Navigating the world of blockchain technology can be an unnerving process. Every new technology comes with its own new set of terms and blockchain is no exception.
If you have been following, you might have come across these terms permissioned and permissionless networks. What exactly do they mean?
Not all blockchains are built the same. Their developers envision certain uses for them in mind and tweak them accordingly.
Blockchain technology is better known as a distributed or decentralised ledger. This means that transactions are not kept in a central place but thousands of different points with no central control.
You may think of your credit card issuer or bank as an example a centralised authority. Data is stored in a central point and transactions must be approved by a third party. Entry is also tightly controlled.
On the other hand, you do not need any permission to use bitcoin or any other decentralised network. As long as you have a computer and internet access, you can download a wallet and start transacting right away.
Permissioned vs Permissionless Networks
With that understanding of decentralised vs centralised networks we can now delve into permissioned and permissionless networks.
You can consider permissioned networks as closed or private. This means that only a few people can access and read the data contained on the blockchain. They may also have different levels of access.
Banks, for example, might need to share some information between themselves while keeping certain information private. This can include sensitive information such as transaction volumes.
In such a network only selected validators verify transactions. A good example is the Ripple network. There is debate whether networks that do not use proof-of-work algorithms should be considered blockchains. Some view them simply as shared ledgers.
It is easy to see why organisations such as banks might prefer permissioned networks over permissionless ones. Bitcoin has maintained its integrity for about ten years. That’s largely because of its decentralised nature. Having no one controlling the network is a major advantage.
Permissioned networks, on the other hand, have some level of control and can suffer from the problems of centralised networks.
With permissionless networks like bitcoin, anyone can be a validator. Virtually anyone can read the blockchain and help verify transactions and create smart contracts. They just have to follow the rules of the network. All you have to do is avail your processing power.
Ethereum is another example of a permissionless network although there are plans to make it a proof-of-stake network.
Permissionless networks use proof of work algorithms. This means you only need your hashing power to build trust. For Proof of Stake systems, you actually have to own a certain amount of coins to gain trust.
Because of this, permissioned networks do not require a lot of computing power that makes bitcoin mining extremely power hungry.
Proof of Stake networks often use consensus algorithms such as Paxos.
Advantages of Permissioned and Permissionless Networks
Permissioned and permissionless networks have their own unique strengths.
As mentioned before, permissioned networks are strong on privacy because only the actors can view the transactions. Permissionless networks are however ideal as a common shared database.
One of the major problems facing bitcoin is scalability. Permissioned networks do not have this problem as consensus can easily be built.
Hybrid networks that bring the best of both worlds however do exist.