Permissioned Blockchains: A Beginner's Guide

Bitcoin is built upon a trustless and permissionless blockchain, which is why it’s so secure and reliable as a cryptocurrency. In order words, anyone can use it, and you don’t need to trust a person or entity, or get permission from them, to do so. It’s what makes the Bitcoin ecosystem so strong: the idea that no one person is in charge.

But there’s recently been a rise in the popularity and usage of permissioned blockchains. Doesn’t that seem to be going against the entire reason for having a blockchain?

First, what is a blockchain? Think of it like a bank ledger, where you record each transaction that you make, and keep a running tally. A blockchain is simply a series of blocks that contain transactions, linked together one after the other in a chain.

But there are other aspects that make a blockchain different than just a ledger. Each transaction is validated and confirmed — essentially someone who didn’t make the transaction confirms it as a kind of third party — before it can be added to the block. A blockchain is also unchangeable. Once a block is created, it’s locked in. It’s also public, which means anyone can see any transaction.

Blockchain technology was created at the same time Bitcoin was, in Satoshi Nakamoto’s white paper. The concept was that the blockchain would function as a decentralized ledger, meaning that transactions are verified by a worldwide network of nodes, and that copies of the blockchain exist outside of one central place. Anyone can set up a node, and anyone can start mining to validate transactions — no one needs to be certified or get permission to do so.

But what happens when that trustless nature is altered? Since 2017 there’s been a rise in permissioned blockchains, which seem to go against the decentralized nature of blockchain technology. We’ve seen private blockchains emerge, which are used internally by companies to maintain transaction records, track supply chains, or keep data private.

But a permissioned blockchain isn’t simply another private blockchain. It’s a blockchain where an owner controls who has the access and the ability to validate transactions.

On a permissionless blockchain, like the Bitcoin blockchain, anyone with the hardware can become a miner and begin validating transactions. Or anyone can set up a node to “watch” the blockchain and confirm transactions. On a permissioned blockchain, though, only certain individuals or entities that have received permission can validate transactions, and the owner of the blockchain can decide who and how many validators that can be.

Additionally, on a permissionless blockchain, the public is able to view all transactions, but on a permissioned blockchain, the public may or may not have visibility into the transactions — it depends on how the owner wants to set it up.

As you can already see, there are a number of trade-offs with permissioned blockchains. One of the challenges with a decentralized, permissionless blockchain is that it’s hard to scale because there are so many transactions that need to be verified, and so many miners involved. Yet permissioned blockchains are easily scalable. There may only be a handful of entities validating transactions, and they are probably not using proof-of-work like the Bitcoin blockchain (which is more secure), just simply an algorithm of their choice.

The same thing is true for its electricity usage. Due to the number of miners validating blocks around the world, a permissionless blockchain uses a lot of electricity, or hash power. But because only a few designated computers may be validating transactions in a permissioned blockchain, it’s more energy efficient with lower costs — which also helps with its scalability.

But trusting only a few entities to essentially oversee the entire blockchain may cause a security concern, the kind that is virtually non-existent on a highly-visible, permissionless blockchain like Bitcoin. For the Bitcoin blockchain, there are so many miners that it’s nearly impossible to stage a 51% attack, or an overthrow of the system where one entity gains 51% of the ecosystem’s hash power. If only a few nodes are permissioned to validate, it’s much easier to overthrow the system if it only takes two or three validators to “turn evil,” as opposed to thousands.

Something else a permissioned blockchain doesn’t offer is decentralization, or being independent of centralized oversight. Bitcoin and its blockchain was created in response to the 2008 misdeeds of centralized financial systems. Permissioned blockchains return to the idea that someone is in charge who can control who accesses it, which policies to enact, and how to run it.

However, a permissioned blockchain may be just what you need. For example, a bank, shipping facility, or grocery store might want to keep its validation processes permissioned, but might allow or even want public visibility into its blockchain. They would be able to keep control of how their data is stored and transacted, but give customers or clients the ability to trace transactions, produce, products, or even certain records back up the chain. 

But could a permissioned blockchain ever work with Bitcoin? No, because the Bitcoin blockchain wasn’t designed that way.

The Bitcoin ecosystem relies on permissionless, trustless, decentralized public consensus to remain a truly digital, global currency, unregulated by any one entity. It relies on anyone around the world being able to turn on a miner and jump right in, and it relies on everyone in the Bitcoin ecosystem to run it together. There are certainly circumstances where a permissioned blockchain would be an advantage, but a permissioned Bitcoin blockchain would no longer be Bitcoin.