Bitcoin, the world’s oldest and largest decentralized cryptocurrency by market cap, utilizes the very first implementation of blockchain technology.
Along with most cryptocurrencies on the market, BTC features a permissionless blockchain network. Anyone with a working internet connection and a compatible device can access and maintain without restrictions.
In this way, BTC’s blockchain is different from permissioned blockchains, which are used mainly by businesses, governments, financial institutions, and consortiums.
Permissioned blockchains are distributed ledger technology (DLT) that sacrifice some degree of decentralization and anonymity to better suit business needs as well as achieve higher network speed and efficiency.
In this article, we will introduce permissionless and permissioned blockchains while exploring the core differences between the two DLT solutions.
What Is a Blockchain Network?
Before we dive deeper into our topic, let’s first revisit the basics of blockchain technology.
Pioneered with the launch of Bitcoin, a blockchain is a digital ledger that is duplicated and distributed across all participants’ devices in the network.
As a result, every change to the blockchain is recorded transparently in real-time on all participants’ ledgers. This means that everyone in the network sees an identical distributed ledger with the same records, allowing users to audit and trace back transactions.
Unlike in traditional networks where individual participants with the right access level can make changes to the server’s data, validators have to reach a consensus through a mechanism like Proof-of-Work (PoW) or Proof-of-Stake (PoS) to update the blockchain.
For that reason, once something is recorded on the distributed ledger, individual users can’t modify, delete, or tamper with the data, which makes the blockchain immutable by nature.
Furthermore, blockchains eliminate the single point of failure by maintaining the ecosystem via a vast network of computers.
Since thousands (or even millions) of devices scattered all over the world add new blocks to the chain and verify transactions, blockchains are more secure against cyberattacks, as hackers have to take over the majority of the network (instead of a single server) to gain control.
While all transactions are encrypted via public-key cryptography, blockchain networks operate continuously without third parties or middlemen.
What Is a Permissionless Blockchain?
Examples: Bitcoin, Ethereum, Litecoin
A permissionless blockchain is the type of DLT technology users in the crypto community are most familiar with.
And this shouldn’t come as a surprise.
Bitcoin, Ethereum, and the underlying blockchain networks of most cryptocurrencies use this form of distributed ledger.
In a permissionless blockchain network, anyone is allowed to participate and become a validator.
For example, if you have a compatible device and a working internet connection, you are free to create a Bitcoin wallet or even maintain the network by becoming a miner.
Permissionless blockchain networks completely lack access controls.
As a result, neither normal users nor validators have to verify their identities or submit Know Your Customer (KYC) documents to join. Instead, they can participate in the network while staying anonymous or pseudonymous.
What Are the Benefits of Permissionless Blockchains?
- Decentralization: Since there are no access controls or restrictions in place for validators, permissionless blockchain networks are truly decentralized. Every participant is equal, and no one can exercise increased authority over the others.
- Increased security: The lack of restrictions for validators incentivizes more participants to maintain the blockchain. For that reason, most permissionless ledgers feature an extensive number of validators, enhancing the network’s security.
- Privacy: As it’s not necessary for participants to provide any personal details or documents to join, permissionless blockchains feature increased privacy, allowing users to stay anonymous or pseudonymous while interacting with solutions in the network.
- Community governance: Instead of a company, government, or another centralized entity, most permissionless blockchains are governed by the project’s community.
- Censorship resistance: Due to the high level of decentralization and the extensive number of validators, permissionless blockchains are effectively resistant to censorship.
What Are the Downsides of Permissionless Blockchains?
- Limited speed and scalability: Since they feature a large number of validators who all need to reach consensus to process transfers and add new blocks to the chain, permissionless blockchains often face issues with limited scalability and transaction throughput.
- Risk of chain splits: In permissionless blockchain networks, the community must work closely together to maintain the ecosystem. However, heated debates and disagreements between miners can split the community and also the blockchain during hard forks (major upgrades that are not compatible with previous versions).
- Energy-efficiency issues: The Proof-of-Work (PoW) algorithm Bitcoin, Ethereum, and many other major blockchains deploy to reach consensus is highly energy-intensive as miners are required to operate physical equipment to solve complex mathematical puzzles. As a result, BTC mining consumes more energy than Sweden in a year. That said, many permissionless blockchains are upgrading their consensus mechanisms to more energy-efficient algorithms (e.g., Proof-of-Stake) to solve such issues.
- Risk of malicious activity: While most permissionless blockchains can effectively protect against hacker attacks, they can’t prevent cybercriminals from entering the network and targeting solutions in the ecosystem.
What Is a Permissioned Blockchain?
Examples: ConsenSys Quorum, Hyperledger Fabric, R3 Corda
Contrary to a permissionless network, a permissioned blockchain is a DLT solution with access controls in place for validators.
This could mean setting up a requirement to request KYC documents from all validators in the network.
Also, in most cases, the organization or the community managing the permissioned ledger chooses the users to validate blocks in the ecosystem.
Furthermore, permissioned blockchains limit the maximum number of validators in the network to increase efficiency as well as achieve higher throughput and scalability.
While some permissioned blockchains have access controls for standard users as well, others only restrict who can become validators (more on this later).
