What is Blockchain? The Ultimate Guide

CONTENTS:

1. Blockchain Technology Summary
2. Making Sense of Blockchain
   • A Brief History of Blockchain
   • How Does Blockchain Work?
   • Types of Blockchains: Public, Private, Consortium and Hybrid
   • Blockchain Use Cases
3. Is Blockchain Technology the Future?
4. FAQs
   • What is the difference between Blockchain and DLT?

1. Blockchain Technology Summary

Blockchain is a database or ledger that records asset transactions that take place via the internet. Unlike traditional databases, records are distributed in multiple locations at the same time, and no centralized authority approves or verifies them. In this perspective, a blockchain is a type of DLT (distributed ledger technology). A peer-to-peer network. 

One of the long-standing problems with distributed systems is the issue of trust. Is it possible to reach a consensus in a computer network made up of independent, distributed nodes? – This is what is called the Byzantines Generals’ Problem. 

In 1982, Lamport, Shostak, and Pease described different solutions to tackle this problem. One of their solutions was to use “cryptographic signatures.” Also in 1982, cypherpunk David Chaum was the first to propose a system similar to blockchain, he called it vault systems.

Other well-known cryptographers attempted to provide alternatives, but they all lacked one critical component: a workable consensus mechanism.

It wasn’t until Satoshi Nakamoto came to the scene. Nakamoto used a consensus mechanism he called Nakamoto Consensus to solve the Byzantines Generals’ Problem and its connected issue, the double-spending problem. 

Nakamoto proposed a proof-of-work (aka mining) consensus mechanism to prevent fraud and encourage members to act honestly. To validate and verify transactions, special nodes (miners) must use a vast amount of computer power to solve two cryptographic puzzles (asymmetric public-key to verify a transaction and a hash function to add a new page or block to the ledger). To structure the data, Nakamoto used a DLT with unique properties, a blockchain. 

A blockchain is a ledger in which data is stored in blocks (pages). In order to chain those blocks (pages) together, a special key is needed, a cryptographic signature (hash). You can think of a hash as a “block signature” by a validator (miner). A new block contains the hash of the previous block (pointer), resulting in a “chain of blocks (aka blockchain).” Because of its design, the history of transactions is nearly impossible to modify or delete. 

Since its inception, blockchain technology has experimented numerous transformations. Let’s say we want to build a digital society from scratch, how would we do it?

1. Blockchain Inception: First, we will ideate a new “weapon of mass destruction”
2. Blockchain 1.0: Second, we will create digital money. E.g., Bitcoin. 
3. Blockchain 2.0: Third, we will disrupt the economy and create a fully functional digital economy. E.g., Ethereum
4. Blockchain 3.0: Fourth, we will disrupt society and create a fully functional digital society. E.g., Ethereum 2.0, Cardano, Polkadot, IOTA, etc.

Blockchain technology is spreading like wildfire, and its use cases stretch far beyond what many of us could have envisioned a few years ago. From its primary purpose, digital money, to decentralized finance (DeFi) to NFTs, crypto gaming, and the metaverse to supply chain, automotive, healthcare, among others. 

Aside from public blockchains (e.g., Bitcoin, Ethereum), new blockchains such as private blockchains (e.g., Ripple), consortium blockchains (e.g., Hyperledger), and hybrid blockchains (e.g., IBM food trust) have emerged to tackle specific industry problems

At its core, blockchain technology solves the problem of centralization, the problem of trust. This is vital when the stakes are high, but for other problems, a centralized (or hybrid) solution may be preferable. Usually, there is a trade-off between efficiency and security (robustness). 

Blockchain technology is revolutionary in that is a distributed, trustless, immutable, censorship-resistance, and transparent system that does not require a third party. 

However, there are some challenges that the new generation of blockchains are attempting to address, such as 51% attacks, data modification, private keys, scalability, and energy efficiency. We are optimistic that as time goes on and adoption grows, these issues will be solved.

If you want to know why blockchain technology is considered to be the most innovative tech of the 21st century (after the internet) with the potential to change the fate of humanity for the better. Keep on reading!

