The ever-expanding popularity of Bitcoin – and cryptocurrencies as a whole – is making an impact on the financial industry. Its growth offers a vision of a more efficient world. One where individuals are able to deal with each other directly without any centralized institutions.
Indeed there are a lot of positive outcomes that can derive from this new method of payment. However, technology has made promises of brand new ways of living in the past, only for them to crash and burn. Either that or they end up taking longer to hit critical mass. Can we say the same about cryptocurrencies? Will it provide substantial improvements?
The answer ultimately lies with the innovative concept, ‘blockchain technology’. It represents the backbone of Bitcoin and is what makes digital currencies so interesting. On top of that, it is a technology that is full of potential.
Blockchain networks allow their members to engage in the block verification procedure in order to build consensus. In addition, it enables them to create smart contracts and rules pertaining to transactions. By eliminating the third party, it provides a trust layer for all types of transactions that originally did not exist. This is because all members of the network have access to the same information thanks to the ledger. Therefore, it is easy for participants to validate and corroborate previous transactions.
As time goes on, more new uses for blockchain would emerge, promising us a brighter and more convenient future. Blockchain is now a popular tool for more than just cryptocurrency, with each new iteration being more unique. With all of this diversity among use cases, several fundamentally different blockchain models would appear. One is ‘permissioned’ and the other is ‘permissionless’. This article will focus on permissionless and will also explain the differences between the two models.
Defining the two
The main distinction that separates the terms are evident in the names themselves. A blockchain that is permissioned requires prior approval before using it. A permissionless blockchain, on the other hand, allows anyone to participate in the system. The two systems may appear on the surface to be similar, but you cannot use them for the same things.
When it comes to permissionless networks, they are, in a way, pretty lenient. Anyone can join the network and jump right into verifying. The most recognizable examples are networks belonging to Bitcoin and Ethereum. Permissioned networks, meanwhile, have the network owner deciding on who can join the network. There will only be a select few members that are able to verify blocks.
The consensus mechanisms can function the same way in a permissionless network. Alternatively, they can have a completely different design, with an example being authority-based.
There are some people who aren’t too keen on the idea of using a permissioned cryptocurrency. A notable reason for this stems from one of the major drawbacks concerning cryptocurrency. That being no one has any control over how exactly it works. Let’s use a company like Maersk as an example. They use blockchain technology as a way to effectively track their shipping logistics. They don’t want to store any of its confidential information onto a permissionless blockchain.
A chain without permission
A lot of people consider the permissionless model to be closer to the original concept of blockchain. This was a concept that the mysterious crypto figure, Satoshi Nakamoto, initially outlined.
A permissionless blockchain is a simple idea. As its name suggests, there’s no permission required to be part of the blockchain network and contribute to its maintenance. Theoretically speaking, anyone and anything is capable of being part of a permissionless blockchain. In a lot of ways, the term “permissionless” is a fancy way of saying “public.”
Because anyone can join a permissionless blockchain, they are prone to being considerably more decentralized than a conventional permissioned system. One particular trade-off is that permissionless blockchains tend to be slower than that of its permissioned alternatives.
Transaction information that is in the storage on permissionless blockchains typically receives validation from the public. If you remember, there are no third-parties to regulate what is happening. Therefore, the system relies on public validation to achieve a public consensus on the transactions they consider to be true.
But what if you need more control, security, and financial privacy? Well, this is where permissioned blockchains come into play.
A chain with permission
Permissioned blockchains take the idea of a blockchain and completely flip it on its head. The original purpose of blockchains was to be systems that are open, free, and public. However, a permissioned blockchain is the exact opposite of this intent. It is common to refer to permissioned blockchains as ‘private blockchains’.
The concept is quite a simple one in principle; permissioned blockchains require permission in order to join. The result is the owner of a permissioned blockchain possessing the ability to dictate who can become part of the network and who cannot. This specific control also means that the blockchain owner can do the following:
- Dictate the structure of the network
- Produce software updates
- Essentially control everything that occurs on their blockchain
Information on permissioned blockchains receives validation only by members of that blockchain that have official approval. The owner is able to control who can see that information. There are some cases in which the public can view certain information in the storage on a private, permissioned blockchain.
There is more to a permissionless model than the fact that it allows anyone to participate in the network. In fact, there are several other noteworthy characteristics that one should know about.
