Blockchains & Distributed Ledger Technologies

Blockchain, the technology behind Bitcoin, is a collective, trusted, public ledger of transactions, that everyone can inspect but which no single user controls. It is a distributed database that maintains a continuously growing list of transaction data records, cryptographically secured from tampering and revision. The crypto-economic rulesets of the blockchain protocol (consensus layer) regulate the behavioural rulesets and incentive mechanism of all stakeholders in the network.

Types of Blockchains

The Bitcoin White Paper was published by Satoshi Nakamoto in 2008, the very first Bitcoin Block was mined in 2009. Since the Bitcoin protocol is open source, anyone could take the protocol, fork it (modify the code), and begin their own version of P2P money. Many so called Altcoins that attempted to be a better, quicker or more anonymous Bitcoin emerged. Soon the code was not only altered to create a better cryptocurrency, some projects attempted to alter the idea of blockchain beyond the use case of P2P money.

The idea emerged that the Bitcoin Blockchain could be in fact used for any kind of value transaction or any kind of agreement such as P2P insurance, P2P energy trading, P2P rail sharing, etc. Colored Coins and Mastercoin attempted to solve that problem based on the Bitcoin Blockchain Protocol. The Ethereum project determined to create their own blockchain, with very different properties that Bitcoin, decoupling the wise contract layer from the core blockchain protocol, suggesting a radical fresh way to create online markets and programmable transactions known as Clever Contracts.

Independent from that private institutions like banks embarked to realize that they could use the core idea of blockchain as a distributed ledger technology (DLT), and create a permissioned blockchain (private of federated), where the validator is a member of a consortium or separate legal entities of the same organization. The term blockchain in the context of permissioned private ledger is very controversial and disputed. This is why the term distributed ledger technologies has emerged as a more general term.

Private blockchains are valuable to solve efficiency, security and fraud problems within traditional financial institutions, but only incrementally. Private blockchains will not revolutionize the financial system. Public blockchains, however, hold the potential to substitute most functions of traditional financial institutions with software, fundamentally reshaping the way the financial system works.

Public Blockchains

State of the art public Blockchain protocols based on proof of work (POW) consensus algorithms are open source and not permissioned, which means that everyone can be part of them and explore them. (1) Anyone can download the code and embark running a public knot on their local device, validating transactions in the network, thus participating in the consensus process – the process for determining what blocks get added to the chain and what the current state is. (Two) Anyone in the world can send transactions through the network and expect to see them included in the blockchain if they are valid. (Trio) Anyone can read transaction on the public block explorer.

Effects: (1) Potential to disrupt current business models through disintermediation (Two) No infrastructure costs! No need to maintain servers or system admins radically reduces the costs of creating and running decentralized applications (dApps).

Federated Blockchains or Consortium Blockchains

Federated Blockchains operate under the leadership of a group. As opposed to public Blockchains, they don’t permit any person with an internet connection to participate in the verification of transactions process. Federated Blockchains are swifter (higher scalability) and provide more transaction privacy. Consortium blockchains are mostly used in the banking sector. The consensus process is managed by a pre-selected set of knots; for example, one might imagine a consortium of fifteen financial institutions, each of which operates a knot and of which ten must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants.

Effects: (1) reduces transaction costs and data redundancies and substitutes legacy systems, simplifying document treating and getting rid of semi manual compliance mechanisms. (Two) in that sense it can be seen as equivalent to SAP in the 1990’s: reduces costs, but not disruptive!

Note: Many would dispute that you could call it a blockchain in the very first place.

Also, Blockchain is still in it’s early stages. It is unclear how the technology will pan out and will be adopted. Many argue that private or federated Blockchains might suffer the fate of Intranets in the 1990’s, when private companies built their own private LANs or WANs instead of using the public Internet and all the services, but has more or less become obsolete especially with the advent of SAAS in the Web2.

Private Blockchains

Write permissions are kept centralized to one organization. Read permissions may be public or restricted to an arbitrary extent. Likely applications include database management, auditing, and more that are internal to a single company, and so public readability may in many cases not be necessary at all, tho’ in other cases public audit capability is desired. Private blockchains are a way of taking advantage of blockchain technology by setting up groups and participants who can verify transactions internally. This puts you at the risk of security breaches just like in a centralized system, as opposed to public blockchain secured by game theoretic incentive mechanisms. However, private blockchains have their use case, especially when it comes to scalability and state compliance of data privacy rules and other regulatory issues. They have certain security advantages, and other security disadvantages (as stated before).

Effects: (1) reduces transaction costs and data redundancies and substitutes legacy systems, simplifying document treating and getting rid of semi manual compliance mechanisms. (Two) in that sense it can be seen as equivalent to SAP in the 1990’s: reduces costs, but not disruptive!

Note: Many would dispute that you could call it a blockchain in the very first place.

Also, Blockchain is still in it’s early stages. It is unclear how the technology will pan out and will be adopted. Many argue that private or federated Blockchains might suffer the fate of Intranets in the 1990’s, when private companies build their own private LANs or WANs instead of using the public Internet and all the services, but has more or less become obsolete especially with the advent of SAAS in the Web2.

An Attempt to Classify

Many people have attempted to classify blockchains, but there is no consensus on how to exactly classify them. A few selected classification schemes are listed below. Please note that hybrid Blockchain solutions like BigchainDB are hard to fit into many of these schemes.

