Permissioned vs. Permissionless Blockchains: The Differences

Permissioned blockchains and permissionless blockchains are two diametrically opposed options when it comes to cryptocurrency trading. A blockchain network outlines all of the transactions regarding a particular cryptocurrency. Permissioned blockchains are private blockchains that include administrator oversight, and permissionless blockchains are public blockchains that have no limitations on them other than those within the various federal, state and local laws governing such blockchains. 

Either permissioned or permissionless blockchains will help you manage your digital assets, but it's important to realize all of the pros and cons of a private blockchain and the technology involved in keeping it secure. Although the technology of public blockchains is advanced, they lack the security measures of private blockchains.

What Is a Permissioned Blockchain?

A permissioned blockchain is a private blockchain that only a few people can access. They are given such access through keys and passwords by the blockchain administrator, who oversees the security measures of the permissioned blockchain.

Within the distributed ledger, not everyone granted access to the permissioned blockchain is able to do the same things. The administrator not only controls who has access to the blockchain, but also what each person allowed on it can do. The identity verification process is a necessary part of this added level of security. 

How Does a Permissioned Blockchain Work?

As a blockchain network, a permissioned blockchain offers a business more transparency because participants can feel more secure while doing business within the digital ledger. Without the proper keys, no one can interact with the permissioned blockchain.

Permissioned blockchains also promote and encourage accountability. It's always clear “who did what” because everyone who has access must log in after providing identity verification. Everything is tracked, which means that the administrator knows whom to contact if something goes wrong.

Despite a lack of central authority, the administrator, along with any others who are involved in making decisions, can set parameters for access, actions and other aspects of interacting with the permissioned blockchain.

Because of their very nature, permissioned blockchains are the cryptocurrency darlings of the business world. Their rigid structure and extremely tight security are true enterprise solutions, because not controlling access — when there are, perhaps, hundreds of employees who might need to use the blockchain — could lead to chaos and confusion.

Advantages of a Permissioned Blockchain

Customization

Because access to the permissioned blockchain is limited to a small group of people, it's easier to customize its characteristics than it would be with a permissionless blockchain, which carries a far greater number of users. When the business needs to make modifications, it's a simple matter to change the permissions afforded to the users on the private blockchain and, if necessary, to alter who has access to it.

Data Protection

Because a permissioned blockchain is highly secure, it provides exceptional data protection. This includes both industry secrets and personal data — not only that of the employees to whom the administrator has granted access, but the rest of the employees as well. Of course, enterprise data security involves much more than just the cryptocurrency flow on the blockchain, but a permissioned blockchain is an integral part of such security.

Disadvantages of a Permissioned Blockchain

Lack of Oversight

While a private blockchain provides great internal transparency, there’s zero chance of any outside oversight without assistance from within the company that's using the chain. This can lead to manipulation of data, corruption, or even outright criminality within the collection of users to whom the administrator has granted access. The implication here is not that every administrator (or user) is a crook, but that lack of outside oversight could lessen the credibility of both the permissioned blockchain itself and the company that uses it.

Difficult Consensus

Because the administrator controls everything, both the business and its users are subject to that person's whim. In addition, while those allowed access to the permissioned blockchain can form a consensus among themselves, the administrator can effectively nullify their concerns, suggestions or directives — because they only have access to the private blockchain through the administrator. If the administrator isn't trustworthy, they can change the rules at any time, which might cause problems within the blockchain that will be extremely difficult to solve.

What Is a Permissionless Blockchain?

A permissionless blockchain is a decentralized arena for working with cryptocurrency that has no administrator, no special permissions and no real secrecy within the blockchain itself.

Permissionless blockchains are secure, however, from external threats. For example, they are not weak against either brute-force attacks or internal scams, such as double-spending. Within the blockchain everyone can see everything. Because of these characteristics, permissionless blockchains aren’t generally for enterprise-level businesses. Rather, they're for individuals and small businesses that rely on their personal keys for their security.

Individuals love the anonymity of permissionless blockchains. There's no Big Brother administrator looking over their collective shoulders to see what they're doing. The users answer only to themselves and to all applicable federal, state and local laws. Some notable examples of permissionless blockchains include Bitcoin and Ethereum. 

