The openness of blockchain ecosystems is subject to many discussions around the crypto community. Depending on the use case, developers design blockchain networks according to customized needs and preferences. People are mostly aware of public, permissionless blockchains like Bitcoin and Ethereum, since they are available for anyone to participate. However, if blockchain technology is a tool that will ultimately disrupt our society, we shall anticipate more permissioned networks to be developed for specific industries.
This blog post goes through the key benefits and risks of the two types of blockchain architecture ecosystems. Every network runs according to its own blockchain consensus algorithm.
Permissionless Blockchains
Permissionless blockchains refer to open decentralized networks that are available for anyone to access and interact. Therefore, anyone can read, conduct transactions and participate on the consensus validation process. Permissionless blockchains are also known as public or trustless blockchains. Most notable examples include the widely adopted cryptocurrencies like Bitcoin, Ethereum, Avalanche, Solana etc. Cryptocurrencies and/or tokens act as an incentive mechanism for users to run the network operations.
DeFi applications such as derivative protocols are built on permissionless blockchains as the concept requires wide adoption and decentralized participation. Permissionless blockchains usually adopt Proof of Work (PoW), Proof of Stake (PoS) and some of their variations as consensus mechanisms, therefore do not involve a central authority.
Permissionless blockchains enhance transparency of transactions and participants are usually pseudonymous. The degree of privacy remains questionable, as it depends on the technological implications of each network. For instance, privacy coins like Zcash and Monero enhance technologies that increase the degree of anonymity. Such cryptographic technologies are zk-SNARKs and ring signatures.
Due to high degree of decentralization, permissionless blockchains are computationally difficult to tamper and censorship resistant. For example, it is very costly for a malicious party to perform a 51% attack on the Bitcoin network. A major drawback is the low throughput and scalability as high transaction volumes affect validation processes. When a blockchain network reaches a significant degree of adoption, network congestion may increase block times and fees.
Permissioned Blockchains
There are two categories of permissioned blockchains; private and consortium. Their fundamental difference is that a private consortium maintains its consensus through one organization, while a consortium blockchain achieves consensus through the agreement of a selected group of nodes. Therefore, a private blockchain fully depends on a centralized party, whereas a consortium blockchain is partially centralized. Running costs are low for permissioned blockhains due to limited number of attackers. An attacker would not have the incentive to attack such a network, especially if there is no monetary value in the form of a token.
There are many mutual attributes between private and consortium blockchains. Both achieve high throughput and scalability compared to permissionless blockchains. Read and write permissions depend from the selected node(s). Both usually adopt different consensus mechanisms than permissionless blockchains. For instance, Proof of Authority (PoA) is ideal among governmental or private institutions and entities, where a centralized party assigns nodes with the responsibility of creating new blocks. Proof of Elapsed Time (PoET) aims to achieve fairness among participants via a lottery system to determine block winners. PoET is used in Hyperledger Sawtooth.
Privacy is questionable in permissioned networks, however there are instances where confidentiality is not essential. If a shipping company uses a blockchain to track flow of products, confidentiality of parties’ identity may not be needed. But within medical institutions where a consortium blockchain would be ideal, keeping track of sensitive data requires privacy. A downside is that transactions are more possible to be altered due to high degree of centralization.
Conclusions
The decision of an individual or a business whether to adopt a public, private or consortium blockchain depends from the use case and the industry. A DeFi protocol would obviously join and build on a public blockchain. A single entity like a shipping multinational could use a private blockchain to keep track of goods and their quality. A consortium blockchain would be ideal for medical institutions within a nation to maintain a transparent ledger of patients’ medical history. The decision depends whether the user prefers an open environment and low performance against a centralized, fast and efficient network.
Most permissioned blockchains fall under the category of consortium blockchains, but face some challenges among implementation. Different parties need to agree on the consensus, thus the network rules. Moreover, it is questionable whether an early technology like a blockchain could manage massive amounts of data upon scaling. Hiring blockchain developers to implement such niche solutions is also costly.