2. Making Sense of Blockchain

People overcomplicate the technology that underpins cryptocurrencies. In this section, we will make sense of blockchain. First, we’ll travel back in time, then we’ll go deep into how it works, what types there are, and last but not least, we’ll look at their applications.

A Brief History of Blockchain

Since its inception, blockchain has experimented numerous transformations. 

Blockchain Inception (1970 – 2009)

Blockchain technology is a synthesis of various proposals by researchers and cryptographers since the 1970s. Pioneers in public-key cryptography include James Ellis (1970), Clifford Cocks (1973), Diffie and Hellman (1976), Ralph Merkle (1978), and others. The following ideas build on those:

Lamport, Shostak, and Pease (1982): In 1982, Lamport, Shostak, and Pease described different solutions (such as digital signatures) to tackle one of the hardest puzzles in computer science: The Byzantine Generals Problem. 

David Chaum (1982): Cryptographer and cypherpunk David Chaum was the first to propose a concept like blockchain (vaults system) in his 1982 dissertation: “Computers Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.”  David Chaum is also credited for inventing digital cash.

• David Chaum suggested Vault Systems, which included all the blockchain components present in Bitcoin except one: proof of work. A consensus mechanism to validate transactions and update the ledger using computational power to prevent double-spending (counterfeiting). 

Stuart Haber & W.S. Stornetta (1991-1992): In 1991 & 1992, Stuart Haber and W.S. Stornetta advanced the concept of a cryptographically secured chain of blocks (Blockchain) by answering the following question: In a digital world, how do we certify if a document is genuine, created or last changed? The answers are in those two papers: 

• “How to Time-Stamp a Digital Document (1991)”, where they proposed attaching timestamps (signatures) to digital documents and storing them on a block chain.
• “Improving the Efficiency and Reliability of Digital Time-Stamping (1992)”. They integrated Ralph Merkle’s ideas (Merkle Trees) to improve efficiency and allow numerous documents to be bundled into one block.

Adam Back, Naor, and Dwork (1997): In 1997, Adam Back (along with Naor and Dwork) [1] pioneered the proof-of-work (consensus mechanism) that Bitcoin Blockchain uses as the mining algorithm to validate transactions. HashCash. Hashcash was originally designed to prevent email spam and later proposed by Hal Finney (RPoW), Wei Dai (B-Money), and Nick Szabo (Bit Gold) as a way of minting coins in digital currencies.

Wei Dai (1998): Wei Dai proposed two ways to keep a ledger in his B-money proposal to create digital cash: PoW based on HashCash and a novel consensus mechanism in which computer power was not required. Today is known as PoS (proof-of-stake) [2].

Hal Finney RPoW (2004): Hal Finney, a computer scientist, and cypherpunk, built on HashCash proof-of-work and prototyped RPOW (Reusable Proofs of Work) [3]. Hal Finney applied hascash proof-of-work to money and made it “reusable (exchangeable)” to save resources in the minting process of a PoW token. 

As an early prototype, RPoW was an important early step in the history of cryptocurrencies and blockchain. There was only one issue: using a centralized computer server as a third party (Trusted Computing). 

Nick Szabo (2005): Nick Szabo’s contributions are endless, from coining the term smart contract in 1994 to creating the first simplified blockchain version. This blockchain version powered Bit Gold, a cryptocurrency that attempted to create “digital gold.”

Although Nick Szabo’s idea was never implemented, it has a remarkable resemblance to the Bitcoin Blockchain. Bit Gold is considered to be its precursor.
All these proposals and implementations had one thing in common: they did not solve the byzantine generals’ problem, also known as the double-spending problem.

The Blockchain Generations – The Evolution of Blockchain

There is no agreement on how many blockchain generations exist; however, there is agreement that at least three exists.

Blockchain 1.0 – Digital Currency, Digital Money (2008 – 2013)

The first application of blockchain technology was money. The aim of the first generation was to improve the current fiat monetary system (or even replace it with a brand new technology). In other words, to forge “internet money.”

The first generation began when Satoshi Nakamoto revealed the true utility of blockchain as a technology in the well-known Bitcoin whitepaper, a decentralized digital “cash” system that allows money to be transferred over the internet without the need for a central bank. With the blockchain, people rely on cryptography rather than banks. 

