Blockchain technology is gaining popularity in the world of finance and digital transactions. Its main feature is the ability to provide a decentralized platform for secure transactions. However, not all blockchains are the same. There exist two main types of blockchains: permissioned and permissionless. In this article, we will explore the differences between these two types of blockchains.
What is a permissioned blockchain?
Permissioned blockchains are closed or have an access control layer. This additional layer of security ensures that only authorized participants can perform the actions they are allowed to perform.
To join a permissioned blockchain network, a user must obtain permission from the network owner. They can only access, read, and write information on the blockchain if given access to it. A private permissioned blockchain defines the roles that dictate how each participant can contribute to the blockchain and what they can access.
Identity verification can be done to let people into the permissioned network instead of having the network owner approve each user. However, users would still be able to perform only certain activities in the network based on the blockchain's designated permissions.
Permissioned blockchains, also known as "private blockchains" or "permissioned sandboxes," are considered partially decentralized, unlike Bitcoin. This is because the network is distributed across known participants.
Ripple is a good example of a permissioned blockchain. It is a large cryptocurrency that supports permission-based roles for network participants. Many businesses prefer permissioned blockchain networks because they allow administrators to configure settings and place restrictions as needed.
How does blockchain consensus work on a permissioned blockchain?
In contrast to permissionless blockchains, permissioned blockchains do not employ the same consensus models. Generally, organizations utilizing permissioned blockchains use robust models such as Practical Byzantine Fault Tolerance (PBFT), federated, and round-robin consensuses.
Proof of Byzantine fault tolerance (PBFT): Utilizing a balloting methodology, PBFT assures security provided that enough participating nodes behave ethically and function correctly.
Federated agreement: Employing preselected trustworthy "signator" clusters per node, federated consensus progresses toward accord via singular transaction generators. These agents collect, screen, and then distribute validated entries.
Round-robin style consensus: Based on rotational selection mechanics, round-robin consensus picks nodes sequentially and pseudorandomly to craft blocks. Post-block creation, participants must await multiple rounds prior to being eligible for subsequent assignments.
Characteristics of permissioned blockchain
Permissioned blockchains are undeniably more secure than public blockchain systems like Bitcoin. This is because of their access control layer, which makes them a preferred choice for those who need to define roles, verify identities, and secure access within a network.
Developed by private entities such as businesses and private organizations, permissioned blockchains are not anonymous, making them an excellent option for those looking for a secure and controlled system.
Private Group Authorizes Decisions
In contrast to open networks, closed groups make decisions in controlled networks. Central authority defines policies instead of consensus rules.Centralization vs Decentralization
Bitcoin is entirely decentralized, unlike controlled chains varying from completely centralized to partly so. Members determine the degree of decentralization and applicable consensus algorithms.Optional Network Transparency
While public ledgers aim for transparency, controlled versions don't necessarily follow suit. Security reasons often dictate obscurity, which can be adjusted according to organizational objectives.
Advantages and disadvantages of permissioned blockchain
Permissioned blockchains have advantages over public ones, but there are also downsides to exclusivity. Here’s a comparison:
Advantages of permissioned blockchain
Permissioned blockchains offer a myriad of benefits, including unparalleled levels of privacy and security. Unauthorized parties are strictly prohibited from accessing or tampering with transaction information without prior verification or permission.
Moreover, permissioned blockchains are highly flexible, allowing for incremental or complete decentralization. This enables businesses to participate with confidence, free from the risks associated with a heavily centralized network.
Additionally, these blockchains are incredibly customizable, with configurations and integrations tailored to the specific needs of an organization. Finally, permissioned blockchains are both scalable and high-performing, thanks to their limited number of nodes required to manage transaction verifications.
Disadvantages of permissioned blockchain
Although there are advantages to this type of blockchain, there are also risks and disadvantages associated with it.
It's crucial to note that permissioned blockchains suffer from severe limitations due to the lack of transparency within the network and the potential risk of collusion and corruption. Since only a select group of individuals controls the network, there is a high possibility of overriding consensus and altering consensus rules for personal gain.
Therefore, the security of a permissioned blockchain is dependent on the integrity of its members. If the network's controllers decide to change the data for their benefit, they can do so without any repercussions. This lack of transparency is a significant drawback of permissioned blockchains. Additionally, permissioned blockchains are subject to regulations and censorship, which can significantly impact businesses that operate under specific rules. Consequently, businesses do not have the liberty to access the uncensorable features of public blockchains.
What is a permissionless blockchain?
Permissionless blockchain networks, as the name suggests, allow anyone to take part in the network and access information. It is a decentralized and open-to-all paradigm that runs on most of the major cryptocurrencies like Bitcoin. There are no gatekeepers or censorship, and anyone who wants to access the blockchain must not pass any Know Your Customer (KYC) requirements or provide identification documents. Technically, anyone can use permissionless blockchains to do anything they want within the network, as long as the protocol allows it.
