Permissioned Blockchain

What Is a Permissioned Blockchain?

A permissioned blockchain is a distributed ledger that is not publicly accessible. It can only be accessed by users with permissions. The users can only perform specific actions granted to them by the ledger administrators and are required to identify themselves through certificates or other digital means.

You might consider the addition of permissioned users as an extra blockchain security system. Administrators maintain an access control layer to allow certain actions to be performed only by certain identifiable participants. Records are kept within the blockchain of who is involved in the transactions. This makes permissioned blockchains different from public blockchains.

Key Takeaways

  • Permissioned blockchains provide an additional level of security over typical blockchain systems like Bitcoin, as they require an access control layer.
  • These blockchains are favored by entities who require security, identity, and role definition within the blockchain.
  • Permissioned blockchains are becoming more common as businesses realize their benefits.

Understanding Permissioned Blockchains

A blockchain can be built and accessed in multiple ways. Some blockchains need special permissions to read, access, and write information. Others only require that you have the ability to connect and can conduct work for the network. The intrinsic configuration of each blockchain controls the participants' transactions and defines their roles in which each participant can access and contribute to the blockchain.

It may also include maintaining the identity of each blockchain participant on the network. Such blockchains are called permissioned blockchains.

Difference Between Permissionless and Permissioned Blockchains

Permissioned blockchains are similar to permissionless blockchains because they use the same technologies. However, permissioned blockchains do not allow users to access the blockchain without identification.

For example, a bank may be running a permissioned blockchain operated through a designated number of nodes internal to the bank to track money transfers. You cannot access this blockchain because you don't have the permissions required. In contrast, you could join a permissionless blockchain like a cryptocurrency mining network once you have established a semi-anonymous account in that network.

Technically, properly conceived permissioned blockchain networks have an access-control layer built into the blockchain nodes.

Much of the inner workings of the blockchains are the same. The key differences between them are:

  • Enterprise vs. Public use
  • Decentralization
  • Development
  • Transparency

Enterprise vs. Public Use

Bitcoin, the most popular cryptocurrency permissionless blockchain, allows anyone to participate in the network in the capacity of a full node or a contributing miner. Anyone can take a read-only role or make legitimate changes to the blockchain, like adding a new block or maintaining a full copy of the entire blockchain.

As blockchain uses grow and mature, more businesses and governments have realized the cost-saving benefits the technology introduces into an organization. As a result, permissioned blockchains have become popular among industry-level firms and enterprises, for which security, identity, and role definition are essential.

For instance, a manufacturer producing a product may use a permissioned blockchain that ties into its supply chain management. The transactions on this blockchain would likely involve logistics partners, financing banks, and other vendors involved in the supply and financing processes. Each entity would have its own level of transparency and permissions that it could use to streamline operations, track inventory, or monitor spending and invoicing.

Decentralization

Permissionless blockchains have a broad decentralization in that they allow for more users and can extend across a much larger network. On the other hand, permissioned blockchains have limited decentralization as they are generally used for enterprise and business purposes, requiring various amounts of centralization.

Development

Generally, permissionless blockchains are open source, which means that a community develops them; they can be changed and used by anyone. Permissioned blockchains are generally proprietary and controlled by the developers or the business using them.

Much of the time, businesses creating or using a "blockchain" are not using a blockchain; they build a distributed ledger with a consensus mechanism for verifying transactions. It can be tough to distinguish the difference because there is not yet a set definition that truly separates blockchain and DLT.

A developer building a permissioned blockchain may opt to make a few select records, like product name and quantity involved in a transaction, available for everyone to read. However, only select participants are allowed to view the transaction price. Other implementations may include limiting participants to act as nodes on the network, enhancing the network's security.

All such permissioning and profile maintenance is handled by this access-control layer. These differ from the un-permissioned or public blockchain networks, which don’t have a control layer.

Transparency

Permissionless blockchains are much less transparent since they provide a certain amount of anonymity for the users. Wallet addresses cannot generally be tracked back to the blockchain users, and transactions are encrypted using various cryptography methods.

Permissioned blockchains require more transparency at certain levels since they are used for conducting business. Nodes, or the users and their connections, are known and their transactions are visible. Among many other benefits, this can defend a company against double invoicing, spending, paying, or any other number of errors that can be made using enterprise management programs.

What Is a Permissionless and a Permissioned Blockchain?

A permissioned blockchain requires user approval to join and is generally used for enterprise purposes, whereas a permissionless blockchain is used for public purposes that require less transparency and control.

What are Permissioned Blockchains Used for?

Permissioned blockchains are generally used to manage supply chains, create contracts, verify payment between parties, and much more.

Can Ethereum be Permissioned?

Many cryptocurrency blockchains are permissionless. However, some, like Etherum, can be further developed into permissioned blockchains for use in environments that require it.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

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