Last update: Jun 7, 2021

Types of Blockchain: A Beginner’s Guide

If you pay attention long enough, you’re likely to hear the word blockchain thrown around. The term is often used synonymously with bitcoin. However, the two are not the same and there are several different types of blockchain. As we enter the third decade of the 21st century, blockchain technologies and projects show significant growth.

History

A blockchain is a decentralized and distributed ledger in digital format that records data lists. These data lists are then gathered into blocks, which are security and arranged chronologically through the use of cryptography.

Many people believe that blockchain was created in 2009 when bitcoin hit the market, but the truth is it was developed much earlier.

W. Scott Stornetta and Stuart Haber created the idea of using cryptography in a chain of blocks to secure digital data and documentation. The initial driver behind blockchain was to prevent data tampering.

These two innovators’ work inspired those behind them to develop and discover other opportunities within the cryptography field.

Eventually, the work of these computer scientists led to the development and release of bitcoin. Known for being the first completely decentralized and permissionless digitized cash platform, this initial digital asset paved the way for the wide variety of blockchain projects available in today’s market.

How does Blockchain technology work?

blockchain tech

We know that a blockchain is a digital, decentralized ledger, but what exactly does that mean? And how does blockchain work?

For starters, a blockchain is just what it says it is: a chain of blocks. Each block stores a list of already confirmed transactions.

Since the blockchain network itself is managed by many computers distributed worldwide, it acts as a distributed ledger used for record-keeping.

As a result, every computer – or node – keeps a copy of the blockchain ledger. These nodes simultaneously communicate with one another to verify that all information on the chain is accurate.

That means transactions that occur on the blockchain happen within a self-contained, peer-to-peer network. This is what makes cryptocurrencies borderless, decentralized, and resistant to censorship.

Confused? Let’s look at an example.

Say Rachel and Adam have some digital assets, but Rachel owes Adam 5 coins.

To send the digital currency she owes Adam, Rachel sends out a message with the transaction information to all network participants.

Within this transaction, Rachel provides Adam’s crypto address. This is a digital signature that validates two things: Rachel owns the coins she is sending and Adam is the coins’ recipient.

Once all participants confirm the transaction is legitimate, it’s put on the blockchain to be mined.

I’ll get more into mining in a moment. Just know that when the block is finally mined, the block’s information is shared with other participants on the network. At this point, everyone ensures the block is valid, and it is then added to the blockchain, and the transaction completes.

Blockchain Architecture

blockchain architecture

I’ve used some words in my explanation of how a blockchain works that you might not understand. If that’s the case, don’t worry.

The important thing to know is that there are three important pieces to every blockchain: the blocks, the miners, and the nodes.

Blocks

Every public and private blockchain is made up of multiple blocks. Each block on the blockchain has three distinct characteristics:

Data – This is the information a user is sending within the block. Most commonly, the information pertains to currency.

However, there are other types of data a blockchain can send as well. These include personal healthcare, property information, contract terms, and much more.

Nonce – The nonce is a randomly generated 32-bit whole number that is established when the zero block is created. At this time, the block header hash is generated.

Hash – The hash is a tiny number that begins with a string of zeroes. It’s paired to the nonce and is a 256-bit number.

Upon creation of the first block in the blockchain, the nonce generates the hash. The data contained within the block is then tied to the hash and the nonce until it is mined.

Miners

New blocks on the blockchain are created through a method referred to as mining.

We know that every block has a unique hash and nonce, but every block that comes after the nonce also has its own unique hash. These blocks reference the hash of the previous block, making mining difficult, especially when it comes to bigger blockchains.

Solving the nonce and generating the hash requires a powerful machine that uses specialized software and tools. Since the hash is 256-bits and the none is 32-bits, miners must find the one nonce-hash combo out of the possible four billion options.

When a miner finds the right combination, their block is then added.

If anyone wants to change the information within a block, the block itself must be re-mined, plus all the blocks that were mined after it.

This is one of the reasons blockchain networks are very secure. Many in the industry refer to it as “safety in the math.” Mining even one block requires a significant amount of computing power and time, which means changing several extremely difficult.

Once a block is mined, all other nodes on the network validate transactions and accept the change. At that point, the miner is rewarded, and everyone moves on to the next block.

Nodes

bitcoin node

It could be argued that decentralization is the most critical piece of a blockchain platform.

This is the idea that no single entity or computer owns or controls the chain. As opposed to a single owner, the ledger is distributed across the blockchain’s nodes.