Unlike their permissionless counterparts that cater to the general public, permissioned blockchains are more suitable for enterprise usage as they can be more easily customized to fit individual business needs.
What Are the Benefits of Permissioned Blockchains?
- Enhanced scalability and speed: Permissioned blockchains feature only a small number of validators. As a result, they can reach consensus much faster than their permissionless counterparts while achieving high scalability and speed.
- Customizability: With access controls for validators, enterprises managing permissioned blockchains can set their own rules and customize the network to best fit their needs.
- Compliance: Permissioned ledgers provide enterprises increased control over the network infrastructure, which allows them to fulfill compliance requirements more efficiently.
- Limited malicious presence: With effective access controls for validators, permissioned blockchains can effectively eliminate (or at least limit) the presence of malicious parties in the ecosystem.
- Cost-efficiency: The small number of validators increases scalability and throughput and decreases the costs of operating the network.
What Are the Downsides of Permissioned Blockchains?
- Increased centralization: Chosen by the organization or the community managing the chain, only a limited number of validators can participate in permissioned networks. While the level of decentralization varies by the network, permissioned blockchains are more centralized than their permissionless counterparts.
- Less transparency: The transparency of permissioned blockchains is based on the organization itself managing it. While some enterprises may decide to maintain the same transparency as permissionless chains, others are reluctant to share information about their processes and procedures with participants.
- Lack of privacy: Since validators — and also standard users in some cases — have to go through KYC, permissioned blockchains feature limited privacy, making it nearly impossible for most participants to use the network pseudonymously.
- No resistance against censorship: As the network is managed by an organization that has to comply with regulations, permissioned blockchains could be subject to censorship in some jurisdictions.
- Potential security issues: With proper access controls, permissioned blockchains can maintain a high level of security in their networks. However, due to the small number of validators, a malicious party has an easier time infiltrating a permissioned blockchain than a permissionless ledger.
Permissioned vs. Permissionless Blockchains: What Are the Key Differences?
Now that you know the basics about permissioned and permissionless blockchains, let’s see the main differences between the two DLT solutions.
Permissioned vs. Permissionless vs. Public vs. Private Blockchains
Public and permissionless, as well as private and permissioned, are concepts that are often used interchangeably for blockchain solutions in the crypto space.
However, there is a major difference between public and permissionless as well as private and permissioned blockchains.
Permissioned and permissionless are phrases used to describe whether a DLT network has access controls in place for validators. Simply put, these chain types have varying write rules.
While anyone can become a validator in a permissionless chain, users have to pass KYC checks and have to go through a voting process to validate blocks in permissioned networks.
However, the above two expressions do not cover whether a blockchain is open for standard users to participate.
When a blockchain is public, anyone can access the network and audit the data recorded on the distributed ledger. By nature, all permissionless chains are public.
On the other hand, private chains only allow select users into the network. In most cases, only those who have passed KYC checks and got approved by the administrator can join. Private DLT solutions restrict the read access for users.
Those without access can neither view data on the chain nor become validators in the network. For that reason, all private blockchains are permissioned as well.
On the other hand, there are public permissioned blockchains on the market that allow anyone to view records on the ledger and interact with solutions within the network but have measures in place to restrict who can validate blocks.
Both Permissionless and Permissioned Blockchains Play a Vital Role in the Industry
As the original implementation of DLT technology, permissionless blockchains feature a high level of decentralization, security, transparency, along with community governance.
On the other hand, permissioned ledgers sacrifice decentralization for higher speed, scalability, and customization. As they are increasingly centralized, many in the community argue that permissioned blockchains go against the core principles of crypto.
That said, like their permissionless counterparts that target the general public and serve a universal purpose, permissioned blockchains play an essential role in the industry by fulfilling the needs of enterprises that can customize them to better achieve their goals and objectives.
Frequently Asked Questions (FAQ)
1. Is Ethereum a permissioned blockchain?
Ethereum is a permissionless blockchain since it lacks access controls for validators.
Ethereum is also a public DLT solution since everyone with a working internet connection and a compatible device can join the ecosystem and interact with apps.
2. Is Hyperledger a permissioned blockchain?
While it is an open-source solution, Hyperledger is a permissioned blockchain that has been tailored for enterprise usage.
3. Is Bitcoin permissionless or permissioned?
Like Ethereum, Bitcoin is also a permissionless and public blockchain network, in which anyone can freely become a miner to maintain the ecosystem.
4. What is the biggest challenge of a permissionless blockchain?
While permissionless blockchains offer tremendous benefits to users, the biggest challenge they face is limited scalability.
Due to the extensive number of validators and the fact that all of them have to reach a consensus to verify transactions and add new blocks to the chain, permissionless blockchains are much slower than their permissioned counterparts.
With that said, many permissionless blockchains are working on fixing their speed-related issues by upgrading to more efficient consensus mechanisms and integrating off-chain scalability solutions.
5. What are the use-cases of permissioned blockchains?
Since they can operate at much higher speeds with enhanced scalability while sacrificing a level of decentralization, the main use-cases of permissioned blockchains are primarily for enterprises.
Examples of permissioned blockchain use-cases for businesses include farm-to-table food tracking, digital identity, supply chain management, and banking solutions.
Originally published at https://permission.io on May 18, 2021.