Satoshi Nakamoto developed a consensus mechanism (also called Nakamoto Consensus) to verify the authenticity of a blockchain network. Bitcoin was the first to use a proof-of-work (PoW) consensus mechanism in a decentralized network for both mining (transaction verification) and achieving consensus (update ledger), thus solving the Byzantine’s general problem or double-spending problem. 

The first generation witnessed the introduction of Bitcoin and the majority of its clones (forks), which compete to become the new “internet money” by addressing some of Bitcoin’s shortcomings such as privacy (anonymity), scalability, and energy efficiency.

The characteristics of the first generation of blockchains are as follows:

• Peer-to-peer network (decentralization): Most “cryptos” use an open, “anonymous” and transparent decentralized network. 
• Cryptography: Most of them use a pair of keys (public and private) for identity purposes and hash functions to timestamp blocks. 
• Consensus Mechanism: Most cryptos use proof-of-work (mining), computer power to verify and update the ledger. 
• Finite Supply: Most of them are deflationary currencies with a finite supply.
• Programming Language: The majority of “cryptos” are developed in C++ and use Bitcoin’s code either directly (Bitcoin Cash) or indirectly (Dogecoin) through forks. 
• Limited functionality: The first generation was simple in its design and lack important features like the ability to use smart contracts. 

Examples: Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC), Zcash (ZEC), etc. 

Exceptions: Centralized altcoins such as Ripple (XRP), Stellar (XLM), and stablecoins such as Tether (USDT), as well as “privacy coins” such as Monero (XMR) that use their own technologies.

At Altcoins mastery we referred to them as “payment altcoins”

Blockchain 2.0 – Digital Economy (2013 – 2018)

The second wave of blockchain technology is about more than just money. Many innovators saw that blockchain could be used to process and record many other activities that required trust. The goal of the second generation is to establish a fully functional digital economy. 

The second generation began in 2013 when Vitalik Buterin release the Ethereum Whitepaper. Vitalik Buterin realized that he could enhance the functionality of blockchain 1.0 by adding a fully-fledged computer (Turing-complete virtual machine) capable of running programs (Smart contracts) and developing apps (decentralized applications or dApps). 

If Bitcoin is “digital gold” in our new digital economy, Ethereum is the platform on which to build “businesses (apps)” to sell products and services without the need for a third party. You can also think of Ethereum as the “iPhone.” 

The second-generation witnessed the introduction of Ethereum, the birth of the Hyperledger Project, the explosion of ICOs (developers could launch their own cryptocurrencies) built on Ethereum (ERC20 tokens) or other nascent smart contract platforms like NEO or ICON, the first DAOs (decentralized autonomous organizations) and the disruption of the traditional financial industry by Decentralized Finance (DeFi).

The characteristics of the second generation of blockchains are as follows:

• Peer-to-peer network
• Cryptography
• Consensus Mechanism: They mostly use proof-of-work, which suffers from the same issues as the first generation of blockchains. However, as alternatives, proof-of-stake (PoS) and delegated proof-of-stake (dPoS) are introduced.
• Programming Language: Ethereum is based on Javascript and has its own programming language, Solidity, for developing dApps. NEO, for example, is written in C# and supports Javascript, Java, Python, and Go programming languages.
• Wider functionality: Smart contracts and dApps
• Increase in use cases: Blockchain 2.0 expands beyond simple payments, transfers, and transactions to include financial services. Examples include traditional banking instruments such as loans and mortgages, complex financial market instruments such as stocks, bonds, futures, and derivatives, and legal instruments such as titles, contracts, and other monetizable asset property.

Examples: Ethereum (ETH), NEO (NEO), ICON (ICX), MakerDAO (MKR), and dApps like Compound (COMP), Aave (AAVE), Uniswap (UNI), etc. 

At Altcoins Mastery, we classify smart contract platforms as infrastructure/platform altcoins whereas financial dApps as financial services altcoins. 

