Ask someone who uses the internet about cryptocurrency (or Bitcoin, as it’s a more popular term) and you’ll get an answer.
Cryptocurrency is becoming a popular topic and a lot of people are considering investing in it. You may even be considering it. Hence, the reason you’re reading this now.
But behind the popularity of Bitcoin, Etherium, and other cryptocurrencies, there’s something called “Blockchain”.
A blockchain is somewhat similar to a public ledger. When someone does a cryptocurrency transaction, the transaction is queued to be written on the blockchain. Once a miner is able to verify the transaction, the transaction is then written on the chain.
If you want to know more about how a blockchain works, check out this video.
Before you invest in cryptocurrency and its blockchain, you should know that there are 2 kinds of blockchains:
The cryptocurrencies you know and plan to invest are all public blockchains.
Anyone can take part in public blockchains. Inside is a built-in feature that rewards those who participate more thoroughly in the system.
The initial sale of cryptocurrencies under public blockchains is called “Initial Coin Offering” (ICO). It’s a term referring to the public sale of tokens by new crypto startups or firms to gather funds for the project.
If you’re familiar with investing in company stocks, ICO is similar to “Initial Public Offering” (IPO). Unlike in an IPO, however, you don’t gain the right to vote in company matters in ICO companies. It’s purely for investment purposes.
Private blockchains, used by enterprises, are the total opposite of public blockchains.
To take part in this type of blockchain, you have to be invited. This is the reason why public blockchains are also called “Permission Blockchains”.
In addition, some private blockchains are centralized. A company or a consortium of companies usually control who process the transaction, establish rules, and agree on what changes to make on the technology.
Now that you have an idea about the different kinds of blockchains...
Here are 5 things you should know before investing (or being accepted into one of them):
1. Peer-To-Peer Networks
Peer to Peer Network (P2P) is what gives the blockchain technology its speed, efficiency, and security.
Both public and private blockchains use a P2P network. That means the participants — the peers — of the blockchain receive a copy of the chain.
Because of this, the blockchain is distributed. There’s no one who holds the entire copy of the blockchain alone. If that’s the case, then it would be possible to erase a blockchain once and for all with a single click.
Due to the blockchain being distributed, there’s no need for a presiding authority. Such is the case with public blockchains. Some enterprise blockchains, however, have companies that more or less exert control on the blockchain.
2. Level of Performance
Of the two, the enterprise blockchains have higher performance.
To illustrate, transactions on a public blockchain don’t exceed 100 per second. In fact, the average transaction per second is around 4-7.
Private blockchains, depending on the enterprise, have to do thousands of transactions per second. Public blockchains won’t be able to handle this number of transactions.
The reason why public blockchains have fewer transactions is because of the block confirmation time. It takes 10 minutes on average to confirm a block in Bitcoin.
But that won’t work with enterprise blockchains. The information and money flowing on some enterprises reach millions in a day.
Imagine the delay large enterprises would experience if they have to wait 10 minutes for a block to get confirmed.
3. Resilience Against Outages and Issues
Both blockchains offer resilience against outages and issues. They are able to come back in case there’s an outage or issue happening.
But each specific blockchain is unique. Therefore, you should check each one and see if the blockchain is prepared in case there’s a problem.
Some actions they can do include:
Create redundant peer nodes
Have a service replication
Do clustered ordering services
4. Security and Privacy
Security and privacy are among the reasons why a lot of investors and traders are turning into blockchain and cryptocurrency.
Whether public or private, transactions are stored in a block. A block in a blockchain is connected to a block before and after it.
Tampering with a block would be a hassle to the hacker. To avoid detection, the hacker must erase his presence by changing the block with the record he wants to tamper with as well as the blocks before and after it.
In addition, the records on the blockchains are secured with cryptography — an art of writing and solving codes. Users have their own private keys acting as digital signatures. If someone alters the record, the network gets notified right away as the keys would become invalid.
In terms of anonymity, there’s a difference between public and private blockchain.
Public blockchains, like that of Bitcoin, make anonymity a selling point. It’s why traders (especially the shady ones) prefer to use cryptocurrency to move funds.
With a public blockchain, no one knows who owns a key unless its owner reveals it. That’s how public blockchains are designed.
It’s a different matter, however, with private blockchains. To join a permission blockchain, you have to be invited to it and get confirmed. That means you don’t get to hide your identity in enterprise blockchains.
Identity is what enterprises use to confirm the membership of an address and accept the transactions. Those in the same network whom they are doing a transaction with would see who’s on the other line.
Unless you belong to an enterprise or organization that uses blockchain technology, then you’re probably stuck with investing in public blockchains. But just in case, you should review the 5 things mentioned above before you participate in an “Initial Coin Offering” or maybe even exchange at cryptocurrency broker.