A blockchain represents a distributed and decentralized digital ledger recording transactions, duplicated and spread across a network of computers. This decentralized storage method ensures unparalleled security, making tampering or hacking virtually impossible.

Bitcoin, the pioneering cryptocurrency, introduced blockchain technology, revolutionizing how data is shared and verified within a network. Each block in the blockchain records transactions, with every participant maintaining a copy of the ledger. This decentralized database, also known as Distributed Ledger Technology (DLT), employs cryptographic signatures to record transactions.

DLTs encompass various technologies and frameworks facilitating distributed architectures. Notable paradigms include permissionless and permissioned blockchains, which we will explore further in this discussion.

What Are Permissionless Blockchains?

Permissionless blockchains, also called public blockchains, are decentralized networks that do not require authorization for participation. They are primarily utilized to manage digital currencies.

Users can generate personal addresses within a permissionless blockchain and engage with the network by validating transactions or conducting transactions with other users.

The pioneering permissionless blockchain, Bitcoin, facilitated peer-to-peer transfers of digital currencies and enabled user participation in the mining process. Mining involves solving intricate mathematical problems to authenticate transactions, utilizing the Proof-of-Work (PoW) consensus algorithm.

Other permissionless blockchains exist beyond Bitcoin. Ethereum (ETH), for instance, is a widely known public blockchain that employs the Proof-of-Stake (PoS) consensus mechanism and introduces innovative features such as smart contracts.

Features of Permissionless Blockchains

Permissionless blockchains are characterized by four key features that serve as the foundation of their network structure.

• Transparency

Permissionless blockchains are renowned for their high degree of decentralization and transparency. Every transaction and data entry recorded on a permissionless blockchain is openly accessible and verifiable by anyone.

Tools such as blockchain explorers enable the extraction of transaction details using addresses, transaction IDs, or block numbers.

• Anonymity

Permissionless blockchains like Ethereum, Bitcoin, and Solana offer pseudo-anonymity. Users can maintain their anonymity by representing themselves through a cryptographically derived public address, corresponding to public keys generated from private keys securely held by users.

As a result, users are not required to disclose personal information such as usernames, emails, or passwords to engage with the network.

• Censorship Resistance

Permissionless blockchains are specifically engineered to resist censorship. Without a single controlling entity, the likelihood of censoring an address or transaction is significantly reduced.

• Consensus

The robustness of a permissionless blockchain is contingent upon its consensus mechanism. Participation in the consensus process is open to all, achieved by staking the minimum required coins (for Proof-of-Stake chains) or maintaining validator nodes (for Proof-of-Work chains). With an increasing number of validators, the risks associated with partial centralization and 51% attacks diminish.

The native cryptocurrency is a crucial component in the open consensus model of permissionless blockchains, incentivizing miners and stakers for their contributions to maintaining consensus and validating transactions.

Pros and Cons of Permissionless Blockchain

Permissionless blockchain offers various advantages and disadvantages, rendering it a compelling platform but perhaps not optimal for private entities or companies seeking heightened security measures.

Pros

• Enhanced Decentralization: Permissionless blockchain provides a broader decentralized platform, accommodating more participants than permissioned blockchain systems.
• Transparency and Efficiency: The platform boasts a high level of transparency, expediting the reconciliation process significantly.
• Censorship Resistance: With its vast participant base, permissionless blockchain exhibits formidable resistance to censorship attempts.
• Robust Security: The repository is highly resilient to disruptions, as corrupting 51% of the network—necessary for compromise—is exceedingly challenging due to the extensive amount of data involved.

Cons

• Reduced Privacy: Unlike permissioned blockchain alternatives, permissionless blockchain systems typically offer lesser privacy protections.
• Performance and Scalability Challenges: As the number of users increases, the platform encounters heightened pressure on its computing resources, leading to lower performance and scalability.
• Energy Inefficiency: The model’s reliance on network-wide verification consumes significant resources, resulting in an inefficient energy usage profile.

What Are Permissioned Blockchains?