With a public blockchain, checks and balances are used to maintain trustworthiness and integrity amongst users.

Basically, you can think of a blockchain as the ability to scale trust alongside technology, which is often a challenge in today’s tech-centric world.

Consensus Mechanisms

These two large words can strike fear in the hearts of anyone new to the blockchain industry, but in reality it’s a simple idea.

The solution, however, is more complex. A consensus mechanism is the way the blockchain determines how all nodes on the network reach an agreement on the data.

Most networks solve this problem through the use of a consensus algorithm. However, which algorithm or mechanism to use is often up for debate. Each node independently verifies all transactions, which means there must be a way to accurately determine the validty of the data.

While there are many consensus mechanisms in use today, the two main choices you’ll run into are Proof of Work or Proof of Stake. Let’s take a closer look at these two.

Proof of Work (PoW)

proof of work concept

The Proof of Work process is a consensus mechanism that proves a node on the network – a miner node – has done the work to create a valid block in the chain.

Even though it’s difficult to generate the block itself, it’s actually quite simple for the network to confirm that the block is legitimate.

The work is validated through the hash function I mentioned just a moment ago. With Proof of Work systems, the difficulty is adjusted so that blocks are created on a consistent basis.

As a result, transactions, rewards, and network fees are released at regularly scheduled intervals.

Basically, miners run the Proof of Work algorithm to try to find the hash before anyone else. Once the block is validated, the winning miner gets the network fees and the corresponding digital currency.

Litecoin is a popular crypto that uses Proof of Work as its consensus mechanism.

Proof of Work is essentially impossible to crack, since it uses physical resources.

However, in order to successfully mine a block on this type of network, miners must use a lot of electricity. This is one of the biggest arguments against using Proof of Work.

Proof of Stake (PoS)

Proof of Stake is a consensus process that argues giving nodes a stake in the network will make them more honest and more likely to take an active interest in the project.

Miners in a Proof of Stake system lock up their coins so they can’t be used. Then, they can use their stake to validate blocks, just like nodes in a Proof of Work network.

However, with Proof of Stake, the amount of power required to solve the algorithms is much less than what you’d need with Proof of Work. As a result, the former is much more efficient than the latter.

The argument here, though, is that those with higher stakes will continue to earn more, thus centralizing the network.

One of the biggest advantages to Proof of Stake is the lack of barriers it takes to get started. Proof of Work typically requires a large mining set up, while Proof of Stake can be done on a desktop or laptop. Stellar, Cardano, and NEO are some of the more prominent blockchain projects that use the Proof of Stake consensus mechanism.

Difference between Blockchain and Bitcoin

Bitcoin (BTC)

Blockchain technology intends to establish a way for the dissemination of digital information.

This technology has been around for thirty years. However, it wasn’t until 2009 that blockchain found a way to provide a real-world use case through bitcoin.

This popular cryptocurrency is built on top of the blockchain platform.

Its anonymous creator, Satoshi Nakamoto, introduced the digital currency in a research paper, calling it a trustless, peer-to-peer electronic cash system.

The thing you want to remember is that bitcoin simply uses blockchain as a method through which it records payments on a distributed ledger.

However, blockchain can be used to store and record a wide variety of data. Blockchain isn’t just a way to move currency. Other use cases include identification, homeownership, inventory, supply chain logistics, and much more.

Why is Blockchain important?

At it’s core, blockchain has plenty of features that make the technology an important part of society moving forward.

These features are what drive blockchain and makes it a viable solution for many markets and industries. Here are some of the key aspects that make blockchain important.

Security

Cryptography is used to add additional security to the data kept on blockchain networks.

This feature means blockchain can provide a higher level of security and safety than other systems. Through cryptography, complex algorithms are implemented to secure information and data stored on blockchain platforms.

Transparency

blockchain technology

Blockchain networks also have a reputation for being transparent. But what does that mean?

For public blockchains, it means users can see all transactions as they occur. This is a great feature for critical events, like elections, where votes can be kept anonymous, yet accurately tracked.

Immutability

Another great feature of blockchain is its immutability. This is a great focus point for industries that need to ensure data or inventory has not been touched or changed.

Immutability is a great feature for supply chain and logistics. Since blockchains are immutable, no one can alter package data as it makes its way from point A to point B without the system being notified.

Efficiency

Improved efficiency is one other way blockchain shows why it’s important.

