In short: the blockchain is the heart of nearly every cryptocurrency. The blockchain is also responsible for probably the most important aspect when it comes to online money: security, preventing hackers, and frauds from entering your system. The blockchain distributes identical copies of databases across the network thus preventing cheating the system. Cryptocurrency is the most popular use for blockchain technology, but it has more potential. The blockchain could serve a wide range of applications.
Technically the blockchain is a distributed digital ledger that can store any kind of data. It records information about cryptocurrency transactions, non-fungible tokens ownership, or smart contracts. Blockchain stands out from the other databases because it’s decentralized, meaning, that it has many identical copies of a blockchain database that are held on many computers across the network. These individual computers are called nodes.
The digital ledger is described as a chain that is made up of individual blocks, hence the name blockchain. A new block is created and added to the chain as new data is added. This happens periodically. As new data is added to the chain all nodes require an update to their versions of the blockchain as all the ledgers have to be identical. Before a new block can be created on the chain and added to the ledger, all existing nodes have to verify and confirm that the new data is legit. This makes blockchain technology highly secure. Transactions are usually secured with cryptography; the nodes solve mathematical equations to process transactions. The blockchain also involves actions that make sure that the transactions aren’t fraudulent, or coins aren’t being spent more than once.
There are three types of blockchains:
In this type of blockchain, anyone can read, write, or inspect the data that is already on the blockchain. This kind of network has no restrictions. Anyone with a working internet connection can get into the network and start sending transactions, even validating blocks. No authority controls the nodes, so it is difficult to alter transactions that are logged in a public blockchain. You can download the protocol whenever you want to and you don’t have to ask for any permission to perform any activity on the network. The system is completely decentralized, no single authority controls the network. It also exceeds the need for a third party.
Private Blockchain technology is one of the most popular blockchains out there. This type of blockchain is controlled by a group or organization. In other words: an authority figure, which can decide who can access the blockchain and who is invited to it. This prevents any fraudulent activities and makes the network safe and more efficient. The authority figure can also alter the chain. Using a private blockchain you have full privacy. These technologies focus on privacy and security rather than having full disclosure. Private blockchains also have the advantage of being more stable which results in fewer fees and faster transactions. These networks are structured to resist any issue, resulting in a robust, well-working, secure network. Using private blockchains saves you resources, you’ll have lower fees, there will be no intruders and you, given that you are the authority figure, will be deciding all the regulations.
Also referred to as blockchain consortium will remove the influence of a sole organization in the network. Thus, many nodes will be using the network and will re-form a decentralized type of network. Instead of one authority figure calling the shots, multiple organizations use the blockchain for their own benefit. These groups come together in a federated blockchain and make the necessary changes that make the network more efficient. The federated blockchain is fast and won’t be affected by any kind of scalability issues. The number of nodes needed for validation is controlled. The network doesn’t just allow anyone to join and start validating data or transactions on the block. They go through a secured procedure to authorize and reach the inner network, thus everything is controlled and maintained. Having low transaction costs is another advantage to the federated blockchain. Transactions are less complex thus get processed faster. This type of blockchain also consumes less energy, they use a few selected groups of nodes for the validation process. It doesn’t use the typical consensus algorithm, it uses a voting system to validate nodes.
To get into a federated blockchain you have to go through an authentication process to be able to access and use the system. Having a clear identity removes all fraudulent activities and minimizes, if not completely removes, risks. Regulation, is again, another advantage, since all nodes work in a regulated environment, thus avoiding total chaos in the system.
It is unnecessary to mention that all blockchains are great. Whether you should choose one or the other depends on your needs and the type of organization/business you are running, or the actions you plan on processing on your blockchain. None out of these three is better than the other in general, for exact purposes one can be more favorable, but as far as security goes, all three provide the highest level.