Permissionless blockchains are considered to be closer to Satoshi Nakamoto’s original concept of blockchain. However, due to its accessibility to the public, the typical trade-off of permissionless blockchains is speed. They tend to be slower than permissioned counterparts, which only have a few members.
Typically, transaction information stored on these blockchains is validated by the public since there is no regulatory body or authority. The network relies on the public to reach a consensus concerning the validity of transactions. The consensus mechanisms typically used in these types of networks are proof-of-work (POW) and proof-of-stake (POS). Generally, honesty is incentivized with these mechanisms in place, which keeps the system working as expected. Some examples of permissionless networks are Bitcoin and Ethereum.
Characteristics of permissionless blockchain
Permissionless blockchains stand out from permissioned ones due to their transparent transactions and anonymous users. Additionally, they strongly promote open-source development.
Decentralized Nature: Permissionless blockchains are inherently decentralized, meaning no single entity has the authority to modify the ledger, shut down the network, or alter its protocols. This decentralized structure is rooted in the consensus protocol, which relies on the collective agreement of the majority of users, typically requiring more than 50% consensus to make changes.
Transparency: Within a permissionless network, users can access all types of information except private keys. The very essence of a decentralized network is to eliminate central authority figures, making transaction transparency a highly valued aspect of permissionless networks.
Anonymity: Unlike permissioned networks, permissionless blockchains do not require users to provide identification or personal information when creating an address, allowing for a higher degree of anonymity.
Tokenization: Permissionless blockchains facilitate the use of tokens or digital assets. These tokens often serve as incentives for users to participate in the network. The value of these tokens and assets can fluctuate over time, increasing or decreasing based on market dynamics.
Advantages and disadvantages of permissionless blockchain
Permissionless blockchains are open and highly decentralized. They have advantages and disadvantages. Here's a comparison:
Advantages of permissionless blockchain
One of the most significant advantages of a permissionless network is its exceptional transparency. Thanks to its high decentralization and vast network, transparency ensures quick reconciliation between unknown parties.
Moreover, decentralization has its perks. Information is not stored in any central repository, making the public record secure, reliable, and accessible to all. This feature also makes it virtually unhackable.
Furthermore, the network is highly secure and resistant to censorship due to its global accessibility. Attackers will find it incredibly challenging to infiltrate the network since there is no centralized repository to target. To override its consensus mechanisms, they would have to attack at least 51% of the network.
Disadvantages of permissionless blockchain
Permissionless blockchains have several disadvantages, most of which are related to their subpar performance. The most significant challenge posed by permissionless blockchains is their high energy consumption and computing power requirements, which are necessary for achieving consensus. Due to their large size, permissionless networks are usually slower and harder to scale than permissioned ones, making it challenging for companies to adopt them as an enterprise solution. Moreover, transaction information is publicly available, which compromises privacy. Finally, anonymity can be considered a disadvantage too, since it enables malicious players and fraudsters to participate in the network without being filtered out.
Key differences between a permissioned and a permissionless blockchain
| Permissioned Blockchain | Permissionless Blockchain |
| Access is restricted to selected participants who have been granted permission by the network owner or consortium. | Open access for anyone who wants to participate in the network without requiring any prior approval. |
| Participants have identified identities and their actions are traceable. | The anonymity of participants is maintained as they do not require identification before participating in the network. |
| Transactions are validated through a consensus mechanism involving pre-selected nodes or entities. | Validation of transactions occurs through a decentralized consensus mechanism such as Proof of Work (PoW) or Proof of Stake (PoS). |
| Scalability can be achieved through centralization or selective participation. | Decentralization ensures scalability but may result in slower transaction processing times. |
| Changes to the protocol require consent from all involved parties, ensuring stability and security. | Frequent updates and changes to the protocol due to the absence of a central authority could impact stability and security. |
| Suitable for enterprise use cases where privacy, control, and regulatory compliance are critical factors. | Ideal for public applications such as cryptocurrencies, digital assets, and decentralized finance platforms. |
Here's a chart summarizing these differences:
| Criteria | Permissioned Blockchain | Permissionless Blockchain |
| Access | Restricted | Open |
| Identity | Identified | Anonymous |
| Consensus Mechanism | Pre-selected nodes or entities | Decentralized PoW/PoS |
| Scalability | Centralization or selective participation | Decentralization |
| Protocol Updates | Require consent from all involved parties | Frequent changes |
| Use Cases | Enterprise, privacy, control, regulation | Public applications |
Similarities between a permissioned and a permissionless blockchain
It is important to note that both blockchains share a number of characteristics that make them unique. Firstly, it is important to understand that both are distributed ledgers, which means that they store multiple versions of similar data across the network. Additionally, both blockchains use consensus mechanisms to verify transactions and agree on how the ledger should look. It is also worth noting that both blockchains are immutable, although this may not be fully applicable to permissioned networks. This means that data stored in these networks is practically impossible to alter unless someone overrides the consensus mechanisms or hacks the system.
