How to Classify Blockchain Technologies

In the previous video, we viewed a blockchain essentially as a decentralized database with some unique features. Just like a database, you can upload all kinds of data on the blockchain.

And this is one way that a blockchain can be classified by the type of data that they can take. The first type is the simplest and probably the one that you’re most familiar with. That’s the cryptocurrencies like Bitcoin, Litecoin, Dogecoin, etc. These are essentially ledgers in that the only type of data that you can put on it are records of who paid whom and possibly who owns what. And that’s why they’re called currencies because these ledgers can be used to record payment activities between different parties. Unfortunately, most of them didn’t pan out as intended because as we’ll learn shortly, they’re incredibly inefficient. And therefore, few people actually use them as a payment mechanism.

Instead, the majority of people use them for the speculative purposes just like the digital form of gold. An asset that doesn’t have much intrinsic value but it can be held as a value storage or investment due to other peoples perceptions. Therefore, we can call these blockchains Gold 2.0. The second type of blockchain spearheaded by a Syrian but also includes competitors like tasos or EOS, further expand the type of data that it can take. In addition to transaction records, you can also upload programs or code that you write to the blockchain, and the network of nose will then execute these programs. This essentially makes the blockchain quote and quote programmable.

And theoretically, you can use it as a computer to execute any program you write the programs are often called smart contracts. And as you can see, this dramatically expand the usability of the blockchain from a simple ledger to a decentralized Cloud computing platform that you can build apps on. In reality however, the possibility is much more limited as the inefficiency often prevents you from uploading super complex programs. The third type, sort of combines elements from these two to have a programmable ledger, that with some tweaks like more centralization becomes more efficient and more usable for enterprise use. We’ll look at Ripple as an example of this class.

The next two types are examples of the apps that you can build on a programmable blockchain. One type called utility tokens represent access right to some blockchain apps. These tokens are the ones that you usually see in the initial coin offering or ICOS. We’ll cover these in our credit tech course. Another example of these apps are Stablecoins, which are like the asset-based securities in the blockchain world. The goal as their name suggests is to use the programmability of the blockchain to essentially pecked a value of these tokens to a fiat currency like the dollar or peg it to the value of some real assets like gold or real estate. We’ll cover this type when we discuss the cryptocurrency market.

The first three types tend to be called quote and quote coins, which comes was their own blockchains. The next types tend to be called tokens, which are apps that piggyback on other blockchains. The next types tend to be called tokens, which are apps that piggyback on other blockchains. Another way that blockchain technologies are usually classified is how accessible they are. That is how visible the data stored on there are to the public. On one extreme for most publicly traded cryptocurrencies like Bitcoin, data on the blockchain is visible to the entire Internet. Everyone can access these data by either joining the network or simply go to a third party website like Block Explorer or Ether Scan.

Because it’s public, anyone can join and become a node. Note that this is different than using the blockchain as end user. As a node, you are a processor and are to provide the intermediation services like transaction verification to the client users. In some settings, a node is called a minor. In other settings, it’s called a validator. Will explain these terms shortly. And more importantly because everything is public, these systems usually aim to maintain a high level of anonymity. In practice, this means hiding the nodes and the clients behind some pseudo anonymous identity generated using cryptography. Such that as a public viewer, you can see all the transactions but cannot guess who made those transactions.

And because everyone can participate, this system could have a lot of nodes and is the most decentralized version of the blockchain. Therefore, they need some complex consensus process to make sure that at the end of the day all the nodes have the same copy of the data.

On the other extreme is a private blockchain, which is very similar to a shared database. Instead of open to the public, these blockchains are just set up as data sharing tools between some already trusted parties. Say between a manufacturer and its suppliers. Because of this, all the members, the nodes are completely known to each other, and others cannot join without permission. And because the party’s already known to each other, often times there’s no need for any consensus mechanism. And whoever uphold the data, could for instance just share it with everybody. And there’s no need to use a token to incentivize other parties to participate either. Not surprisingly, this type of blockchain is the closest analog to a shared Google doc.

And it’s consequently used primarily for either internal purposes or B2B applications between already trusted business parties. In the middle, taking features from both public and private blockchains is a permission blockchain. Here, just like a public blockchain, the data could be made publicly available in an anonymized form. But like a private blockchain, not anyone can just simply sign up to become a node. Access to this system is tightly controlled and noded, minors or validators have to receive permission to be able to participate. And because of this, just like a private blockchain, the consensus process is usually much simpler.

At the same time if the data is made public, this could also serve as a monitoring device to ensure that the permission nodes are not doing anything bad. This would theoretically enhance the processing efficiency making it more suitable as enterprise-level product that could be used in high volume, high frequency applications such as cross-border business payments. Ripple and Hyperledger fabric are examples of permission blockchains.