How Does a Permissionless Blockchain Work?

The primary idea behind a permissionless blockchain is to create a milieu with no central authority at all, not even an administrator. Everyone can participate in the consensus, has access to everything within the blockchain, and can verify what occurs on the blockchain and then validate it with broad consensus.

A secondary concept is to provide a way for people to build consensus easily. If everyone participates, then everyone has a stake in what's happening on the permissionless blockchain. The combination of "everyone pitching in" and the abundance of digital assets, such as tokens and NFTs, helps to make everything involved in the permissionless blockchain more efficient.

The openness of the permissionless blockchain is designed to get as many people involved as possible so that the public blockchain is resistant to corruption. For the permissionless blockchain to have to be reset, more than half of it would have to be corrupted, and it's nigh impossible to corrupt that much data without someone noticing first.

Advantages of a Permissionless Blockchain

Quick Reconciliation Process

Because the permissionless blockchain provides free access to everyone, there are no extra steps to go through for validation of transactions, or for interaction between intermediaries with authorization and the people on the blockchain. This is true even though the permissionless blockchain helps users maintain their anonymity. The ease of reconciliation is also supported by the fact that the permissionless blockchain is highly resistant to censorship, meaning that "a deal's a deal" once completed.

Steadfast Stability

Public blockchains are the foundation of the world of cryptocurrency. Because so many people use them, and because more than half of the users would have to decide to alter the blockchain, people have great confidence in them. No one person or business can have total control over so many users, and smart contracts add an additional layer of stability.

Disadvantages of a Permissionless Blockchain

Power Consumption

Permissionless blockchains are power hogs. Because they’re so large, they require great amounts of power to keep them up and running. Also, permissionless blockchains are slower to respond than private blockchains. Blockchain technology is improving all the time, but lots of users on a blockchain network means the need for a lot of power. Along with the need for such large amounts of power, there’s also the specter of increased costs. These involve not only the power to run the system itself, but to foster the consensus and reconciliation processes.

Small Block Size

Small blocks mean that users have to wait until a new block is created before transactions will complete. This slows down the process, and contributes to a higher associated cost. And it doesn't just slow down the processes for the user in question, but for all of the permissionless blockchain's users.

Permissioned Blockchain vs. Permissionless Blockchain

Access to Cryptocurrency Transactions

Whether you're doing everything under the watchful eye of an administrator or other central authority, or you're remaining largely anonymous on a public blockchain, you're still buying and selling NFTs and other tokens and/or converting one currency to another. The idea is the same even if the methods are different.

Reconciliations

When working with intermediaries, the members of a blockchain have to verify transactions to protect the members of the blockchain. In both cases, the members of the blockchain and the intermediaries share data with each other to validate the reconciliation process, thus protecting all parties from nefarious activities. Smart contracts are part of the fabric of both kinds of blockchains. These are automated programs designed to remove the need for excessive monitoring of situations within the blockchain.

Security

The chief difference between permissioned blockchains and permissionless blockchains is in their type of security. In the case of the former, there’s an additional layer of security provided by the administrator, who assigns access to the private blockchain. When it comes to the latter, anyone can access the public blockchain.

B2B vs. P2P

Permissioned blockchains normally deal with large businesses that buy and sell tokens from each other, whereas permissionless blockchains deal with individuals and smaller businesses.

Which Should You Use — Permissioned or Permissionless Blockchain?

If you're a beginner, then the permissionless blockchain is the way to go. You don't have to get anyone else's approval to participate, and you can start small when it comes to your transactions. You'll buy and sell with one person or with a couple of people.

If you're experienced, then you can branch out into permissioned blockchains. You can cultivate relationships with businesses, separating your personal transactions from your business transactions. But just because you're experienced doesn't mean that you can't trade on a permissionless blockchain if the parameters of the transaction fit your needs.

The Bottom Line

For crypto investors and traders, having a well-rounded view of permissioned and permissionless blockchains is invaluable. While permissionless blockchains are the norm in cryptocurrencies, some businesses have opted to use private, permissioned blockchains, which can differ significantly from their public counterparts. Staying informed on all aspects of distributed ledger technologies will ensure you remain ahead of the curve when it comes to understanding this ever-evolving field.