Permissioned vs. permissionless blockchain: Which is better for you?
It is important to note that the two blockchain architectures have distinct use cases, making each of them more suitable for specific applications. Permissionless blockchains are ideal for financial applications and highly applicable for those that require high levels of decentralization. On the other hand, permissioned blockchains are better suited for applications that require high levels of security and privacy. However, it is crucial to consider the pros and cons of both Distributed Ledger Technology (DLT) paradigms before investing your funds. In a research paper published in the Journal of Software, researchers Solat, Calvez, and Naït-Abdesselam presented a strong case for why permissionless blockchains are superior to permissioned ones. Their paper, titled "Permissioned vs. Permissionless Blockchain: How and Why There Is Only One Right Choice," put forward compelling arguments.
Possibility of recalculating next blocks in a closed network
A blockchain system ensures data integrity by verifying transactions and protecting historical transactions from tampering. This works in a permissionless network by invalidating the rest of the succeeding blocks when one block is altered.
In a permissioned network, the researchers asserted that “it is possible to recalculate all the next blocks (...) such that all altered blocks will become valid again. In other words, only chaining blocks to each other, based on the hash of the previous one, cannot ensure the integrity and security of the data and protect transactions against tampering.”
Simply chaining blocks to each other isn’t enough
The current method of chaining blocks based on the previous block's hash is no longer sufficient to ensure the integrity and security of data, and to protect transactions against tampering. Researchers have demonstrated that this type of blockchain structure has become "unhelpful" and no longer meaningful. Despite the scalability and performance challenges of permissionless blockchains, closed networks are still not a viable alternative. The researchers have highlighted the shortcomings of permissionless blockchains and the appeal of permissioned blockchains.
A permissioned blockchain does not allow open participation
The researchers strongly assert that a closed network is incapable of achieving the goal of a blockchain. This is because a permissioned blockchain system lacks the ability to allow open participation in the transaction submission and validation process, thereby rendering it ineffective. Additionally, participants cannot expect the network to resist censorship if they do not possess the necessary permission to send transactions. The paper clearly outlines three fundamental characteristics that any blockchain system must possess at all times.
According to the researchers, openness is a mandatory and essential feature for a blockchain network to function effectively. The proof-of-work (PoW) consensus mechanism used by permissionless blockchain networks like Bitcoin and Ethereum serves as a powerful tool to prevent Sybil attacks. Ethereum has since adopted proof-of-stake (PoS) as its consensus mechanism.
The consensus mechanisms in blockchain networks prevent validators from creating spam blocks and compel them to consume power to counter Sybil attacks. However, it is ultimately up to the organization to decide if the risks and weaknesses associated with each network outweigh the benefits they offer. In the next section, we will explore the possibility of the coexistence of both paradigms.
Can permissioned and permissionless blockchains co-exist?
As we delve deeper into this topic, it is crucial to look back on the implications of Satoshi Nakamoto's white paper in the first place. Nakamoto is a pseudonymous figure known as the "Father of Bitcoin", who proposed the complete opposite to centralized institutions such as banks and other financial gatekeepers as a solution to many problems with modern finance.
Back in 2008, Nakamoto first outlined a decentralized peer-to-peer protocol for tracking and verifying digital transactions. The blockchain in Nakamoto's paper was an answer to crises that highlighted the weaknesses of a centralized financial system. Nakamoto's blockchain was a permissionless, trustless, and stateless blockchain that could prevent double-spending and generate clear, accessible records of transactions for all participants to inspect at any time.
However, once it became apparent that blockchain technology could be used for multiple applications, offshoots from the original purpose were explored. Permissioned blockchains were born to "bridge the gap" between traditional blockchain technology and use cases by organizations that preferred limited access.
There is a strong argument against networks with gatekeepers, so to speak. The basic reasoning is that consensus mechanisms like PoW and PoS serve that purpose. Public technologies will prevail since they are flexible, have more benefits, and have lower barriers to entry. The same is true with permissionless blockchains, which are more widely used now.
But while public technologies may be dominant, closed technologies still have merit. It can be argued that there are specific use cases and applications that work well with closed technologies. A permissioned blockchain's strength lies in its efficiency. It can:
Process data and transactions more energy-efficiently
Reach consensus more quickly
It does not require algorithms to be as complex as permissionless blockchains since it are only accessible to a closed group.
In certain business settings and use cases, permissioned blockchains may be more appropriate. The same principle applies to the internet and intranets. In summary, permissionless and permissioned blockchains can coexist, just with different purposes.
