The traditional blockchain model, with which many if not most people are by now familiar, if not in practice then at least in theory, has been embraced at this point by many businesses. The technology’s inherent transparency, decentralization and unalterable records make it a popular tool for undertaking all types of tasks.
Now, many companies are leveraging blockchain through what is known as a “federated” or “consortium” blockchain. In short, these terms refer to a private blockchain that’s shared by several organizations, often those that work together on a regular basis. Although they’ve been around for several months, an increasing number of companies are now realizing the advantages of this collaborative, closed-loop approach.
A federated blockchain is permission-based, owned and maintained by the participating companies and may only be used by members of companies that have been approved by the other participants to join the network.
Unlike the public, decentralized blockchain with which most people are familiar as a way to conduct transactions, a federated blockchain is centralized. Because fewer participants are using it, it’s significantly faster than the public model. It’s also more scalable and offers greater privacy for its participating organizations.
While federated blockchains are relatively new, they’re in some ways an extension of private blockchains, which have been around for some time. In the private model, a single authority or organization writes access to the network and designates read permissions as either public or restricted.
With the federated blockchain model, however, each of the participating organizations has an equal voice. It could be considered as a hub through which multiple organizations exchange information and work simultaneously.
Also, in the federated blockchain model, the consensus process is controlled by a pre-selected set of nodes. For example, it might be that with a federated blockchain in which 15 companies participate, a minimum of 10 of those companies must sign every block in order for the block to be considered valid.
One advantage for companies that participate in a federated blockchain is the low cost associated with transactions. And because all activity is regulated, transaction fees stay the same no matter how many users are on the network. Thus, it’s a great choice for enterprises because they’ll get better pricing than they would via traditional banking arrangements.
Financial organizations are currently the most active participants in the federated blockchain space, although an abstract published in France last fall advocated for the use of federated blockchains in exchanging healthcare data.