Everybody is talking about blockchain technology and its possibilities. However, most of the latest news surrounding blockchain speaks little to nothing about what it can achieve. The blockchain is more than the basis of Bitcoin and meme altcoins. It transcends into everything and has the potential to affect commerce, manufacturing, and even politics. It is essential to understand what, why, and how blockchain fees and technology work before blockchain can be applied to these sectors. In this article, we talk about four primary types of blockchain and fees in detail.
What Is the Blockchain?
The blockchain is a digital ledger of financial transactions that records, duplicates, and distributes financial information across an array of computer systems. It consists of blocks (a unique digital compilation of data in which new financial records are added). It contains an algorithmic cryptographic hash, a time-stamp showing the transaction time, and transaction information.
The popularity of the blockchain started as far as 2008 when a person or a group of people under the alias Satoshi Nakamoto used the word blockchain to describe a public ledger of Bitcoin. Today, Bitcoin and blockchain go hand in hand as it was the foundational implementation of Bitcoin, serving as the perfect tool to solve the issue of double-spending without depending on a central authority.
The blockchain offers benefits like independence and decentralization as it is not issued, regulated, or controlled by a federal authority. There is no middle-man to help transactions or process finances, eliminating distrust and extra costs to process transactions.
It preserves anonymity as there is no need to present loads of personal information before one can partake or use the network. So, it assures participants’ privacy. The blockchain exhibits high accuracy in transactions while ensuring utmost security, despite its 24/7 availability. The blockchain is a perfect rescue for safeguarding and accessing information. It is virtually impossible to hack, alter or change any information, making it the best tool to bypass fraud.
How Does the Blockchain Work?
The perfect way to explain how the blockchain works are to use the Bitcoin operation system. When a participant requires a desired amount of Bitcoin, he requests a purchase keyed into the computer connected to the blockchain. The request is transmitted to a network of power machines called the NODES.
Thousands of these supercomputers or machines worldwide confirm that request via computer algorithms. The process is called mining. In this case, millions of participants need Bitcoin. Hence, there is a need to fight for the scarce amount of Bitcoin left. The miners are presented with mathematical equations to be solved by the computer. So, whoever solves this first is rewarded a particular amount of Bitcoin.
The bitcoins include network fees shared with the buyer and seller. Network fees are unstable as they can either be low or high, depending on the network’s traffic and volume of Bitcoin. After a purchase is confirmed, it is added to the block of digital ledgers. The ledger can be accessed worldwide and by anyone. The block containing your purchase is permanently linked to other blocks of Bitcoin transactions by a cryptographic hash and processed before it is time-stamped.
Types of Blockchain
The blockchain is an open-source technology that applications or platforms are built upon. Although regarded as one, the blockchain is categorized into different types that allow companies to choose when they intend to formulate a blockchain solution to satisfy a particular need. There are four types of blockchains, i.e., permissionless public, permission private, consortium, and hybrid blockchain.
The public permissionless blockchain is a decentralized platform that offers no restriction or barrier to entry. With it, anyone with access to the internet is allowed to be a member and can even validate transactions easily. Here, participants can earn money via transactions, network, or gas fees, when they validate transactions. The security on the public blockchain is tightened if protocols are followed by the members and all the nodes are connected and have equal district and power. Common examples of public blockchains are Bitcoin and Litecoin.
As mentioned earlier, the public blockchain security is one of the biggest advantages it possesses given that every financial transaction on it is immutable. Also, it thrives on communal agreement; when the majority of the participants in a public blockchain agree on an issue, perhaps the validity of a transaction, it strengthens the blockchain against tampering with external bodies. Public blockchains are also very transparent. Despite being public, anonymity is preserved as transactions are stored widely across all the ledgers, making it difficult to trace them back to the original address.
Since most public blockchains operate using the Proof of Work (PoW) consensus mechanism, it can be energy-intensive consuming a lot of power. Concerning scalability, public blockchains perform poorly as the more users on a public blockchain contain, the more it gets burdened with traffic, reducing scalability.
Permissioned private blockchains are managed by blockchain controlled by a single body and can only be accessed when such a participant is given authority to provide consensus to the network. Private blockchains are created solely for companies that do not want to share their space or data with the general public.
They are centralized as entry is only possible by the approval of a central head. Unlike private blockchains which is controlled by a coalition of the members, private blockchains are governed and regulated by a central body. Common examples of private blockchains are Ripple and Hyperledger, and MultiChain.
Consortium blockchains are similar to private blockchains. However, they are controlled by multiple organizations rather than one. Multiple organizations with similar goals can combine their needs and create a private blockchain shared equally. In a consortium blockchain, there is more decentralization as compared to the private blockchain because governance is awarded to each head of the price organization. There is more security as long as cooperation is maintained among the organizations to prevent risks. A popular example of a consortium blockchain is CargoSmith, Energy Web Foundation (EWB), and R3.
The hybrid blockchain is a combination of the operating system of both the public and private blockchains. In most cases, a hybrid blockchain is controlled by one company. However, the overall functions are set to a public level and viewed by anybody. Hybrid blockchains are both permissionless and permissioned. Operators can regulate who gets access to their data, even though they are set to be viewed by the public. During data-keeping, important data is set to private while the rest can be allowed for public view. An example of a hybrid blockchain is DragonChain.
What Is the Blockchain Fee?
A blockchain is a free tool that serves as a medium for executing transactions seamlessly; if so, why is there a need to pay blockchain fees? Blockchain fees are mandatory fees added to your transactions to ensure they are processed when due. They do not go to the blockchain rather they end up as a form of reward to the validators who have played a part in the execution and processing of your transaction.
How Do Blockchain Fees Work?
When Bitcoin was created, Satoshi Nakamoto found some underlying issues limiting the free flow of transactions as they were being spammed. In Bitcoin, spammed transactions are transactions that create an extra load effect in the overall network due to their malicious intent or defiance of Bitcoin protocols. In order to ensure spammed transactions stopped, blockchain fees were introduced to help de-clog the network and speed up the processing. Blockchain fees serve as a tool to reward participants who serve as validators, reduce the finishing subsidy, help increase the blockchain security, and speed transactions.
Types of Blockchain Fees
There are various forms of blockchain fees, and they include:
Maker fees are common fees charged by big crypto platforms to makers. Makers are people who book down orders in the order book that can be fulfilled later on ( not immediately). They set the marketplace for people and provide liquidity. Since they provide these benefits, maker fees differ on several cryptocurrency platforms and are generally lower than taker fees.
A taker removes liquidity from the market as they take a maker’s order from the order book and fulfill it. Their fees are higher than maker fees as they remove the benefits the maker provides.
Withdrawal and Deposit Fees
A fee is charged by the exchange platform on lending platforms and crypto exchanges when you borrow or buy crypto. Also, when you intend to liquidate your token, you are also charged a few (although it is free on some exchange platforms).
Gas fees are native to the Ethereum ecosystem or Ethereum-based coins or platforms. Gas fees entail more as they can either be a form of reward given to validators for the computing power used in processing transactions or payment for a transaction made under your name.
The blockchain is an impressive piece of technology with endless possibilities. It’s found in everything from cryptocurrencies to manufacturing. Take some time to learn about the blockchain and the fees associated with it. You never know where you’ll find the perfect investment to fit your portfolio.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.