Types of blockchain

Based on the way that blockchain has evolved, it can be divided into multiple categories with distinct, though sometimes partially overlapping, attributes. At a broad level, Digital Ledger Technology (DLT) is an umbrella term that represents distributed ledger technology, comprising blockchains and distributed ledgers of different types:

Figure 1.9: DLT types

In this section, we will examine the different types of blockchain from a technical and business perspective.

Distributed ledgers

A distributed ledger is a broad term describing shared databases; hence, all blockchains technically fall under the umbrella of shared databases or distributed ledgers. Although all blockchains are fundamentally distributed ledgers, not all distributed ledgers are necessarily blockchains.

A key difference between a distributed ledger and a blockchain is that a distributed ledger does not necessarily consist of blocks of transactions to keep the ledger growing. Rather, a blockchain is a special type of shared database that comprises blocks of transactions. An example of a distributed ledger that does not use blocks of transactions is R3’s Corda (https://www.corda.net). Corda is a distributed ledger that is developed to record and manage agreements and is especially focused on the financial services industry. On the other hand, more widely known blockchains such as Bitcoin and Ethereum make use of blocks composed of transactions to update the replicated shared database. As the name suggests, a distributed ledger is distributed among its participants and is replicated across multiple nodes, sites, or organizations. This type of ledger can be either private or public.

Shared ledger

This is a generic term that is used to describe any application or database that is shared by the public or a consortium. Generally, all blockchains fall into the category of a shared ledger.

Public blockchains

As the name suggests, public blockchains are not owned by anyone. They are open to the public, and anyone can participate as a node. Users may or may not be rewarded for their participation. All users of these “permissionless” ledgers maintain a copy of the ledger on their local nodes and use a distributed consensus mechanism to decide the eventual state of the ledger. Bitcoin and Ethereum are both examples of public blockchains.

Private blockchains

As the name implies, private blockchains are just that—private. That is, they are open only to a consortium or group of individuals or organizations who have decided to share the ledger among themselves. There are various blockchains now available in this category, such as Hyperledger Fabric and Quorum. Optionally, both blockchains can also be in public mode if required, but their primary purpose is to provide a private blockchain. These blockchains are also called consortium blockchains, or enterprise blockchains.

Semi-private blockchains

With semi-private blockchains, part of the blockchain is private and part of it is public. Note that this is still just a concept today, and no real-world proofs of concept have yet been developed. With a semi-private blockchain, the private part is controlled by a group of individuals, while the public part is open for participation by anyone.

This hybrid model can be used in scenarios where the private part of the blockchain remains internal and shared among known participants, while the public part of the blockchain can still be used by anyone, optionally allowing mining to secure the blockchain. This way, the blockchain can be secured using PoW, thus providing consistency and validity for both the private and public segments. This type of blockchain can also be called a “semi-decentralized” model, where it is controlled by a single entity but still allows multiple users to join the network by following appropriate procedures.

Permissioned ledger

A permissioned ledger is a blockchain where participants of the network are already known and trusted. Permissioned ledgers do not need to use a distributed consensus mechanism; instead, an agreement protocol is used to maintain a shared version of the truth about the state of the records on the blockchain. In this case, for verification of transactions on the chain, all verifiers are already preselected by a central authority and, typically, there is no need for a mining mechanism.

There is no requirement for a permissioned blockchain to be private, as it can be a public blockchain but with regulated access control. For example, Bitcoin can become a permissioned ledger if an access control layer is introduced on top of it that verifies the identity of a user and then allows access to the blockchain.

Fully private and proprietary blockchains

There is no mainstream application of these types of blockchains, as they deviate from the core concept of decentralization in blockchain technology. Nonetheless, in specific private settings within an organization, there could be a need to share data and provide some level of guarantee of the authenticity of the data.

An example of this type of blockchain might be to allow collaboration and the sharing of data between various government departments. In that case, no complex consensus mechanism is required, apart from a simple SMR with known central validators. Even in private blockchains, tokens are not really required, but they can be used as a means of transferring value or representing some real-world assets.