Blockchain 3.0 – Digital Society (2018 – Present)

Third-generation blockchains go beyond financial services and improve on Blockchain 2.0. The goal is to make Blockchain 2.0 more efficient and ready for mass adoption. It is fair to say that some technologies are inspired by blockchains, yet are whole new technologies developed to overcome the limitations of these. The goal of the third generation is to establish a fully functional digital society. 

We could place the start of the third-gen with the launch of Cardano (ADA), Polkadot (DOT), EOS.IO (EOS), and IOTA (MIOTA) in 2017 and the development of new technologies such as Hashgraph (HBAR), Holochain (HOT) and Sidechains (e.g., RSK) in 2018.   

We are currently witnessing the explosion of NFTs and the Metaverse, as well as the abandonment of proof-of-work as the primary consensus mechanism in favor of more efficient alternatives such as proof-of-stake (PoS), the rise of the interoperability layer to connect blockchains together (Polkadot), the creation of blockchains focusing on specific use cases (EOS for dApps), the proliferation of DLTs (distributed ledger technology) as blockchain alternatives to tackle specific industry problems such as Internet of Things (IOTA), and so on. 

The common characteristics of the third generation are: 

• Peer-to-peer network: Greater decentralization with public blockchains and less with private blockchains. 
• Cryptography
• Consensus Mechanism: Proof-of-work is abandoned in favor of proof-of-stake (PoS) or delegated proof-of-stake (dPoS). New consensus mechanisms emerged: Trustless proof-of-Stake (TPoS), Proof-of-Burn (PoB), Proof-of- Importance (PoI), Proof-of-Signature (PoSign), Proof-of-Humanity (PoH), etc. 
• Programming Language: Blockchains upgrades to enable additional programming languages, allowing more programmers to participate.  
• Wider functionality: The majority of solutions try to improve scalability issues in order to facilitate mass adoption: lightning network, cross-chain transactions, etc. Improved mechanism for smart contracts (inbuilt software verification), etc. 
• Increase in use cases: Blockchain 3.0 expands towards art, health, science, identity, governance, education, public goods, media & entertainment, etc. 
• New technologies emerged: Faster, fairer, and more secure technologies emerged as alternatives to blockchain such as Hedera Hashgraph (HBAR) which achieve absolute security and can handle 100,000 transactions per second. Other examples include Holochain which proposes multi-chain solutions, and Tangle, which provides unlimited scalability for the internet of things (IoT) while remaining quantum-safe (unhackable by quantum computers).

Examples: Ethereum 2.0 (ETH), Cardano (ADA), Polkadot (DOT), EOS.IO (EOS), Decentraland (MANA), Axie Infinity (AXS), IOTA (MIOTA), Hashgraph (HBAR), etc. 

At Altcoins Mastery, we classify third-generation blockchains and new technologies as infrastructure/platform altcoins whereas services dApps that go beyond finance as non-financial altcoins (others). 

How Does Blockchain Work?

And, finally! We will discuss (simply) the technical aspects of blockchain. The first thing we need to understand is what a Blockchain solves. 

The Byzantine Generals’ Problem

The Byzantine Generals’ Problem is a game theory problem that has puzzled humanity for centuries and was deemed “unsolvable” until mathematicians Lamport, Shostak, and Pease (1982 [4]) proposed several ways in which could be solved (theoretically). Satoshi Nakamoto was the first to solve it (practically) in 2009.  

Don’t be put off by its fancy name. The Byzantine Generals’ Problem is a metaphor that shows the difficulty that nodes (decentralized parties or generals in the metaphor) face in reaching consensus without relying on a trusted central party. 
In other words, how can we ensure that everyone agrees on the next move in a distributed network with no central authority? How can we trust in one another?

The metaphor goes as follows: 

Imagine you are a general in the Byzantine army (or Danerys Targaryen if you are a fan of game of thrones) who wants to conquer a well-stocked and fortified city (King’s Landing to sit on the Iron Throne). Your lieutenants (Jon Snow, Ramsay Bolton, Jorah Mormont, and Melisandre) have the city surrounded. The only way for the city to fall is to plan a coordinated attack. If there is any miscommunication, the offense will fail. 

