Permissioned vs. Permissionless Blockchain: A comprehensive guide

Blockchain technology has become a cornerstone of the digital revolution, offering a decentralized approach to data management and transactions.

At its core, it offers a decentralized network, where, unlike previous systems, no single entity has control. This decentralization is achieved through cryptographic techniques that ensure data security and integrity. Participants in a blockchain network can trust the data recorded on the ledger without needing a central authority to verify transactions.

There are several types of blockchain networks, with more to be developed as the technology evolves. The two most prominent types are permissioned and permissionless blockchains, each catering to different needs, trade-offs, and use cases. So, what sets them apart?

In this article, we’ll dive into the key differences, use cases, advantages, and challenges of each type of blockchain, helping you determine which one might be best suited for your needs.

What is a permissioned blockchain?

A permissioned blockchain is a type of blockchain that requires approval to access the network. Unlike public blockchains, where anyone can join, permissioned blockchains restrict access to specific members. These participants are usually verified by a central authority that manages the network.

In a permissioned network, a central entity has control over the blockchain's governance, deciding who can read the ledger, execute transactions, and participate in the consensus process. This level of control is often necessary for industries that require strict compliance with regulatory standards or where sensitive data is involved.

Another defining feature of permissioned blockchains is their use of customizable consensus mechanisms. Unlike open blockchains that often rely on energy-intensive methods like Proof-of-Work (PoW), permissioned blockchains can implement more efficient consensus algorithms. Some popular options include Practical Byzantine Fault Tolerance (PBFT) and Raft, which are better suited for environments with known participants.

Key characteristics of permissioned blockchains

• Restricted access: Only authorized participants can join and transact on the network.
• Centralized governance: Typically governed by one or a few organizations.
• Participant control: Network administrators control who can read, write, or validate transactions.
• Scalability: Often designed for higher efficiency and scalability compared to public blockchains.

What is a permissionless blockchain?

A permissionless blockchain is a public blockchain open to anyone who wants to join the network. There is no central authority controlling access, and participants can freely view the ledger, execute transactions, and participate in consensus. Some prime examples include popular blockchains like Bitcoin and Ethereum.

In a permissionless blockchain, the network is maintained by a decentralized group of participants, often referred to as nodes. These nodes work together in verifying transactions and maintaining the integrity of the blockchain. Like most blockchains, permissionless networks also employ consensus algorithms like Proof-of-Work (PoW) or Proof-of-Stake (PoS) to ensure that all participants agree on the state of the ledger.

Even more than other network types, permissionless blockchains are designed to be transparent, with all transactions and data publicly accessible. Anyone across the globe can verify the data recorded on the blockchain, making it a trustless system where network participants do not need to rely on a centralized authority to ensure the validity of transactions.

Key characteristics of permissionless blockchains

• Open access: Anyone can join the public network and participate in transaction validation.
• Decentralized governance: The network is governed by a consensus protocol without a central entity.
• Transparency: All transactions are publicly visible on public blockchains.
• Decentralized security: The security of the network is enhanced by its decentralized nature.

Main differences between permissioned and permissionless blockchains

The main differences between these two blockchain architectures can be summarized in the following table:

Let's examine some of these aspects more closely.

Access control

• Permissioned blockchains: Access is restricted to authorized participants, ensuring that only selected entities can interact with the network. This control may be preferential in environments where data privacy and confidentiality are of greater importance.
• Permissionless blockchains: Open to anyone with an internet connection. There are no barriers to entry, allowing for a broader participation base but with no authority over who can access the network.

Governance

• Permissioned blockchains: Governance is typically centralized, either by a single organization or a consortium. Decision-making and voting processes are more straightforward, but less democratic.
• Permissionless blockchains: Governance is decentralized, with control distributed among all participants. Decision-making can be slower and more complex due to the need for consensus among a diverse group of participants.

Consensus mechanism

• Permissioned blockchains: Use consensus mechanisms like Practical Byzantine Fault Tolerance (PBFT) or Raft, which are optimized for speed and efficiency but may sacrifice some level of decentralization.
• Permissionless blockchains: Commonly use Proof of Work (PoW) or Proof of Stake (PoS for consensus), which prioritize security and decentralization but can be slower and more resource-intensive.

Security and trust models

• Permissioned blockchains: Security is based on the trust among a known group of participants. While this can reduce the risk of malicious attacks, it also introduces a single point of failure if trust is compromised.
• Permissionless blockchains: Security is derived from the decentralized nature of the network, making it more resilient to attacks. Participant trust lies in the chosen consensus mechanism, which is responsible for the integrity of the blockchain.

Scalability and performance

• Permissioned blockchain: Can offer scalable performance due to the controlled environment and optimized consensus rules. This makes them suitable for enterprise applications requiring high throughput.
• Permissionless blockchain: Faces scalability challenges due to resource-intensive consensus mechanism options. However, ongoing developments like Layer-2 solutions aim to address these issues.