1 – Decentralization
Permissionless networks require decentralization. What this means is no central entity has the authority to make any changes to the ledger or the protocols. Moreover, they have no power to shut down the network. A majority of permissionless, decentralized networks base their foundation off of consensus protocols. This basically means that any kind of network change is achievable as long as 50% + 1 of the users approve of it.
2 – Digital assets
Another notable characteristic of a permissionless network is the presence of a financial system on the network. A large number of these networks possess a specific type of user-incentivizing token. This is capable of growing or falling in value; it largely depends on the relevancy and state of their respective blockchain. As is, permissionless blockchains usually employ either monetary or utility tokens. Whichever it chooses depends on the purpose that they serve.
3 – Anonymity
When you think about it, given the way blockchains typically operate, anonymity is an incredibly relevant component within the industry. There are a lot of permissionless networks that do not require users to submit personal information prior to creating an address. Similarly, before they submit any transactions. Be that as it may, personal information is a requirement for legal purposes in certain cases. Bitcoin, for example, does not offer full anonymity. This is largely due to user identity indirectly tying to the addresses that they have the private keys of.
4 – Transparency
By design, blockchain networks are bound to be transparent. This is a crucial and mandatory characteristic that is necessary for the network’s operation. It becomes more relevant when you take into account that participating users must have the incentive to trust the network. So, a transparent network needs to grant users full access to all information beyond the private keys. These can range from addresses to how transactions go through processing into blocks. Furthermore, the freedom that will allow them to see all transactions that the network processes.
Advantages & Disadvantages
With every advantage, there is also a disadvantage. Some of the advantages that permissionless blockchains provide include the following:
- They offer users with more efficient performances in comparison to public blockchain networks
- They possess clear-cut governance structures
- High customizability
- Access controls
- Comparatively better scalability
A few of the notable disadvantages of these blockchains include the following:
- Security relies mostly on its members’ integrity
- More often than not, these networks are prone to censorship and regulation
- They are considerably less transparent
- They are vulnerable to hacks and various forms of manipulation
- Comparatively less anonymous
Permissionless networks are the most dependable when it comes to security. This is primarily because the odds of a collision at the hands of actors with malicious intentions are slim. The high number of nodes existing in the network help soften these potential events. Pretty much anyone is able to gain access to the ledger and see the accuracy of transactions. Alternatively, they can check to see if the data is still consistent.
Because they are widely-open, anyone can utilize it in a way that does not need the creation of additional infrastructure. Among others, these are some of the most prominent benefits of permissionless blockchains.
Out of all the drawbacks pertaining to these networks, the major one is that they are very slow. They are only capable of validating a certain number of transactions per second. These require an excessive amount of energy consumption, which is very inconvenient. One of the biggest threats when it comes to these blockchains is the risk of a 51% attack. There are a handful of nodes that are able to make the network much more susceptible to hacks and collusions.
Bitcoin & Ethereum
Permissionless blockchain networks provide the power necessary for most of the market’s digital currencies. By harnessing them, users have the ability to create a personal address and start interacting with the network. They can do so by way of submitting transactions, thus adding more entries to the ledger.
In addition, all parties have a choice. On the one hand, they can run a node on the system. On the other hand, they can employ the mining protocols in order to help with transaction verifications.
Let’s look at Bitcoin as an example. In the case of this cryptocurrency, mining is done through solving complex mathematical equations. In return, they effectively provide validation for the transactions that the network saves. Anyone has free reign to download the Bitcoin blockchain and commence with mining operations. Moreover, they can do this in exchange for both mining fees and block rewards.
In the case of digital currencies like Ethereum, the blockchain network supports smart contracts. These are transactions that self-execute as soon as certain criteria are met. The terms of agreement residing in the lines of code. Ethereum also utilizes a permissionless blockchain, so anyone is able to develop and add smart contracts onto the network. At no point do the developers impose any limitations.
In the end, the best way to separate permissionless from permissioned is to look at how they operate.
With a permissionless blockchain, the public is what validates information regarding transactions. In permissioned systems, however, transaction information receives validation from a specific group that the blockchain’s owner approves of. Systems of this kind are often more scalable and faster, but they are comparatively more centralized. Permissionless systems, meanwhile, are open for all to join. The outcome is it’s typically more decentralized, with the trade-off being speed and scalability.
Both of these models are branches of the same technology that goes through various developments to suit different needs. Moreover, they both have their fair share of benefits and can prove to be advantageous for an array of technologies. Ultimately, though, it all depends on what exactly the use cases are.