What Is DLT and Different Types of Blockchain?
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Blockchain was invented over a decade ago, and as Bitcoin became popular, it changed the way the world saw online transactions and digital currencies. Along with the Bitcoin blockchain, other Distributed Ledger Technologies (DLTs) emerged and saw use in various industries, such as finance, healthcare, and real estate.
In this article, I’ll explain the different types of Blockchain and their fundamentals. We’ll also discuss the different protocols used to reach consensus so everyone is on the same page about which transactions are legit and which are from malicious actors.
In this article
What is DLT?
A DLT is a digital system for recording asset transactions in which the transactions and details are recorded in multiple nodes simultaneously.
Unlike traditional databases, a DLT does not store information centrally. It is distributed and decentralized, spread out over multiple nodes, each containing the same information. This decentralization provides better security and transparency, and parties using it don’t need to trust each other, just the protocol.
A distributed ledger can record data such as a registry, transactions, etc. A consensus algorithm verifies the data and makes the decentralization work, making it often more secure than a centralized solution. We’ll soon discuss the different mechanisms used to reach a consensus.
The terms DLT and blockchain are often used interchangeably, but blockchain is a type of implementation of DLT.
Related: A Beginner's Guide to Cryptocurrency
What is blockchain?
Blockchain is a shared, immutable ledger for recording transactions in a way that makes it difficult or impossible to change, hack, or cheat the system.
A blockchain is formed by blocks chained together. Each block bundles transactions together, along with the actual timestamp and the cryptographic hash of the previous and current blocks. Each additional block reinforces the ones before it, as hacking a single block requires hacking every subsequent block as well.
How does a blockchain achieve consensus?
One of the challenges of blockchain is determining which transactions are legitimate and should be added to the network. This is called the “Byzantine Generals Problem.”
Now, imagine several generals, with their armies, surround a city, and to successfully conquer it, they need to attack together. To coordinate this attack, they must send messengers between them and reach a consensus on when to attack. But which messengers are to be trusted? And how can you be sure your message arrived?
Blockchains do this using various consensus mechanisms. These protocols ensure that all nodes are synchronized and validate legitimate transactions. Even if malicious and corrupt actors try to change the transactions, as long as they are not the majority, the consensus mechanism adopted by all the nodes validates legitimate transactions.
Different blockchain consensus mechanisms
The consensus mechanism adopted depends on the desired outcome for each specific blockchain. The biggest influence on deciding which consensus mechanism to pick is the “scalability trilemma.”
The Scalability Trilemma, a term coined by Vitalik Buterin (founder of Ethereum), refers to a widely held belief that decentralized networks can only provide two of three benefits at any given time concerning decentralization, security, and scalability.
Proof of Work
Proof of Work (PoW) is the consensus mechanism Satoshi Nakamoto used to secure Bitcoin and solve the “Byzantine Generals Problem.”
In a PoW-based blockchain, miners solve complex mathematical puzzles with huge amounts of computational power to add a new block to the blockchain. This puzzle has no utility besides proof that work has been done. So, miners need more computational power to find the answer faster and have a higher chance of getting the rewards for creating a new block. Depending on the speed at which the algorithms are solved on the Bitcoin blockchain, the algorithm automatically adjusts the difficulty so a block is created on average every 10 minutes.
The downside of PoW is how energy-intensive it is. According to the University of Cambridge’s Bitcoin electricity consumption index, bitcoin miners are expected to consume roughly 140 TWh of energy, roughly 0.6% of global electricity consumption.
A PoW blockchain tends to score high in decentralization and security but low in scalability.
Related: What Is Bitcoin?
Proof of Stake
Proof of Stake (PoS) is a consensus mechanism where only network actors who have a financial stake in the network could add the blocks in the blockchain. Users can stake their tokens to become a validator (someone who can produce blocks), which means they lock their tokens up for a certain time. After doing so, they are eligible to produce blocks. They also get tokens as a reward, just like mining in a PoW blockchain. They usually receive the transaction fees along with a fixed reward.
If bad actors try to manipulate the transactions, they risk losing everything they staked to become validators. So, each validator has a vested interest in keeping the network secure.
It is also more environmentally friendly than PoW since instead of using computational power to validate transactions. Validators must just hold the coins of the blockchain on which they are validating.
Delegated PoS
Delegated Proof of Stake (DPoS) is a very fast consensus mechanism. To achieve increased scalability, some decentralization and security are sacrificed.
In a DPoS system, users can stake their coins to vote for a certain number of delegates. Delegates are voted to govern the system and to propose core changes. The delegates that receive the highest amount of votes get to produce blocks and are rewarded for creating these blocks. Just like with PoS, they are either paid from the transaction fees or a fixed amount of coins.
Electing delegates is a continuous process, so who the top delegates are can constantly change. If an elected node misbehaves or does not work efficiently, it will be quickly expelled and replaced by another one.
