When a company is formulating a blockchain solution to fill its
supply chain needs, inevitably the decision must be made as to what
type of blockchain is best suited for the project. Therefore,
it is essential to have a clear understanding of the options
available for
blockchain structures. Not all types of blockchains
are appropriate for supply chain information management.
Permissionless vs. Permissioned Blockchains
All types of blockchains can be characterized as permissionless,
permissioned, or both.
Permissionless blockchains allow any user to
pseudo-anonymously join the blockchain network (that is,
to become “
nodes” of the network) and do not restrict the rights of
the nodes on the blockchain network.
Conversely,
permissioned blockchains restrict access to the network to
certain nodes and may also restrict the rights of those nodes on
that network. The identities of the users of a permissioned
blockchain are known to the other users of that permissioned
blockchain.
Permissionless blockchains tend to be more secure than
permissioned blockchains, because there are many nodes to
validate transactions, and it would be difficult for bad actors
to collude on the network. However, permissionless
blockchains also tend to have long transaction processing times due
to the large number of nodes and the large size of the
transactions.
On the other hand, permissioned blockchains tend to be more
efficient. Because access to the network is restricted, there
are fewer nodes on the blockchain, resulting in less processing
time per transaction.
Like so many things, pros come with cons, and the reduced
processing time in permissioned blockchains is no exception:
the
centralization of permissioned blockchains to some
central authority (be it a government, a company, a trade
group, or some other entity or group that is granting the
permission to nodes and creating the restrictions of the
blockchain) makes it a less secure system that is more prone to
traditional hacking vulnerabilities. The fewer nodes there
are on a blockchain, the easier it is for bad actors to collude, so
private blockchain administrators must ensure nodes adding and
verifying
blocks are highly trusted.
Types of Blockchains
There are four types of blockchain structures:
- Public Blockchains
Public blockchains are permissionless in nature, allow
anyone to join, and are completely
decentralized. Public blockchains allow all nodes of the
blockchain to have equal rights to access the blockchain, create
new blocks of data, and validate blocks of data.
To date, public blockchains are primarily used for exchanging
and mining
cryptocurrency. You may have heard of popular public
blockchains such as Bitcoin, Ethereum, and Litecoin. On these
public blockchains, the nodes “mine” for cryptocurrency
by creating blocks for the transactions requested on the network by
solving cryptographic equations. In return for this hard
work, the miner nodes earn a small amount of cryptocurrency.
The
miners essentially act as new era bank tellers that
formulate a transaction and receive (or “mine”) a fee for
their efforts.
- Private (or Managed) Blockchains
Private blockchains, which may also be referred to as managed
blockchains, are permissioned blockchains controlled by a single
organization. In a private blockchain, the central authority
determines who can be a node. The central authority also does
not necessarily grant each node with equal rights to perform
functions. Private blockchains are only partially
decentralized because public access to these blockchains is
restricted. Some examples of private blockchains are the
business-to-business virtual currency exchange network Ripple and
Hyperledger, an umbrella project of open-source blockchain
applications.
Both private and public blockchains have drawbacks – public
blockchains tend to have longer validation times for new data than
private blockchains, and private blockchains are more vulnerable to
fraud and bad actors. To address these drawbacks,
consortium and
hybrid blockchains were developed.
- Consortium Blockchains
Consortium blockchains are permissioned blockchains governed by
a group of organizations, rather than one entity, as in the case of
the private blockchain. Consortium blockchains, therefore,
enjoy more decentralization than private blockchains, resulting in
higher levels of security. However, setting up consortiums
can be a fraught process as it requires cooperation between a
number of organizations, which presents logistical challenges as
well as potential antitrust risk (which we will examine in an
upcoming article). Further, some members of supply chains may not
have the needed technology nor the infrastructure to implement
blockchain tools, and those that do may decide the upfront costs
are too steep a price to pay to digitize their data and connect to
other members of the supply chain.
A popular set of consortium blockchain solutions for the
financial services industry and beyond has been developed by the
enterprise software firm R3. In the supply chain sector,
CargoSmart has developed the Global Shipping Business Network
Consortium, a not-for-profit blockchain consortium which aims to
digitalize the shipping industry and allow maritime industry
operators to work more collaboratively.
1
- Hybrid blockchains
Hybrid blockchains are blockchains that are controlled by a
single organization, but with a level of oversight performed by the
public blockchain, which is required to perform certain transaction
validations. An example of a hybrid blockchain is IBM Food
Trust, which was developed to improve efficiency throughout the
whole food supply chain. We will discuss IBM Food Trust in more
detail in an upcoming article in this series.
Blockchain Types for Supply Chain Use
Because members of supply chains have important data privacy and
competition considerations, blockchain for supply chain requires
some extent of permissioned functionality, which exists in private,
consortium and hybrid models of blockchain. It is therefore
not surprising that Businesswire recently reported that consortium
and hybrid blockchain types are expected to grow at the highest
rate in the supply chain market from 2020-2026.
2 Future articles in this “Blockchain in
Supply Chain” series will explore some of the popular
consortium and hybrid blockchains being implemented in the supply
chain sector.
Decisions, Decisions
Footnotes
1 CargoSmart and Maritime Industry
Operators Commit to Transforming the Shipping industry,
CargoSmart (July 12, 2019), https://www.cargosmart.com/en/news/cargosmart-and-maritime-industry-operators-commit-to-transforming-the-shipping-industry.htm;
Our Platform, GSBN, https://www.gsbn.trade/our-platform (last
retrieved July 19, 2021).
2 The Worldwide Blockchain Supply
Chain Industry is Expected to Reach $3+ Billion by 2026 –
ResearchAndMarkets.com. Businesswire (March 16,
2021), https://www.businesswire.com/news/home/20210316005759/en/The-Worldwide-Blockchain-Supply-Chain-Industry-is-Expected-to-Reach-3-Billion-by-2026—ResearchAndMarkets.com.
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