at all.
Federated or consortium blockchains work under the leadership of a group. This type of hybrid blockchain removes sole autonomy assigned to a single entity and instead distributes the leadership to multiple companies or representative individuals. They come together to make decisions for the best interest of the whole network.
Comparing Private and Public Blockchain Technology
Blockchain has evolved over the years and the definition of the types is often misconstrued. It’s easy to blur the lines between public and private blockchains since they have many similarities:
- They are both decentralized peer-to-peer networks, where all participants maintain a replica of a shared append-only ledger of digitally signed transactions.
- Both maintain the replicas in-sync using a protocol referred to as a consensus.
- They provide certain guarantees on the ledger’s immutability regardless if some participants are at fault or malicious.
The single distinction between the two involves who is allowed to participate in the network, maintain the shared ledger, and execute the consensus protocol. A public blockchain has a completely open network, where anyone is allowed to join and participate. It typically has an incentivizing mechanism in place to encourage more participants to join.
One of the disadvantages of a public blockchain is the considerable amount of computational power it needs to maintain a large scale distributed ledger. To achieve consensus, each node must solve a complex, resource-demanding cryptographic problem called proof of work to make sure all are in sync. Another is its openness, which implies little to no privacy for transactions and supports a weak idea of security.
A private blockchain, on the other hand, requires an invitation before validation from either the person in charge of the network or by a set of rules put in place by that POC. Companies that set up a private blockchain generally set up a permissioned network, which places restrictions on who is allowed to participate and in which specific transactions.
The access control mechanism could differ in three ways:
- existing participants could decide which entrants could join,
- a regulatory authority could give out licenses for participation, or
- a consortium could agree on which participants are qualified.
And once one has joined the network, it will play a role in maintaining a decentralized blockchain network.
Blockchain is slowly but steadily being adopted by many industries for all the benefits they can reap from the technology. The idea of having an immutable record of activities or transactions can help boost security in this digital age where everything runs on data.
There are pros and cons for both public and private blockchains. You’ll just have to know how they work to know the difference. Only then will you be able to understand why certain applications are made to benefit specific areas of particular industries. Pretty soon, applications of the technology will expand, improving processes on a much, much larger scale.