However, there are some very good reasons to not have federated nodes. Blockchains are often judged to be less resilient to corruption when they have fewer nodes operating and securing the network. It is more feasible to take over a handful of computers and their operators then it is the ten thousand or more nodes that operate at any given time on the Bitcoin network.
Here are a few examples of blockchain networks that operate with some form of federation or designated nodes.
Factom is a public blockchain that has two classes of federated nodes, see figure 6. Half of these are processing transactions whilst the other half watch to make sure that the nodes processing the transactions are accurate and not censoring transactions. Users of the system elect nodes to be Federated Factom nodes. Factom does not use mining but does have a native cryptocurrency. The Federated nodes are rewarded with “Factoids” the Factom cryptocurrency for processing transactions. The nodes can then sell Factoids back into the market to those who wish to utilize the Factom blockchain.
Figure 6 The Factom federated network.
Waves is a public blockchain that limits participation in the network to nodes that hold sufficient “waves” of cryptocurrency. Currently, the limit is set to approximately 1,000 waves. The Waves blockchain is a peer-to-peer network, and any computer running the Waves software is considered a node and can propose new transactions. But only full nodes are allowed administrative duties. They relay blocks and transactions to miners and answer queries for end users about the state of the blockchain. Full nodes ensure that new blocks are valid. They check the format of the block in order to validate that all hashes in the new block are correct, that there is a hash of the previous block, and each transaction was signed by the right parties. Full nodes can mine new blocks. Mining on Waves consists only of generating new blocks, it does not require solving difficult math problems like Bitcoin. See figure 7.
What is cryptocurrency?
Cryptocurrency is a type of digital cash and is a bearer instrument. An old type of bearer instrument was a document that entitled the holder to the rights of ownership, such as shares, bonds, and cash money (coins and notes). Many bearer instruments are banned because of their potential for abuse, for example through tax evasion and money laundering.
The idea of digital cash has been around since the ‘90s, such as Digicash. But it never took off because all the systems relied on a trusted third party to facilitate the record of ownership and transfer. A third party that facilitates the record of digital cash makes it a non-bearer instrument and gives the third party a lot of power.
Figure 7 Bitcoin node vs. Waves node.
Cryptocurrency was developed by Satoshi Nakamoto as a way to prevent the holder of digital currency from sending it to more than one party. This is often referred to as “preventing double-spending”. In a centralized system, preventing double-spending is easy: the third party, for instance a bank, checks their record of ownership and disregards any fraudulent transfers.
The revolution that Satoshi began with Bitcoin in 2008 is a system that allowed the electronic transfer of digital cash without a central party checking its record of ownership. Satoshi developed a peer-to-peer electronic cash system.
The network collaboratively works to prevent double-spending and operates in much the same way as a network for file sharing. Every peer in the network has a list with all the network’s transactions. The peers check all new transactions to make sure they are valid and that there are no attempts to double spend the cryptocurrency.
A cryptocurrency is only a valid entry in a database. Cryptography is used to ensure a request to update the database is correct. There is a distributed network that enforces the rules around updating entries. Some blockchain networks have scarcity mechanisms such as mining that drive the perceived value of an entry. But the root of any cryptocurrency is to have only a valid entry in a database. Cryptocurrencies now have real-world value and can be traded for traditional currencies or directly for goods and services.
What are tokens?
Not all blockchain networks have cryptocurrency, but all networks allow for the issuance of some kind of token. A token - much like cryptocurrency - can act as a bearer instrument and be used to transfer value between two parties over a blockchain network. It’s important to note that tokens are very flexible and may not be bearer instruments.
A significant difference between a cryptocurrency and a token is who actually creates them, see figure 8. A token is created by a single party that would like to account for something of value. In contrast, a blockchain network generates a cryptocurrency as a reward mechanism for nodes that facilitate the upkeep of the shared database.
Figure 8 Differences between tokens and cryptocurrency.
The Ethereum foundation pioneered and greatly improved token technology. The Ethereum blockchain was designed to host smart contracts, and these are well suited for creating tokens. A smart contract is code that executes within a blockchain. The smart contract code is a series of instructions that dictate how that token works.
There are many types of tokens, and the Ethereum network has many standards based around how these tokens work. The shared standards allow any tokens on Ethereum to be utilized by other applications. Here are two popular token standards:
ERC-20
The ERC-20 token standard is the most popular token on the Ethereum network, and other blockchains have adopted the same rule set for their tokens. One of the driving factors for its popularity was that the ERC-20 tokens were used for crowdfunding. These funding events were called initial coin offering (ICO).
ERC-721
The ERC-721 is another popular token standard. It differs from the ERC-20 in that each token is unique. A common use for the ERC-721 is digital collectibles. It allows an issuer to prove uniqueness and transferability of a digital asset while allowing each asset to be unique. Cryptokitties (https://www.cryptokitties.co) was the first ERC-721 implementation.
What does distributed mean?
There are three main types of blockchains, as shown in figure 9:
■ public blockchains,
■ private blockchains, and
■ hybrids.
Public blockchains allow anyone to participate in the network as long as they have access to the internet, hardware and electricity. Private blockchains only allow trusted parties to operate their blockchain. Hybrid blockchains control who can participate and at what level of participation each node is allowed to operate. These key differences are important to understand as they affect how distributed a blockchain network can become.
Distribution is characterized by how many independent nodes are operating on a network and keeping a full history of their respective blockchain. For public blockchain this would include all nodes that are mining new blocks and all nodes that are validating