What is the blockchain? At a very simplified, high level, it can be thought of as a distributed database that maintains a list of records in blocks that are chained together in a specific order. Each block links to the history of the block that came before it, stamped with the time it was created. The linking of these blocks to form this continual record is called “Blockchain.”
Part 2 examines the current landscape at a deeper level, to provide a better context for understanding Blockchain
Permissioned vs. Permissionless blockchains:
In order to understand permissioned vs. permissionless blockchains, first there is a need to understand decentralized and centralized systems in general.
Centralized vs. Decentralized Systems:
A centralized system is one that that is governed by a central hierarchical authority; examples of such being banks, financial institutions, credit card companies, etc. If you want to use a Visa card you must request access from Visa and be approved. At any time, your access to that line of credit may be made unavailable to you and your access revoked.
A decentralized system is one that requires no permission to access or use its network.
PERMISSIONED VS. PERMISSIONLESS BLOCKCHAINS:
With a permissionless blockchain, there is no barrier to entry to use it. It is equivalent to a decentralized system. Anyone can run a node. Permissionless blockchains enable anyone to take interact with it. The transactions on it are approved and handled by votes/agreement and consensus mechanisms. They require a consensus mechanism to ensure that the changes to the database are recorded accurately.
A permissioned system can be referred to as a “private” system. It is equivalent to a centralized system. In order to access it, you are required to have some sort of permission to access all or parts of that system. There are a multitude of variants and hybrid permissioned/permissionless blockchains that exist. For example, a blockchain may be public to read the information, but require permission to access or transact on the network.
Other permissioned blockchains may be totally in-house (highly permissioned), unable to be accessed or read outside of the organization that controls it.
The utility of permissioned blockchains is preferred by corporations or organizations with specific needs. There is generally no requirement for transparency in this case. This is a centralized system with access for specific participants. Most corporations do not want to have all their transactions, supply management, legal contracts and decision making written onto a public ledger for public view. This would put them at a disadvantage in the marketplace because their competitors’ strategies and situations would not be open and available for all to see.
Currently, there are no banks or financial institutions that would put their entire infrastructure onto a public blockchain. To put their entire financial transaction structure into the same stream as a public blockchain, while technically feasible, would leave them open to AML/KYC (Anti-Money Laundering/Know Your Customer laws) concerns. Institutional money has been extremely wary of public blockchains in general, because of the need to safeguard proprietary information and privacy of users. However, they remain very active in the permissioned (private) space.
The key component of blockchain’s appeal is the immutability of transactions records; that is, the inability to go back and change information that has been verified in the past. Also appealing is the fact that there is an audit history available without the need to create it separately within the database.
Permissionless or public blockchains are open to the public and require some type of consensus algorithms to make any modifications to the data. Anyone can participate to read/write or audit the transaction(s) in a public blockchain without permission. Being transparent and open to public any individual can download and start running a public node on their local devices, send the transaction, validate it, and track it at any given time on the blockchain. The decision-making process is normally done by one of several decentralized consensus algorithms, such as Proof of Work (PoW) or Proof of Stake (PoS). There is a great deal of energy required to do the consensus work and is one of the main disadvantages of this type of blockchain.
Permissioned blockchain: This type of blockchain is closed to the public and requires a special authorization to access it. Permissioned blockchains are generally used by Corporations. It is also called a Private blockchain. Because it is permissioned, in many cases, there is not a need for a consensus mechanism to add blocks to the chain. It depends on validators that it has preselected to endorse the transactions. The permissioned blockchain is normally developed by a private organization or an individual where not everyone can read/write/audit the transaction(s). Generally, write/audit permission is kept centralized, while read permission may be public or restricted to a limited number of people. It is secured cryptographically. From an organization’s point of view, a permissioned blockchain is cost-effective and efficient.
Next, in Part 4 of this series, I will be covering “Blockchain in Today’s Environment”.