How to differentiate kinds of blockchains
Blockchain is a kind of decentralized data register (or a database) developed for performing operations with cryptocurrencies. It’s a continuous sequential chain of blocks that functions according to certain rules. The database contains information about transactions in the network. Blockchains’ immutability is ensured by elements of cryptography. There are main (contains key information and set further rules) and subsequent blocks (contains the hash (ID) of the previous block).
There are four types of blockchains:
The variety is caused by target users’ needs. We will discuss the specificity of each type in the article.
Public blockchains are built on trust and transparency. They are based on distributed ledger technology (DLT). According to DLT, information in the blockchain is distributed across a peer-to-peer network. Public blockchains are permissionless and non-restrictive – anyone can join and become an authorized node. To verify the authenticity of data, public blockchains utilize special consensus algorithms. The two common algorithms are Proof of Stake (PoS) and Proof of Work (PoW). In public blockchains, all users can view current and past data, as well as to conduct mining activities. Valid records cannot be changed. Public blockchains usually keep their source code in open access so that everyone can contribute to further development by finding bugs or proposing changes. To conclude, the advantages of public blockchains are transparency and the independence of third parties.
There are some disadvantages. Public blockchains are not as fast and scalable as compared to other types of technology. Moreover, hackers can modify public blockchains without any restrictions if they manage to gain 51% computing power in the network. Therefore, this type of blockchain is not completely secure as well.
The most notable examples of public blockchains are Bitcoin and Ethereum.
Private blockchains are networks with restricted access, usually run by a single organization. They are similar to public ones in the way they function, but private blockchains are much smaller. There are permission levels, security, and authorizations in private blockchains. Organizations determine who can join the network and which nodes have the authority to view and manage data. Besides, private blockchains do not offer their source code, so users cannot find bugs and propose updates. This can lead to less security. Another disadvantage is that there’s no anonymity in private blockchains. The main advantage of this type of network is speed. Due to its small size, transactions can be much faster than in public blockchains.
The popular private blockchains are Monero, Ripple, and Hyperledger.
Hybrid blockchains are also controlled by organizations. These networks combine features of both public and private blockchains. It allows owners to create permission-based systems alongside public systems to control access to certain blocks. However, in hybrid blockchains, the controlling entity cannot alter transactions. Anyone can join such networks and have full access to their public parts. Identities are hidden and are revealed only during transactions. For users, the main advantage of hybrid blockchains is fast and cheap transactions. Such networks aren’t vulnerable to 51% attacks due to their closed ecosystem.
Consortium blockchains are equally controlled by multiple entities. Such networks also have features of both public and private blockchains. In consortium blockchains, preset validator nodes conduct consensus procedures. Member nodes do not have the authority to verify transactions, but they can initiate and receive them. Consortium blockchains are secure, scalable, and fast. However, they are not completely transparent.
Sidechain is a technology that allows using crypto assets in another blockchain with the possibility to return them back. The technology is intended as a solution to public blockchains’ scalability issues. Besides, sidechains can be used for modeling changes in the original blockchain without risks because they are independent.
How do sidechains work
Users of the original blockchain send assets to a special address. Then, members of the federation (a group of operators who act as an intermediate point between the main chain and sidechain) lock it to avoid spendings on the other side. These members are chosen by the owners of the sidechain. After the transaction is completed, the sides receive a confirmation. After it, the agreed amount is transferred to a sidechain and users can spend it right away. The same procedure applies to transferring the assets back to the main chain. This process is called a 2-way peg.
To deconstruct the process, let’s consider an example. Imagine user A, who has 3 BTC on the main chain and wants to exchange it for 3 equal coins on the sidechain (let’s label them as sidecoins). As mentioned above, the two-way peg technology allows it. The two blockchains are separate entities. Therefore, to get assets on the sidechain, user A has to transfer coins to the address of user B, who will return sidecoins as soon as they get paid. Some sidechains have features that will automatically transfer sidecoins after detecting the payment from user A. Once user A gets sidecoins, they can freely operate in the sidechain. For example, they can spend 1 sidecoin and then send the remaining 2 back to the mainchain to get 2 BTC. The reverse process is the same.
Examples of sidechains
Let’s look through Polygon, an Ethereum sidechain. It was designed to attract users to the platform. Polygon is a Layer-2 solution that offers tools for creating scalable decentralized applications (dApps) with a focus on security, performance, and user experience. The two products that brought the sidechain to wide success are the Proof-of-Stake (PoS) Commit Chain and the More Viable Plasma (MoreVP) L2. Polygon’s PoS blockchain manages to attract dApp developers due to its scalability. In the sidechain, there are no instances of network congestion common to Proof-of-Work (PoW) blockchains.
The lighting network is a second-layer technology compatible with Bitcoin. It was developed to de-congest the Bitcoin blockchain. The lightning network utilizes special channels to process transactions more efficiently than the main chain. On the lightning network, operations are cheaper and faster. Moreover, the sidechain allows users to perform all types of transactions including exchanging crypto assets.