Due to their closed nature, permissioned blockchains represent the antithesis of permissionless blockchains, akin to private blockchain networks.

There are various motivations behind intentionally restricting access to permissioned blockchains. The key distinction between permissionless and permissioned blockchains lies in their accessibility; not everyone can participate in a permissioned blockchain without special authorization from the network administrator or owner.

Why do we utilize permissioned blockchains? The primary objective is establishing a blockchain network secluded from the public eye. Not all blockchain applications necessitate public accessibility, and organizations often cannot afford to expose their processes or data publicly. In such cases, permissioned blockchains offer invaluable utility, albeit diverging slightly from the foundational principle of decentralization.

Entities such as banks, companies, or institutions find permissioned blockchains indispensable for safeguarding their data and ensuring compliance with regulations.

A primary instance of a permissioned blockchain is Ripple (XRP).

Features of Permissioned Blockchains

The distinguishing characteristics that set permissioned blockchains apart from permissionless networks include the following:

• Privacy

Privacy is a flexible option in permissioned blockchains. Depending on the specific use case, transaction records can be selectively kept private or hidden from other participating organizations within the network.

For example, organizations engaged in transactions with petroleum distributors may keep these interactions confidential to prevent competitors from accessing sensitive information.

• Anonymity

The level of anonymity within permissioned blockchains is at the discretion of the network administrator(s), who have the authority to regulate user access privileges.

In permissioned blockchains, maintaining participant anonymity is not a mandatory requirement. The top-level entity can identify and authorize each network participant in hierarchical structures.

For example, in a supply chain management system deployed on a Hyperledger Fabric network, the governing body may be able to ascertain the personal details of all network participants.

• Censorship

Authorities and stakeholder organizations can implement tailored regulations to suit their business objectives when designing permissioned blockchains.

These regulations empower authorities to govern and manage the network’s state, enabling the censorship of certain users from participating or imposing restrictions on specific transaction types that do not align with the network’s policies.

• Consensus

Unlike public permissionless blockchains, permissioned blockchains, operating within an enterprise framework, do not necessarily adhere to the consensus mechanisms employed by their public counterparts. Instead, centralized operators have the flexibility to establish their consensus protocols using either public or proprietary methods.

Pros and Cons of Permissioned Blockchain

Although the permissioned blockchain is a valuable tool for bolstering security and protection, making it a preferred choice for numerous private entities, it still has certain drawbacks. Let’s explore the advantages and disadvantages of permissioned blockchain.

Pros

• Decentralized Participation: Companies can engage in permissioned blockchain networks without the burdens associated with centralized models, enhancing inclusivity and participation.
• Emphasis on Privacy: Privacy is a cornerstone of permissioned blockchain, providing users with robust privacy features while accessing transaction details.
• Customizability: Permissioned blockchain offers flexibility through various configurations, enabling users to tailor the network according to specific requirements. This includes options for hybrid integrations or modular components.
• Enhanced Performance and Scalability: With limited access and fewer participants, transaction processing is streamlined, improving performance and scalability.

Cons

• Increased Risk of Collusion and Data Corruption: The limited number of participants in the permissioned blockchain raises the likelihood of collusion and potential data corruption, undermining the integrity of the network.
• Complexity of Consensus: Achieving consensus in this model is challenging as the operator can alter the rules governing consensus at any given time, introducing uncertainty and potential conflicts.
• Limited Transparency: Due to the restricted participant pool, external oversight is less transparent, hindering visibility and accountability.

Conclusion

Permissioned and permissionless blockchains offer diverse applications, each catering to specific needs within various industries. It is not accurate to deem one approach superior to the other, as their suitability depends on the unique business criteria at hand. Both permissioned and permissionless blockchains exhibit distinct features tailored to their respective purposes.

Permissioned blockchain primarily targets private entities and companies seeking to securely manage their data and operations. On the other hand, permissionless blockchain aims to foster inclusivity by encouraging widespread participation and contributions from individuals.

Continuous development and upgrades are underway for both permissioned and permissionless blockchains, expanding their capabilities and utility across a broader spectrum of applications.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.