One of the main arguments for crypto is its decentralized nature. Unlike a banking system built on trust alone, digital assets use blockchain technology to eliminate the central organ. However, did you know that not all blockchains are genuinely decentralized? That some are controlled by a restricted group of people, similar to traditional finance?
Types of blockchains: the basics
All blockchains can be divided into two categories based on their operating principle: permissionless and permissioned.
Permissionless blockchains are open for anyone to participate. All the users have equal rights and the level of influence. This approach provides the highest level of decentralization, as no single person or an organ can control or change the system. Permissioned blockchains, on the contrary, restrict access to the network to particular nodes and may also limit their rights.
This is the most common type of blockchain, as most top cryptocurrencies rely on open public ledgers. It means that the system is fully open and decentralized. All the network participants, called nodes, have equal rights that a central organ cannot restrict. Primarily, public blockchains serve as platforms for issuing and exchanging an asset. The former can be achieved via mining or staking, depending on the consensus algorithm.
Bitcoin, of course, is the number-one example of a public blockchain. It was introduced in 2009 as a response to the banking corruption that led to the global financial crisis, aiming to create a truly decentralized financial ecosystem not controlled by any government or person. Ethereum, the second biggest coin, also operates on a public blockchain.
Private blockchains are systems controlled by a group of selected people, most often project founders. Regarding managed blockchains, regular crypto users cannot become a node and participate in the network’s decision-making.
In this perspective, such blockchains can only be considered partially decentralized. Yes, the transaction data is public and recorded in the open ledger, but “outsiders” cannot become the network’s nodes and impact its development.
Hyperledger, an umbrella project of open-source blockchain applications, is an example of a private blockchain. Some argue that XRP cryptocurrency is private, but that’s not the case. Although the Ripple company is a contributor, consensus or transaction processing changes should be approved by at least 80% of validators.
This is a type of permissioned blockchain controlled by a group of companies rather than one entity. Thus, the level of decentralization will be higher compared to private systems. Nevertheless, such blockchains are difficult to be realized, as they require continuous efficient communication between separate organizations. A consortium example is the R3 company group that convened the world’s largest permissioned enterprise blockchain ecosystem.
Hybrid networks attempt to combine the best of private and public blockchains. As a rule, such systems combine two ledgers — open and private. The former makes it accessible to anyone, while the latter is used for system modifications.
Hybrid blockchains are usually customizable, meaning you can decide how many rights and responsibilities to give and to whom. Although one company may own the blockchain, it doesn’t have complete control. An example of a hybrid system is the blockchain of IMB, an American multinational technology corporation.
Which one is better?
All types have their advantages and disadvantages. The community prefers permissionless blockchains as they offer a higher level of decentralization and anonymity. Still, they are usually limited in terms of scalability and speed. As for the permissioned systems, they require trust between users and owners but don’t have the same scalability problems. At the end of the day, pay attention to the project itself, its reputation, roadmap, and long-term prospects rather than base a decision solely on the blockchain type.