Now assume the only way to communicate is via messengers and some lieutenants are traitors (Ramsay Bolton, Melisandre, etc) who use black magic to poison the mind of loyal generals from agreeing upon a common course of action. 

To prevent small traitors to disrupt communications (byzantine failures) an algorithm is needed. To solve the Byzantine Generals’ problem, loyal leaders need a secure way to come to an agreement (known as consensus) and carry out the attack (known as coordination). 

How does Blockchain Solve the Byzantine Generals Problem?

Lamport, Shostak, and Pease presented the problem in abstract form to generalize it to all distributed systems. Satoshi Nakamoto solved that problem in terms of blockchain and cryptocurrencies. One of the fundamental issues that arise if we do not reach consensus in a decentralized payment system is the problem of double-spending. 

We described that problem in “What is Bitcoin? The Ultimate Guide.” 

“Double-spending” means that the same units of a currency can be spent twice. In other words, “digital counterfeiting.”  

Assume, for the sake of argument, that Jon Snow purchases two swords from Jamie Lannister for $100. Transactions in a cash-based system are irreversible. However, because digital currencies are essentially digital files, it is easy to copy and spend the same file (money) several times. We can’t rely on users to always act in the best interests of the system. In a centralized system, this is solved by trusting a third party. 

But how do we solve that problem in a decentralized system? 

We place the trust in a public, distributed ledger that keeps a record of all transactions. In the Byzantine Generals problem analogy, the blockchain is the truth that all parties must agree on. 

But how do we agree on which transactions took place and in what order? How do we prevent the generals’ problem and double-spending? How do we validate them?

The solution lies in a Byzantine fault-tolerant consensus algorithm. In other words, in a consensus mechanism. Satoshi Nakamoto called it “Nakamoto Consensus.”

What is Nakamoto Consensus?

The Nakamoto Consensus is a set of rules used to validate the authenticity of a blockchain network. To reach consensus applies a proof-of-work consensus algorithm on a Byzantine Fault Tolerance (BFT) peer-to-peer network.  

Byzantine Fault Tolerance (BFT) has been used in peer-to-peer networks before for crypto-related projects, and even some early forms of digital currency. However, they were problems. Classical BFT systems use a voting system for consensus, in simple terms, if a leader “cheated” like in the Byzantines’ General Problem analogy he could disrupt the system and remove other loyal leaders. 

The real breakthrough came when Satoshi Nakamoto proposed a proof-of-work (aka mining) Sybil Resistance mechanism (to avoid 51% attacks) combined with a Chain selection rule (longest chain rule) as a consensus mechanism to avoid fraud and encourage users to operate honestly.

Participants or “miners” in this system must “work” hard by devoting large amounts of computing resources to solving cryptographically hard puzzles and being chosen to add new pages to the ledger (blocks). The faster miners get rewarded with Bitcoin. If there is any conflicting information, the longest chain (ledger) with the most computational votes (power) supported by the network is the one that is legitimate. This is known as the longest chain rule, and it is essential for attaining consensus.

Essentially, miners need to solve two cryptographic puzzles. These cryptographic hard puzzles allow one to sign and verify transactions without requiring a trusted third party. 

The first puzzle (digital signature puzzle) that miners need to solve is an asymmetric-key algorithm (public-key cryptography). With public-key cryptography the sender signs transactions with her private key. Using his correspondent public key, miners can verify and ensure that the sender has the funds and the signature actually belongs to the sender. This is easy to verify and not part of proof-of-work.

The second cryptographic puzzle (proof-of-work puzzle) is what is called a hash function. A hash function is a type of cryptographic signature, you can think about it as a miner’s “block signature”. The sender signs the transaction with her private key. The miner signs a block with a hash. The term “proof-of-work” refers solely to completing this difficult puzzle.

Once transactions are verified, miners bundled them up into blocks. For a new block (page) to be added to the chain (ledger) miners search for a specific key (hash) that must meet certain parameters established by the network (in case of bitcoin, bitcoin uses SHA-256 hash algorithm which requires the number to start with a specific amount of zeroes). New blocks contain the hash (pointer) of the previous block, imagine this as a chain but in order to lock them together, we need to find the special key (hash) of the new block. 

