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The Fundamental Difference Between Permissioned And Permissionless Blockchains


The characteristics of permissioned and permissionless blockchains

Note: This is the script for the video on YouTube. List of sources are in the video description!

Different entities use a blockchain for different purposes in different environments. In this blog post, we will take a look at how the characteristics of a blockchain change in regards to its implementation.

General Characteristic 1: Distributed Storage

Centralized storage versus distributed storage

A blockchain is a subset of the distributed ledger technology, which means that a shared ledger is stored locally by all participants of the network instead of storing it on a centralized server.

General Characteristic 2: Tamper-Proof And Immutability

Blockchains and traditional databases have different data structures

The blockchain takes this concept a step further. Instead of having a data structure, which is centered around particular variables like accounts, it stores all the information in chronological blocks, which are chained together. Since these blocks are cryptographically connected, a change of one information within an existing block leads to a change in all of the following blocks. Hence, changes in the existing information within the blockchain can easily be spotted and rejected by the operators. So it is intended that whatever is written into a blockchain will always be stored within it the same.

General Characteristic 3: Transparent

Since a blockchain is storing information chronologically, a full record of all transactions is necessary to calculate the current state of information like account holdings. Hence, any party with the right to read the information can audit all transactions, since there is a transaction history under which asset lifetimes can be tracked. Consequently, this leads to a high degree of provenance, since all transaction records are visible to everybody with access to the data.

General Characteristic 4: Consensus-Based

To determine which information will be written into new blocks of the blockchain, all actors need to agree on shared rules. These rules are referred to as consensus mechanism, which is actually the most important aspect to determine further characteristics.

There Are Two Different Kinds Of Blockchains, Permissionless, And Permissioned Blockchains.

Synonyms for permissioned: enterprise, federated, consortia
Synonyms for permissionless: open, public (see ConsenSys)

Permissionless means that everybody can read, write and validate transactions or other information, which is written into the blockchain as well as participate in the validation (consensus) process. The sum of all validators determine, which transactions are valid and therefore form a new block. Since these two implementations are fundamentally different, let us take a deeper look into the most significant characteristics of each of those.

Characteristics Of Permissioned Blockchains:

Before we start: The possibility of a data rollback, which threatens the immutability is way higher on a permissioned blockchain. Additionally, the characteristic “transparent” is depending on the level of privacy used by the implementation and the participants. While there are useless private blockchains, privacy is not a characteristic of any blockchain. Instead, there are layers of privacy that can be applied to any blockchain, even permissionless chains, allowing for private or “shielded” transactions on a public blockchain.

Permissioned #1: Permissioned

The characteristic ‘permissioned’ indicates that consortia members have the ability to restrict access. The members of the consortia decide who can participate in the consensus mechanism of the network. In other words, they decide who can validate transactions on the network. Furthermore, permissioned networks can have multi-level access control, which enables the operators to restrict and control access to the functions of the network.

Permissioned #2: Regulatory Compliant

Regulated companies have to follow Know your customer — KYC, anti-money laundering — AML and counter terrorist financing — CTF regulations in the jurisdictions in which they operate. On top of that, they also have to comply with data protection regulations and many other laws.

Permissioned #3: Clear Governance Structure

Governance is the establishment of policies, and continuous monitoring of their proper implementation. While governance is an ongoing dispute for permissionless blockchains, federated blockchains exhibit clear decision management structures, since debates are easier to settle between a consortium of businesses compared to a public arena of hundreds of thousands of individuals and entities.

Permissioned #4: Semi-Decentralized

While the consensus mechanism still requires the consent of most of the operators to write new information into the ledger, mostly there are only a hand full of operators in the first place. Hence, the security is entirely reliant on the integrity of its members. This leads to a higher transaction throughput compared to permissionless blockchains, but also increases the likelihood of collusion between operators.

Examples: Hyperledger, JP Morgan’s Quorum, or Libra.

Characteristics Of A Permissionless Blockchain:

According to Andreas Antonopoulos, the greatest polymath and educator in the crypto ecosystem, a blockchain has five fundamental properties. It is open, public, borderless, neutral and censorship-resistant. So let’s take a look at each of these.

