A blockchain is a decentralized ledger composed of blocks to record transactions in an anonymous, secure, and trustless manner. It relies on a consensus mechanism of a network made of nodes to check the genuinity of its transactions.
How Do They Work?
- Process: A blockchain is a distributed ledger that is simultaneously updated after each valid transaction. To check whether a transaction is genuine, it is verified multiple times by different nodes that comprise the network. Once verified, a network node (called miner/validator) can add a transaction into a block and then add a completed block to the blockchain.
- Consensus: These nodes reach consensus by various mechanisms such as Proof of Work, Proof of Stake, Proof of Time, Proof of Authority, Proof of History, and many other methods.
- Detecting Fraud: If even a single transaction is manipulated by any node, it changes the entire hash of the block due to an algorithm called Merkle Tree and then the block won’t fit into the blockchain. This is then detected by other nodes and they soon catch which node manipulated the transaction. As a punishment, they can ban it(Bitcoin) or confiscate its staked crypto(Ethereum, Cardano, Solana).
Types of Blockchains
There can be a number of blockchains based on how you classify them. Here are a few common classifications that Glossary.Today’s team has curated.
Based on Permission
- Permissioned Blockchain: These blockchains are usually used for a company’s internal usage and not everyone is allowed to join. They are known as private blockchains. Example: Hyperledger.
- Permissionless Blockchain: A user does not need any permission to connect and utilize these blockchains. They are also known as public blockchains. Example: Bitcoin and Ethereum.
- Consortium Blockchain: These blockchains are controlled by a group or companies. Example: Quorum, Hyperledger Corda.
- Hybrid Blockchain: A hybrid blockchain has both elements of permissioned and permissionless blockchains. These chains usually have the non-core component in public while the core component is controlled by an internal team.
Based on Consensus Mechanism
Blockchains can be also divided on how they reach a consensus which is a process of concluding that a transaction is valid.
- Proof of Work: These blockchains are those where nodes need to run complex computations that must yield the same results for a given transaction. Example: Bitcoin
- Proof of Stake: These blockchains are those where node runners (validators) need to stake some collateral as a guarantee that they won’t act in a bad manner. Example: Ethereum
- Proof of History: In these blockchains, the transactions are timestamped and considered valid only when they have spent some time in the blockchain network. Example: Solana
- Proof of Authority: Here, a few people are designated to run the operations such as adding new members, verifying transactions, undertaking governance, and other routine activities.
Based on Architecture
- Layer-1: A layer-1 blockchain is a chain that can independently verify and finalize transactions. Example: Ethereum
- Layer-2: A layer-2 blockchain is a specific-purpose blockchain that can add new transactions but relies on the layer-1 blockchain to perform the finalization of transactions. Example: Base is a Layer-2 blockchain used for scaling Ethereum transactions.
Based on Network Structure
- Centralized: Centralized blockchains are those where a single entity or a group of entities control the network, including all its validators. Example: BNB Chain
- Decentralized: Here, all nodes are truly independent and are not controlled and neither rely on any centralization. Example: Bitcoin and Ethereum
- Hybrid: In these blockchains, some parts are centralized while the rest of the nodes are independent and decentralized.
