What are the different types of blockchains and consensus algorithms?
The world of cryptocurrencies stands on the pillars of blockchain technology, which is a record keeping technology holding a specific type of database. As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order. Blockchain technology helps to decentralise trade, allowing users to perform transactions directly by doing away with the need for intermediaries such as companies or banks.
Also popularly known as Distributed Ledger Technology, it is like a network of computers having the same history of transactions. Blockchain ensures that security is maintained through cryptography, which helps in encrypting all the transactions. Today, we will look at the different types of blockchain systems and the algorithms used by cryptocurrencies.
Types of blockchain structures
There are primarily two types of blockchain structures: Permissionless and Permissioned, which are further divided into four categories – public, private, consortium and hybrid blockchain. All of these have their respective purposes and benefits. According to experts, although the underlying technology behind various structures is the same, the target end users of the different types of blockchain may differ.
While permissionless blockchain allows any user to join the blockchain network, in other words, become a node of the network, permissioned blockchains have only a few nodes to validate the transactions, hence it is difficult for just anybody to join the network.
Delving deeper into the 4 types of blockchains that are commonly known to people, public blockchain fall under permissionless, while private and consortium blockchains fall under permissioned category. However, hybrid blockchain is common to both the categories.
Here’s a detailed look at the 4 types of blockchains:
Public blockchain – Permissionless in nature, these allow anyone to join the network and are completely decentralized. In a public blockchain, all the nodes have equal rights to access the blockchain, create new blocks of data, and validate blocks of data. This blockchain is mainly used for exchanging and mining cryptocurrency. Examples of public blockchain are Bitcoin, Ethereum and Litecoin.
Private blockchain – Also called managed blockchains, these are permissioned in nature and are controlled by a single organization. Here the central authority decides who can be a node, and it may or may not grant each node with equal rights to perform functions. Private blockchains are only partially decentralized since the access is restricted. Ripple and Hyperledger are a few examples of private blockchain.
Consortium blockchain – Unlike private blockchain which is governed by a single entity, consortium blockchain is governed by a group of organisations. Also, there is greater decentralisation here as compared to in the former category. In a consortium blockchain, the consensus procedures are controlled by pre-set nodes. There is a validator node that initiates, receives and validates transactions.
Hybrid blockchain – As the name suggests, a hybrid blockchain has an element mix of both private and public. It is a form of blockchain that is controlled by a single organization but there is a public blockchain that oversees the performance, and does certain transaction validations. IBM Food Trust is an example of hybrid blockchain. The private aspect allows for specific data stored in the blockchain to be controlled.
Consensus Algorithms – Proof of work vs. Proof of stake
Besides the different types of blockchain systems, the world of cryptocurrency works on two major consensus algorithms. These are proof of work and proof of stake. Before we get on to the difference between the two, let’s first understand their purpose.
Proof of work and proof of stake are the two major consensus mechanisms that cryptocurrencies use to verify new transactions, add them to the blockchain, and create new tokens. The mechanism allows all the computers in a crypto network to give a consensus on which transactions are legitimate.
Proof of work was first used by Bitcoin, while proof of stake was first employed by Cardano, the ETH2 blockchain and others. The difference between the two is that proof of work uses mining, while proof of stake uses staking to achieve the same goals.
In proof of work, the network uses a large amount of computing power to solve a mathematically complex puzzle, which in turn validates transactions. This system is secured and verified by virtual miners from around the world. Miners of each network receive rewards denominated in the network’s native cryptocurrency. Whenever the value of the cryptocurrency grows, more miners are incentivized to join the network, which in turn strengthens its security.
On the other hand, proof of stake blockchain employs a network of validators who put their own crypto at stake in exchange for a chance to get the right to validate new transactions, update the blockchain, and earn a reward.
A major difference between the two lies in the amount of energy consumed. In proof of stake, the network operates with substantially lower energy consumption as compared to proof of work, since it does not require miners competing to solve the same puzzle.
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