“Blockchain” – the word is gaining popularity beyond the fintech world. But do we always mean the same thing using this term? CoinFox offers a deeper look into the problem.

As it often happens with phenomena that are enjoying wide adoption and becoming household words, the standardisation of terminology is reserved for enthusiasts in specialised blogs. The blockchain technology is not an exception: due to the hype that surrounds it and the myriad of hopes cherished about its implementation in different spheres of life, very few people actually try to figure out what type of blockchain is meant in every particular case, if at all realising the general principles of its work.

Partly the confusion comes from the fact that the word “blockchain” is used to define both the technology that creates distributed ledgers and, at the same time, its result, the ledgers themselves.

Besides, despite the growing number of use cases of the technology apart from cryptocurrencies and even the financial sector in general, a lot of people still associate it with virtual money. For them, “blockchain” is understood as the name for the technology with the following properties:

•    Openness and accessibility

•    Equal status of participants

•    Immutability and irreversibility

•    Decentralised and distributed character

•    Anonymity for the network’s users

No doubt, this is exactly the type of technology that underpins most cryptocurrencies; but this configuration of technological solutions is regarded as the “classic” blockchain only because it was the first one ever realised in practice.

It turned out that a lot of bitcoin blockchain’s characteristics could serve well to meet the needs of a variety of industries, from the banking sphere to the protection of digital intellectual property. Consequently, attempts to introduce the technology to a wider range of uses have led to the creation of new types of blockchain.    

How can the existing blockchains be classified?

In August 2015, the founder of Ethereum Vitalik Buterin published a detailed article on the company’s blog where he gave his classification of blockchain types. Buterin divided the existing ledgers into 3 groups: public blockchains, consortium blockchains and fully private blockchains. 

He explained the difference in the following way:

“In a public blockchain anyone in the world can send transactions to and expect to see them included if they are valid, and anyone in the world can participate in the consensus (transaction) process…In a consortium blockchain consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions….In a private blockchain permissions are controlled by the centralized organization.”

Another attempt of classification was proposed by Mark Walport, the Chief Scientific Adviser for the British Government, in a report dedicated to distributed ledgers and the potential of blockchain in the sphere of public management. The document lists the following types: unpermissioned public ledgers, permissioned public ledgers and permissioned private ledgers.

In general, whatever classification we take, blockchains can be distinguished according to the level of access granted to different categories of network participants. It concerns both “active” participants – those who have the right to validate transactions – as well as “passive” ones – those who can just “read” the ledger and track changes in it. 

Thus, private blockchains lack some important characteristics of the “classic” bitcoin blockchain, namely, the openness of the system, the absence of central administrator and, therefore, the equal status of participants.

The fact that private blockchains are being administered has led to rather (and maybe unjustly) critical attitude, which can be found among regulars of specialised web communities. Bitcoin and blockchain enthusiasts increasingly lament that banks are “taking over” blockchain, chop off technological elements they do not like (for example, the system’s openness) and continue to consider this maimed version to be “the blockchain”. 

However, it seems utterly misleading to regard private blockchains as a creation aimed at compromising the technology. New types of blockchain where consensus is built differently have been appearing due to two main objective reasons. First of all, the distributed consensus mechanism that did a perfect job for validation of on-chain asset movements may not work in the same fashion for off-chain assets that exist in the real physical world. In other words, in cryptocurrency ledgers, each node has access to all information necessary for validation of transactions. For example, in the bitcoin system, it is evident to everyone how many bitcoins have been issued in total, and the blockchain allows tracking the history of movements of each and every bitcoin. Consequently, each node can check whether a user really possesses the amount of bitcoins that he claims to own. Off-chain assets cannot be checked in the same way: the whole data necessary for decision-making is not accessible to every civilian in the country or every employee at a particular institution. That is why all users of the system cannot participate in the consensus building and verification process: they simply do not have all the necessary information. Second, the authenticity of the most of the information to be verified with the use of blockchain is historically guaranteed by the state (for instance, the ownership rights for land property). Thus, the participation of ordinary users in the process of data authentication in most countries is useless from the juridical point of view. To consider these limitations, administered or partly-administered blockchains were suggested. 

In essence, private and public blockchains differ in their technical architecture, and that is why it is so crucial to understand what type of the blockchain is being discussed in every particular case. The co-existence of different kinds of blockchain can be considered as a positive thing, as this way they can be adopted for a greater variety applications and  thus bring benefits to more spheres of human activity.

Yulia Seslavinskaya