To find that key, miners run data (guesses) through a one-way function that produces a unique output, that unique output is the key (hash or fingerprint). This process is called Hashing or mining (guessing). The winner takes the previous block and chains it with the new one, resulting in a chain of blocks (Blockchain). The longest chain (ledger) supported by the majority of the miner’s computing power is the valid chain.

For their work (solving those puzzles), miners receive network fees (e.g., gas fees) for the first puzzle (digital signature puzzle), and cryptocurrency (e.g., Bitcoin, Ethereum) for their “proof-of-work” in solving the second puzzle (hard puzzle or proof-of-work puzzle).

The beauty of the blockchain is that If the input of a hash is even slightly modified, the output will be completely altered. Since the blocks are linked together, it is impossible for someone to change an old entry without invalidating the blocks that follow. This is what is referred to as being immutable (irreversible). 

Elements of a Blockchain

To build a blockchain we need 5 elements: 

1. Peer-to-peer network: This is exactly what the internet provides us with nowadays. We require a network of equally privileged computers (nodes or participants). This network is open and visible to all users, allowing them to easily exchange and communicate with one another.
2. Cryptography: Cryptography enables secure communication in the presence of malevolent actors (hostile environment). Blockchains make use of two types of cryptographic algorithms (signatures), asymmetric-key algorithms (public-key cryptography), and hash functions that produce unique outputs (hash or fingerprints) to timestamp (sign) blocks and chain them together. 
3. Consensus Algorithm: The consensus algorithm is also referred as a protocol. A protocol is a set of rules that establish how we add a new page, also known as a block, to our records. Here is where most blockchains differ, there are different types of consensus rules. The most common is Bitcoin’s Proof-of-work (PoW) and Cardano’s Proof-of-Stake (PoS). 
4. Incentives (Punishment & Reward): In order to prevent fraud, we must encourage participants to act honestly. Blockchains compensate their miners (help us maintain our ledger and add new pages) with cryptocurrencies (coins or tokens) and fees (gas, etc). 
5. Market Adoption: This element is often overlooked. For a blockchain to be valued and truly decentralized, it must be maintained by a sufficient number of people. Only by reaching this critical mass will we be able to ensure that a blockchain is both robust and immutable.

Let’s illustrate how these elements interact with an image: 

The first thing we have to remember is that a Blockchain is a ledger

Here is the step-by-step process on how blockchain works

Step 1: A new transaction is requested

• Let’s say we want to send 100 USD worth of Bitcoin (or your cryptocurrency of choice that use proof-of-work) to our grandmother. 

Step 2: The transaction is broadcasted to a peer-to-peer network

• We announce the transaction to the participants (nodes) of a peer-to-peer distributed network.  
• We haven’t included it in the diagram, but the transaction is routed to a pending queue, which is a pool of transactions awaiting confirmation. This is known as a mempool.

Step 3: Miners (special nodes) solve the first cryptographic puzzle to check the validity of a transaction (check the digital signature)

• Miners verify that the digital signature actually matches with the correspondent transaction and public key (person). We signed transactions with our private key. The digital signature allows to prove ownership of funds. 
• In other words, miners check to see if Marc has the funds, and it is him who sends the money to his grandmother.

Step 4: Once transactions are confirmed, they are clustered into blocks

• Transactions are bundled up together into blocks
• Marc’s transaction is bundled up with other transactions such as Jon’s transaction. 

Step 5: Miners compete to solve the second cryptographic puzzle and find the key (hash) to chain those blocks (block signature). The winner receives cryptocurrency. 

• Miners use computer resources to solve cryptographic puzzles and find the key that will allow them to chain (lock) the blocks together, producing a long history of permanent transactions (a chain of blocks). 
• When a miner finds the key, it is published to the peer-to-peer network, allowing everyone to update the ledger.
• In exchange for their “proof-of-work”, miners receive cryptocurrency (e.g., Bitcoin, Ethereum) and network fees (e.g., gas fees). 

Step 6:Transaction is complete

• My grandma receives Bitcoin.
• Participants (nodes) update their ledgers.