Tokenized blockchains

These blockchains are standard blockchains that generate cryptocurrency as a result of a consensus process via mining or initial distribution. Bitcoin and Ethereum are prime examples of this type of blockchain.

Tokenless blockchains

These blockchains are designed in such a way that they do not have the basic unit for the transfer of value. However, they are still valuable in situations where there is no need to transfer value between nodes and only the sharing of data among various trusted parties is required. This is similar to fully private blockchains, the only difference being that the use of tokens is not required. This can also be thought of as a shared distributed ledger used for storing and sharing data between the participants. It does have its benefits when it comes to immutability, tamper-proofing, security, and consensus-driven updates, but is not used for a common blockchain application of value transfer or cryptocurrency. Most of the permissioned blockchains can be seen as an example of tokenless blockchains, for example, Hyperledger Fabric or Quorum. Tokens can be built on these chains as an application implemented using smart contracts, but intrinsically these blockchains do not have a token associated with them. In other words, we can say that there is no native (default) cryptocurrency in tokenless blockchains.

Layer 1 blockchains

Any base layer chain, responsible for consensus is a layer 1 blockchain. For example, Bitcoin and Ethereum. We can also think of two other types of blockchain architectures. One is monolithic architecture, which is just one base layer responsible for all operations, and another type is called polylithic architecture, which is composed of multiple chains.

Monolithic and polylithic blockchains

The original Bitcoin blockchain is a monolithic chain. Other examples include Ethereum and Solana. These chains are categorized as Layer 1 blockchains as they are base layer single-chain protocols where all functionalities including programmability (smart contracts), consensus protocol, security, and any related functionality are part of the same base blockchain. In other words, no component is off chain.

Polylithic chains include examples such as Polkadot, Avalanche, and Cosmos. In this type of architecture, multiple chains of the same or different types connect to a core chain and form a network of networks. Both types are considered layer 1 chains where a single base layer is the source of canonical truth. In polylithic architectures, there can be multiple chains, but they are horizontal to the core chain, and in some cases the core chain is not strictly needed and subnets can talk to each other directly. We can think of these architectures as multi-chain architectures. If chains connecting to the core chain are all the same type and built using the same rules, we call them homogeneous chains, and if they are of different types and follow different rules, we call them heterogeneous chains. Usually, multichain architectures aim to be heterogeneous architectures.

Layer 2 blockchains

Layer 2 blockchains have also recently emerged as a solution to the scalability and privacy problems on classical layer 1 blockchains, such as Ethereum and Bitcoin. Such solutions are called layer 2 solutions, which is a generic term used to describe solutions that use layer 1 as a base layer for consensus and settlement but execute transactions off chain at the so-called layer 2. These chains run on top of layer 1 chains. Many solutions exist in this space, such as sidechains, zero-knowledge rollups, optimistic rollups, plasma chains, and Lightning Network.

Sidechains

More precisely known as “pegged sidechains,” this is a concept whereby coins can be moved from one blockchain to another and then back again. Typical uses include the creation of new altcoins (alternative cryptocurrencies) whereby coins are burnt as a proof of an adequate stake. “Burnt” or “burning the coins” in this context means that the coins are sent to an address that is un spendable, and this process makes the “burnt” coins irrecoverable. This mechanism is used to bootstrap a new currency or introduce scarcity, which results in the increased value of the coin.

This mechanism is also called “Proof of Burn” and is used as an alternative method for distributed consensus to PoW and Proof of Stake (PoS). The example provided previously for burning coins applies to a one-way pegged sidechain. The second type is called a two-way pegged sidechain, which allows the movement of coins from the main chain to the sidechain and back to the main chain when required.

This process enables the building of smart contracts for the Bitcoin network. Rootstock is one of the leading examples of a sidechain, which enables smart contract development for Bitcoin using this paradigm. It works by allowing a two-way peg for the Bitcoin blockchain, and this results in much faster throughput. Another example is Deku, which is a side chain layer 2 solution for Tezos.