Alternative consensus mechanisms
The consensus mechanisms above are the most commonly used. Yet, depending on the demands, a blockchain may need a different consensus protocol. Here’s a list of alternative consensus mechanisms:
- Proof of Authority
- Proof of Capacity
- Proof of Elapsed Time
- Proof of Identity
- Proof of Authority
- Proof of Activity
- Practical Byzantine Fault Tolerance
- Asynchronous Byzantine Fault Tolerance
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Consensus mechanism used by popular cryptos
Consensus mechanism | Cryptocurrency |
Proof of Work | Bitcoin, Ethereum, Litecoin, Dogecoin |
Proof of Stake | Stellar, Ethereum 2.0 |
Delegated Proof of Stake | Tron, EOS |
Proof of Authority | VeChain |
How do we solve the scalability trilemma?
There is no solution to the trilemma for Layer 1 protocols in the decentralized ecosystem yet. Layer 1 refers to blockchain protocols like Bitcoin, Litecoin, and Ethereum.
So far, the solution lies in Layer 2 protocols. They operate on top of the Layer 1 blockchain and are often built to improve scalability, transaction speeds, and efficiency. The Lightning Network is an example of a Layer 2 solution built on top of Bitcoin.
These solutions achieve decentralization, security, and scalability, often through batching transactions and periodically settling them on the Layer 1 blockchain. Thousands of transactions can be made, and only the final state gets passed along to a settlement layer like Bitcoin or Ethereum.
Different types of blockchains
Due to its adaptability and ease of use, various industries have started incorporating blockchain technology. As each industry functions in its unique manner, different types of blockchain have evolved. The need to match the dynamic needs of various sectors led to the introduction of different types of blockchain.
Public blockchain
As the name suggests, a public blockchain is a non-restrictive, permission-less distributed ledger system.
It does not restrict who can participate or be a validator or node. No one has complete control over the network, which ensures data security and helps immutability because a single person can not manipulate the Blockchain. Anyone is authorized to access the ledger, validate and verify transactions, and mine.
Public blockchains are secure, transparent, and require no intermediaries. Because of their public nature, they are highly censorship-resistant.
Private blockchain
A private blockchain, as the name suggests, is a restrictive system that everyone cannot access freely. Private blockchains are usually used within an organization or enterprise where only selected members participate in a blockchain network. Only pre-chosen entities have permission to access the blockchain. These entities are chosen by the respective authority and are given permission by the blockchain developers while building the blockchain application.
Private blockchains are similar in use to public blockchains but have a small and restrictive network. They are deployed for voting, supply chain management, digital identity, asset ownership, and other purposes.
Private blockchains are fast and more scalable. However, they have downsides, including centralization, lower security, and the trust required in the blockchain operator.
Examples: Ripple, Hyperledger Fabric, Corda
Consortium
Consortium blockchains are governed by a group and not by a single entity. This contradicts what we saw in a private blockchain, which only a single organization manages. More than one organization can act as a node in this type of blockchain and exchange information or do mining. Banks, government organizations, etc., typically use consortium blockchains.
This approach has all the same benefits as a private blockchain and could be considered a sub-category of private blockchains rather than a separate type of chain.
Examples: Energy Web Foundation (EWF), R3
Hybrid
A hybrid blockchain combines the features of both private and public blockchains. It lets one have a public permissionless system and a private permissioned system. With such a hybrid network, users can control who gets access to which blockchain data is stored. Only a selected section of data or records from the blockchain can be allowed to go public, keeping the rest confidential in the private network.
The hybrid blockchain system is flexible, so users can easily join a private blockchain with multiple public blockchains. A transaction in a private network of a hybrid blockchain is usually verified within that network, but users can also release it in the public blockchain to get verified.
Example: Dragonchain
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Coins and tokens without blockchains
Many of the most popular tokens and coins don’t have their own blockchains. They are created on top of existing ones.
Tokens
Tokens differ from traditional cryptocurrencies because they're not intended to be used as general-purpose currency. They're also created as smart contracts on top of existing blockchains, such as Ethereum, and do not exist as stand-alone systems. Blockchains like Polkadot and Cardano will soon also have tokens being created on top of them.
As you might imagine, there are various use cases for crypto tokens. They can represent assets like NFTs, real estate, stocks, or bonds. Some are used as a payment method to use the project that launched the token.
Examples: Chainlink, Uniswap, Theta
Stablecoins
As the name suggests, stablecoins are cryptocurrencies created for the sole purpose of providing reliable value storage. They came about because standard cryptocurrencies like Bitcoin and Ether can fluctuate wildly in value over a short span.
They have some mechanism to keep them stable, pegged to a specific value. Most keep reserves of those currencies as a guarantee of the token’s value.
Examples: USDT, USDC, BUSD
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The bottom line
DLT is a new technology that enables us to build decentralized alternatives to the current status quo. The DLT and consensus mechanism used heavily depend on a project or company's requirements.
As stated in the “scalability trilemma,” there is often a trade-off between scalability, security, and decentralization. This is similar to the college trilemma, where one must choose between enough sleep, good grades, and social life.
Through the development and adoption of Layer 2 solutions, we might soon enjoy the benefits of having all three: scalability, security, and decentralization opening the doors to a host of new possibilities.
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Writer
Claudio is a freelance copywriter specialized in finance and cryptocurrencies. Besides writing, he is interested in biohacking, trading cryptocurrencies and being curious.
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