Characteristics of a permissionless blockchain

#1 OPEN means that anyone can access the network and participate in the validation process and other functions without authorization, vetting or identity verification. You are a dog? Fine! A blockchain doesn’t care. But there is an even more interesting aspect of open. You can use the network stack, for example, the ethereum protocol, to write applications on top of it. While traditional payment systems only allow innovation from the inside, everybody can write applications on top of an open blockchain without asking for permission. Hence, you cannot be stopped from accessing it. It’s not just open, it is unclosable. When someone writes an open-(source) application on top of an open network it creates a tsunami of innovation, where everybody is starting to build on top of everybody else’s application. That’s exactly what we see in the decentralized finance space on ethereum right now.

#2 PUBLIC is the idea that everything you do is verifiable on the network by everybody else. By running a full node, which stores the full history of all transactions, full node operators are fully independent of any third party by authoritatively reconciling with their own copy of the ledger to determine whether the funds have been double spend or are available in the first place.

#3 BORDERLESS means that it doesn’t matter where you are, the blockchain is an international phenomenon and therefore it’s already there once you arrive in another country. Our traditional laws, practices, and customs are based on the idea that money is somewhere. If you plan to enter or leave the EU with 10.000 € or more in cash, you must declare it to customs. But my crypto assets are on the blockchain and therefore they are already there. I just know the key to access them. The point is that nobody who is writing laws is considering that money can be everywhere. Money has become information with no physical form, which exists everywhere all the time.

#4 NEUTRAL simply means, that the network doesn’t care who you are, where the money comes from and to where or to whom you send it to. It ignores all KYC, AML or similar regulations as well as international sanctions, which is one of the reasons why North Korea tries to hack as much cryptocurrency exchanges as possible. The idea of having a neutral payment system sounds pretty radical, but that’s how the world worked until 20 years ago.

The fifth and final property of a permissionless blockchain is that it is #5 Censorship Resistant: If someone wants to stop a transaction, they can’t. Money is the communication of value and whether you believe that everybody should have the right to freely transact or not, that’s what bitcoin and other permissionless blockchain implementations do. The idea of money as a system of communication also comes with the aspect of freedom of speech as a basic human right. And there are a lot of governments who disagree with this idea. The problem is that money stops working once it is turned into a system of policing. Censoring, blacklisting, restricting, seizing funds from actors or denying countries the participation in the network is simply not possible if the consensus mechanism and its execution are sufficiently decentralized.

Examples of permissionless blockchains: Bitcoin, Ethereum and Zcash.

The Root And Future Is Permissionless

With an open and public (permissionless) blockchain, you don’t need to trust anything other than the outcome of your own verification and validation. Bitcoin introduced the concept of decentralized security through computation. So, bitcoin has a security model, which is based on market forces and game theory, which is one of the aspects fueling the disruptive uniqueness of the technology.

On the other hand, permissioned blockchains are business as usual disguised as disruptive innovation by taking out the parts that are disruptive for incumbents. They are replacing the function of a centralized clearinghouse with a consortium of ’n’ participants. These are known and permissioned participants who will assemble transactions and sign them rather than compete through market forces as permissionless blockchains do.

The issue here is not only that it causes confusion and blurs the lines between two fundamentally different platforms. It also has a deeper underlying issue. Traditionally a clearinghouse like a stock exchange has no skin game. They are not a market participant, so they don’t trade themselves. This is called separation of concerns. Now we have these new blockchain based consortium's which not only host the market, but are also the most prominent participants. Hence, we replaced independent clearinghouses with cartels.

Clear Differentiation Is Necessary

I’m not saying that all implementations of consortia blockchains are bad. There are already projects, which facilitate the communication and interaction between market participants by reducing friction, costs and processing time. However, we need to start to differentiate better between these implementations, instead of just calling both of them blockchain, because of their underlying data structure.

So this is a call to action for all media outlets, bloggers and companies who use one of these two implementations:

Don’t just say you or they are using a blockchain and instead clarify what exactly is used: A permissionless or permissioned blockchain.

For the detailed list of sources take a look at the comment section of the video. PS: Own your keys!



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