With blockchain, networks can offer better security, better processes, and better scalability. Additionaly, blockchain transactions can occur in a matter of seconds, as opposed to the few days, or even weeks, that traditional banking transactions can take to complete.

Cheap

One other feature that makes blockchain important is its cost. Compared to other technologies that offer similar features, blockchain is significantly cheaper.

Plus, the removal of a central authority removes the challenge often associated with running a network efficiently. The lack of centralization means there’s no need to use a middleman. Not only does this help efficiency, but it also drives down cost.

Limitless use cases

The thing to remember about blockchain is that it’s not limited to just one particular market.

This technology has use cases in neary every industry you can image. Blockchain can be used in finance, trading, government, healthcare, education, supply chain, oil, and many others. It’s safe to say the uses for blockchain are limitless.

How to implement Blockchain Technology

Digital currency is the most recognized way to implement blockchain, however, there are a few others ways you can use this innovative functionality. Let’s take a look at some of the more popular methods.

Cryptocurrency

cryptocurrency example

If you sell any types of products or services, one way to receive payment is through digital currencies.

It’s not too difficult to integrate an API into your website or app so you can diversify the way you accept payments.

Not only that, but your compay will save money on gateway fees since digital asset fees are lower than what credit cards and banks charge.

This is also a way to provide your customer with a discreet and anonymous way to pay for content or products.

Adult content, for example, is something many people might prefer paying for with crypto.

People may not want these transactions to show up on their bank or credit card statements, so crypto may be a welcome payment option.

Smart contracts

Smart contracts are most often associated with Ethereum, which is the second most popular cryptocurrency in the market.

With smart contracts, users can create legal agreements that aid in executing transactions. Users can create contracts with caveats and criteria that say the agreement is not fulfilled until terms are met.

Additionally, smart contracts have various use cases. Finance, real estate, healthcare, and education are just a few markets where smart contracts are quickly gaining traction.

As a result smart contracts, and Ethereum, are starting to earn the attention of many businesses in the industry.

One positive aspect of smart contracts is that a lot of the work has already been completed by Ethereum.

So even if you’re a small business, you can use smart contracts to your advantage without needing a huge development team or infrastructure.

Plus, Ethereum already has an ecosystem, so you won’t need to set up a blockchain network. Sounds like a win to me.

IoT

A third avenue through which you can implement blockchain is through IoT, or the Internet of Things.

IoT provides networks a way to connect multiple smart devices, which work together to benefit users, like you and me. Think of it as how you can control your lights with your phone.

There are much more complex systems, which is where blockchain comes into play. With blockchain, IoT systems have an additional layer of security and protection.

This is especially important if you have a lot of smart devices in your home. Unless all your devices are all from the same manufacturer, vulnerabilities can arise.

With blockchain implementation, these potential weaknesses can be addressed before they become a problem.

Different types of Blockchains

internet of things and bitcoin

There are three different types of blockchains in the market today. These are not distributed ledger technology, or DLTs, that some people think are blockchains. The three blockchain types are public blockchain, private blockchains, and hybrid blockchains.

Public blockchain

Public blockchains are open-source networks, which means anyone who wants to can participate. Users can be miners, community members, developers, or investors. All transactions occur on the network are completely transparent, which means anyone has access to the details of all transactions.

Additionally, public blockchains are entirely decentralized, with no single controlling entity. Plus, they are resistant to censorship. They are open to anyone, no matter who or where they are, which makes it very hard for authorities or governing bodies to shut down public blockchains.

Private blockchain

The second type of blockchain is a private blockchain. These are permissioned blockchains, which include a variety of differences from their public counterparts.

For example, a user must gain consent to be able to join the blockchain. Additionally, transactions are private, so only participants with permission can view details. Plus, private blockchains are more susceptible to centralization than public ones.

This makes private chains appealing to large businesses and enterprises that need to share or collaborate. A private blockchain gives them a way to share info without compromising sensitive data.

The businesses running the chain have complete control over governance and participants, but this is typically accepted for the other benefits provided by a private blockchain.

Hybrid blockchain

Last on our types of blockchain is the hybrid blockchain. These networks combine the privacy that comes with a permissioned blockchain with the transparency and security associated with a public one.

This gives businesses the flexibility to determine who has access while specifying what data they want to make public.

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author Andrej Ilisin

A serial entrepreneur working primarily with digital assets. He's the CEO of Sharp Capital, a company that focuses on growing online businesses. Andrej is also huge crypto, chess, and CrossFit enthusiast.