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Bybit Learn
May 17, 2022

Consortium Blockchain

The term "consortium blockchain" refers to a group of private blockchains, each owned by individual institutions that have banded together to share information to improve existing workflows, transparency and accountability.

Blockchain technology is the storage of data and information in a chain of digital blocks, which are linked to one another by hash algorithms, enhancing the security of the data in each block. The most commonly known use of blockchain technology is in cryptocurrency, which is a digital ledger of transactions distributed throughout a blockchain. Basically, there are three types of blockchain technology available in the form of public, private and consortium blockchains. 

Public blockchains are openly accessible to anyone who can access the internet, while private blockchains are used by individual enterprises to support business use by developing corporate software solutions with it. A consortium blockchain is midway between public and private blockchain, as it involves the blockchain of not just an individual organization, but a cluster of them belonging to different organizations. Yet it still exists still within a controlled group of users, unlike a public distributed ledger. 

Formation of a Consortium Blockchain

A consortium blockchain is a combination of multiple private blockchains belonging to different organizations, where each of them forms a node on the chain as a stakeholder in the alliance — and can only leave or join the network with the authorization of the stakeholders. While each organization manages their own node or blockchain, the data within can be accessed, shared and distributed by organizations within the consortium. In doing so, cross-organization and cross-technology solutions can be developed to improve their existing workflows, accountability and transparency, thereby addressing the issues and challenges encountered by individual blockchains. 

Generally, only organizations with common objectives as well as complementary blockchain technologies are successful in joining to form a consortium blockchain.

Benefits of a Consortium Blockchain

The aim of forming a consortium blockchain is to facilitate cooperation among a group of complementary blockchains. This helps each one to address the challenges they encounter individually, and to develop solutions that can be applied to the entire consortium. By building on the established structures in each blockchain, solutions can be developed in a shorter amount of time with shared resources. In this way, fewer development costs are required through economies of scale. 

There is also no service or transaction fee for dealings within a consortium blockchain. Smaller organizations will reap the greatest benefits from participating in a consortium blockchain. An example of a supply-chain consortium blockchain is that between a logistics company and a manufacturer, where solving the problems in either of the organizations can help to improve the results for both.

Other than saving time, costs and resources, a consortium blockchain also instills greater than in a private blockchain, where the consensus is centrally controlled. Since a consortium blockchain is formed by multiple organizations, each will have a stake in the decision-making process, ensuring that the blockchain isn’t governed by a single entity. This helps share and spread control among the participating organizations, with checks and balances in place which reduce the likelihood of corruption. 

Unlike public blockchains, which maximize their user base to achieve decentralization, a consortium blockchain exists within a contained group of member organizations that share similar goals and objectives. This makes it much easier to reach a consensus among stakeholders and to expedite transaction speed, thereby enhancing its scalability. With fewer nodes in a consortium blockchain, it’s also easier to make changes to block data once a consensus has been reached by the majority of the participating organizations. 

In addition, as information within the consortium blockchain is only shared among participating organizations and restricted from public access, it provides a level of security that will instill trust in organizations’ clients. 

Therefore, the collaboration among private organizations in a consortium blockchain has numerous benefits, from resolving common challenges to saving time and operational costs. This leads to faster transaction speed and higher scalability while retaining privacy. Sectors like finance, banking, healthcare and supply chain logistics can benefit from such partnerships.