bitcoin.jpg

If you have been following distributed ledger technologies (Blockchain), you would see the term permissioned blockchain being thrown around. What is the core difference between a permissioned vs. a permissionless blockchain?

A permissioned blockchain restricts the actors who can contribute to the consensus of the system state. In a permissioned blockchain, only a restricted set of users have the rights to validate the block transactions. A permissioned blockchain may also restrict access to approved actors who can create smart contracts.

Permissionless blockchain is contrary to what you read above – Here anyone can join the network, participate in the process of block verification to create consensus and also create smart contracts. A good example of permissionless blockchain is the Bitcoin and Ethereum blockchains, where any user can join the network and start mining.

Now you may wonder what the benefits and disadvantages of each approach are? In a permissionless world, you do not have to prove your identity to the ledger. As long as you are willing to commit processing power to be part of the network and extending the blockchain, you are allowed to play. Any miner who is playing the game by the rule may be able to solve the hash puzzle and verify the block of transactions to win the mining reward (Higher the mining power, better the chances of winning the mining reward).

In the permissioned blockchain world, you need to be an approved actor in the system to participate in growing the chain as well as building consensus. Many of the blockchain consortiums that build private blockchains for financial institutions and other enterprises follow this model.

One other critical difference between these two is the underlying mining model – permissionless blockchains use Proof of Work(PoW) mining where hashing power is offered to build trust. As long as 51% of the nodes are honest players, network consensus is reached. (Read about 51% attack here).  While Bitcoin uses PoW mining, Ethereum uses a Proof of Stake model (PoS) for reaching consensus.  Proof of stake mining asks users to prove ownership of a certain amount of currency (their “stake” in the currency). Instead of buying computers and electricity for mining in a PoW system, a PoS systems uses the capital to acquire the coins/tokens that allow you to validate transactions.

Permissioned blockchains do not have to use the computing power based mining to reach a consensus since all of the actors are known; They end up using consensus algorithms like RAFT or Paxos. There are also other PBFT algorithms that can be used to reach consensus without PoW mining.

Let us look at the topic of enterprise blockchains. Almost all of these piloted blockchains these days are permissioned. There are many reasons why this is the case:

  1. Privacy – using a permissioned blockchain allows only actors who have rights to view the transactions. A permissionless blockchain is ideal as a shared database where everyone can read everything, but no single user controls who can write. Imagine you are a large bank who uses a shared ledger with a list of other banking partners within a consortium – you do not want the volume of your transactions to be visible to your competitors.
  2. Scalability – A Permissioned blockchain can build a simplified Proof of Stake model to establish consensus; this prevents the proof of work by burning computational cycles. The ultimate result is scalability compared to a public blockchain network like Bitcoin. (See BigChainDB).
  3. Fine Grained Access Control – A Permissioned blockchain allows restricted access to the data within the ledger (See the design model underlying R3CEV’s Corda)

I want to highlight one of the most famous interviews by Bitcoin guru Andreas Antonopoulos – Sewer Rat and the Bubble Boy. When asked about “How are enterprise/private blockchains different from bitcoin’s blockchain?”, Andreas responded:

“The banks and the corporations say, “Oh, bitcoin’s awesome. We want that. Only without the open, decentralized, peer-to-peer, borderless, permissionless part. Could we instead have a closed, controlled, tame, identity-laden permission version of that please?”

It is an interesting argument where Andreas compares Bitcoin network to the Internet and the private blockchains as the secure intranet within enterprises. He compares them to the Sewer Rat and the Bubble Boy:

Bitcoin is a hardened platform because its security is tested on an everyday basis.

“Bitcoin is a sewer rat. It’s missing a leg. Its snout was badly mangled in an accident in last year. It’s not allergic to anything. In fact, it’s probably got a couple of strains of bubonic plague on it which it treats like a common cold. You have a system that is antifragile and dynamic and robust.”

Does this mean that the enterprise blockchains are the bubble boy?

 “let’s take bitcoin, cut off its beard, take away its piercings, put it in a suit, call it blockchain, and present it to the board.” It’s safe. It’s got borders. We can apply the same regulations. We can put barriers to entry and create an anti-competitive environment to control who has access. It will be more efficient than our existing banking system.

Eventually, successful, vibrant, innovative companies are the ones that turn their IT infrastructure inside out. In the future of finance, successful, vibrant, and innovative banks are the ones that turn their infrastructure inside out and make it part of an open, borderless financial system that serves the other 6 billion, that serves all the people who have been excluded from finance.”

I for one cannot wait to see how this whole debate will shape up the future of finance. The advent of bitcoin and blockchain and DLT technologies is a pivotal moment in the history of computing and technology. It will change the way of how we build systems of the future.

You can watch the full-text interview with Andreas here and the video of his talk here.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s