Types of Blockchains: Public, Private, Consortium and Hybrid

We find at least four types of blockchain networks: 

1. Public Blockchains: In a public blockchain, also known as open or permissionless, anyone with an internet connection can join the network, send transactions as well as become a validator (miner).
   

• Use Cases: Money, transactions, document validation, etc. 
• Examples include Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), etc.

2. Private Blockchains: In a private blockchain, also known as permissioned or closed, to join we need approval by the network administrators. The participation and validation are restricted. Think about it as a company intranet. 
   

• Private Blockchains are more suitable for enterprises that do not want every participant to have access to its contents
• Such networks do not require such robust consensus mechanisms, and others do not use blockchain at all. They are DLTs (Distributed ledger technologies), which are less centralized but still have a significant degree of centralization when compared to public blockchains.
• Use Cases: Supply chain, asset ownership, etc. 
• Examples include Ripple (XRP). 

3. Consortium Blockchains: In a consortium blockchain, also known as federated blockchain, a group of private participants (e.g., companies) are responsible for the network’s maintenance. They are similar to private blockchains, except instead of a single entity, you have a group of entities working together. 
   

• Uses Cases: Banking, Research, Supply Chain, etc. 
• Examples include Quorum, Hyperledger, and Corda

4. Hybrid Blockchains: A hybrid blockchain is a combination of public and private blockchains. They are conformed by public and private entities. They usually operate in a public blockchain where a private network is hosted. Some aspects are kept private while others are open to the public. 
   

• Hybrid blockchains are best suited for projects that cannot go private or public and have a lack of trust. Most of their applications are in supply chains but they are also useful in finance, IoT, and other fields. 
• Use cases: Medical records, real state
• Examples include the IBM food trust and XinFin

Note: We did not include new technologies such as Hashgraph, Halochain, and Tangle as they are not blockchains but rather a unique type of DLT. 

Blockchain Use Cases

Blockchain applications are limitless. This is why it is regarded as the greatest invention of the 21st century. Here is a nice chart with some examples:

3. Is Blockchain Technology the Future? 

Since its inception, blockchain technology has spread like wildfire, and its use cases stretch far beyond what many of us could have envisioned a few years ago. From its primary purpose, digital money, to decentralized finance (DeFi) to NFTs, crypto gaming, and the metaverse to supply chain, automotive, healthcare, among others. 

Some even anticipate that the fourth generation of blockchains will emerge when the third meets other exponential technologies such as AI, Robotics, the Green Revolution, Quantum computing (still in development), IoT (we already have IOTA), and others.

Blockchain technology has come a long way and it is only a matter of time before a fully functional digital society emerges. 

However, blockchain technology is not a panacea and has drawbacks such as scalability (inefficiency), energy efficiency (power-hungry), and privacy. All of these issues are now being addressed by the next generation of blockchains, but we are not quite there yet.

Blockchain technology, at its heart, solves the problem of centralization. If we don’t need to decentralize something, we probably don’t need blockchain technology and would be better off with a centralized solution or a hybrid. Typically, there is a trade-off between efficiency and security (robustness). Depending on the use case, one may be preferred over the other.

The following are the Pros and Cons of blockchain technology:

4. FAQs 

What is the difference between Blockchain and DLT? 

A blockchain, a chain of blocks, is a type of DLT. This is a common example of a specialized service, product, or application displacing the “umbrella” to which it belongs. Consider Kleenex and facial tissues, or Post-it and sticky notes. Although all blockchains are DLTs, not all DLTs are blockchains.

A DLT (Distributed ledger technology) is simply a decentralized database that is managed by many nodes (participants). There is no central authority or trusted third party. That means greater transparency, robustness (difficult to hack), and resistance to fraud and manipulation. 

Blockchain is nothing else but a DLT with a specific set of features. In a blockchain, data is stored in the form of a chain of blocks that are timestamped (signed) with cryptographic hash functions. DLTs do not require such blocks or consensus mechanisms like proof-of-work, but instead, use different methods to reach consensus and store data. DLTs typically provide more scalability options.

Other DLTs besides blockchain include Hashgraph, Halochain, and Tangle.