Types of Blockchains – DLTs (Distributed Ledger Technologies)

Blockchains & Distributed Ledger Technologies

Blockchain, the technology behind Bitcoin, is a collective, trusted, public ledger of transactions, that everyone can inspect but which no single user controls. It is a distributed database that maintains a continuously growing list of transaction data records, cryptographically secured from tampering and revision. The crypto-economic rulesets of the blockchain protocol (consensus layer) regulate the behavioural rulesets and incentive mechanism of all stakeholders in the network.

Types of Blockchains

The Bitcoin White Paper was published by Satoshi Nakamoto in 2008, the very first Bitcoin Block was mined in 2009. Since the Bitcoin protocol is open source, anyone could take the protocol, fork it (modify the code), and embark their own version of P2P money. Many so called Altcoins that attempted to be a better, swifter or more anonymous Bitcoin emerged. Soon the code was not only altered to create a better cryptocurrency, some projects attempted to alter the idea of blockchain beyond the use case of P2P money.

The idea emerged that the Bitcoin Blockchain could be in fact used for any kind of value transaction or any kind of agreement such as P2P insurance, P2P energy trading, P2P rail sharing, etc. Colored Coins and Mastercoin attempted to solve that problem based on the Bitcoin Blockchain Protocol. The Ethereum project determined to create their own blockchain, with very different properties that Bitcoin, decoupling the clever contract layer from the core blockchain protocol, suggesting a radical fresh way to create online markets and programmable transactions known as Wise Contracts.

Independent from that private institutions like banks began to realize that they could use the core idea of blockchain as a distributed ledger technology (DLT), and create a permissioned blockchain (private of federated), where the validator is a member of a consortium or separate legal entities of the same organization. The term blockchain in the context of permissioned private ledger is very controversial and disputed. This is why the term distributed ledger technologies has emerged as a more general term.

Private blockchains are valuable to solve efficiency, security and fraud problems within traditional financial institutions, but only incrementally. Private blockchains will not revolutionize the financial system. Public blockchains, however, hold the potential to substitute most functions of traditional financial institutions with software, fundamentally reshaping the way the financial system works.

Public Blockchains

State of the art public Blockchain protocols based on proof of work (POW) consensus algorithms are open source and not permissioned, which means that everyone can be part of them and explore them. (1) Anyone can download the code and embark running a public knot on their local device, validating transactions in the network, thus participating in the consensus process – the process for determining what blocks get added to the chain and what the current state is. (Two) Anyone in the world can send transactions through the network and expect to see them included in the blockchain if they are valid. (Three) Anyone can read transaction on the public block explorer.

Effects: (1) Potential to disrupt current business models through disintermediation (Two) No infrastructure costs! No need to maintain servers or system admins radically reduces the costs of creating and running decentralized applications (dApps).

Federated Blockchains or Consortium Blockchains

Federated Blockchains operate under the leadership of a group. As opposed to public Blockchains, they don’t permit any person with an internet connection to participate in the verification of transactions process. Federated Blockchains are swifter (higher scalability) and provide more transaction privacy. Consortium blockchains are mostly used in the banking sector. The consensus process is managed by a pre-selected set of knots; for example, one might imagine a consortium of fifteen financial institutions, each of which operates a knot and of which ten must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants.

Effects: (1) reduces transaction costs and data redundancies and substitutes legacy systems, simplifying document treating and getting rid of semi manual compliance mechanisms. (Two) in that sense it can be seen as equivalent to SAP in the 1990’s: reduces costs, but not disruptive!

Note: Many would dispute that you could call it a blockchain in the very first place.

Also, Blockchain is still in it’s early stages. It is unclear how the technology will pan out and will be adopted. Many argue that private or federated Blockchains might suffer the fate of Intranets in the 1990’s, when private companies built their own private LANs or WANs instead of using the public Internet and all the services, but has more or less become obsolete especially with the advent of SAAS in the Web2.

Private Blockchains

Write permissions are kept centralized to one organization. Read permissions may be public or restricted to an arbitrary extent. Likely applications include database management, auditing, and more that are internal to a single company, and so public readability may in many cases not be necessary at all, however in other cases public audit capability is desired. Private blockchains are a way of taking advantage of blockchain technology by setting up groups and participants who can verify transactions internally. This puts you at the risk of security breaches just like in a centralized system, as opposed to public blockchain secured by game theoretic incentive mechanisms. However, private blockchains have their use case, especially when it comes to scalability and state compliance of data privacy rules and other regulatory issues. They have certain security advantages, and other security disadvantages (as stated before).

Effects: (1) reduces transaction costs and data redundancies and substitutes legacy systems, simplifying document treating and getting rid of semi manual compliance mechanisms. (Two) in that sense it can be seen as equivalent to SAP in the 1990’s: reduces costs, but not disruptive!

Note: Many would dispute that you could call it a blockchain in the very first place.

Also, Blockchain is still in it’s early stages. It is unclear how the technology will pan out and will be adopted. Many argue that private or federated Blockchains might suffer the fate of Intranets in the 1990’s, when private companies build their own private LANs or WANs instead of using the public Internet and all the services, but has more or less become obsolete especially with the advent of SAAS in the Web2.

An Attempt to Classify

Many people have attempted to classify blockchains, but there is no consensus on how to exactly classify them. A few selected classification schemes are listed below. Please note that hybrid Blockchain solutions like BigchainDB are hard to fit into many of these schemes.

Related video:

http://www.youtube.com/watch?v=mWtKjBd52WI

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