Transparency and privacy

• Permissioned blockchain: Offers higher privacy and confidentiality since access is restricted and transactions are visible only to authorized participants. However, this may come at the cost of reduced network transparency.
• Permissionless blockchain: Highly transparent, as all transactions are publicly visible on the blockchain ledger. This transparency can be a double-edged sword, however, as it provides security through visibility, but potentially lowers user privacy.

Permissioned blockchains: Advantages and limitations

Permissioned blockchains: Pros

Enhanced privacy and confidentiality

Permissioned and private blockchains provide controlled access to the network, ensuring that only authorized participants can view and interact with data. This could make them suitable for industries like finance and healthcare, where protecting sensitive information is critical.

Scalability and efficiency

Due to their controlled environments and optimized consensus mechanisms, permissioned and private blockchains can handle a higher volume of transactions with lower latency. This scalability and efficiency make them a potential option for enterprise applications that require fast and reliable transaction processing without the bottlenecks often seen in permissionless networks.

Compliance with regulations

The centralized governance of permissioned blockchains can allow for easier enforcement of regulatory requirements, such as GDPR and financial regulations. Organizations may choose to ensure that their blockchain operations comply with legal standards, offering greater peace of mind in highly regulated industries.

Streamlined governance

Permissioned, private blockchains benefit from centralized or consortium-based governance, enabling quicker and more efficient decision-making. This streamlined process allows organizations to adapt swiftly to changes in business needs or regulatory environments without needing widespread consensus from a large, decentralized community.

Permissioned blockchains: Cons

Centralization risks

The centralized nature of permissioned blockchains introduces the risk of single points of failure. If the central entity is compromised, it can jeopardize the entire network, leaving it more vulnerable to attacks compared to decentralized systems.

Limited transparency and openness

Permissioned and private blockchains often sacrifice transparency for privacy and control. While this can be beneficial for protecting sensitive information, it limits the openness of the network, making it harder for external parties to audit or verify the blockchain's operations.

Vetting new participants

Managing a private, permissioned blockchain can become complex as the number of participants increases. The central authority must ensure that the blockchain remains secure as more entities join, presenting a challenge unique to this network type. Additionally, the need to verify and authorize new participants can slow down the process of scaling the network, limiting its ability to accommodate rapid growth.

Vendor lock-in

Permissioned networks can become dependent on a particular vendor's technology and services, which could limit an organization's flexibility. For example, if a governing body decides to transition to a different blockchain platform or modify the existing one, the process can be costly and time-consuming.

Permissionless blockchains: Advantages and limitations

Permissionless blockchains: Pros

True decentralization

Permissionless blockchains offer full decentralization, without a lone entity controlling the network. This trustless system relies on decentralized consensus mechanisms like PoW and PoS, allowing participants to transact without needing to trust one another or a centralized authority, ensuring higher levels of autonomy and security.

Security through consensus

The security of permissionless blockchains is enhanced by their decentralized nature. Consensus mechanisms like Proof-of-Work and Proof-of-Stake make it extremely difficult for any single entity to compromise the network, providing a resilient defense against attacks and preserving the immutability of transactions.

Community innovation

Permissionless, public blockchains encourage open innovation by allowing anyone to participate in the network's development and use. This inclusivity means a vibrant community of developers and users can continuously contribute to the evolution of the blockchain, potentially leading to technological advancements and diverse applications.

Censorship resistance

The decentralized structure of permissionless blockchains makes them highly resistant to censorship and tampering. Without a central authority, no one person can alter or control the data on the blockchain, ensuring the integrity of the ledger and protecting against malicious interference.

Permissionless blockchains: Cons

Scalability and energy consumption

Permissionless blockchains face significant challenges in scalability due to their resource-intensive consensus mechanisms. Proof-of-Work blockchain networks like Bitcoin consume large amounts of energy and struggle to process transactions quickly, leading to slower performance and higher costs.

Regulatory and legal uncertainty

The decentralized and global nature of permissionless blockchains complicates regulatory compliance, as they pose new questions to traditional legal frameworks. This can create legal uncertainty for participants and poses challenges for governments attempting to enforce regulations on decentralized systems.

Governance and hard forks

Governance in permissionless and public blockchains can be contentious, as decisions require consensus from a large and diverse community. Disagreements can lead to hard forks, where the blockchain splits into two separate networks, causing fragmentation and potential instability within the ecosystem.

51% attacks

While permissionless blockchains are generally secure, they are not immune to security risks like a 51% attack. A well-known vulnerability in PoW blockchains, this hack can occur when an entity controls more than 50% of the network's hashing power.

This person (or persons) could then manipulate the blockchain in ways like double-spending coins or blocking new transactions. Although such attacks are rare and difficult to execute, they remain a potential risk, especially for networks with lower user participation.

Use cases: Permissioned vs Permissionless blockchains

Financial services and banking

• Permissioned blockchain: Suited for financial institutions that require privacy, regulatory compliance, and control over the network. Enables secure and efficient processing of transactions within a controlled environment.
• Permissionless blockchain: Used in decentralized finance (DeFi) platforms where transparency, security, and global accessibility are prioritized. However, scalability and regulatory challenges may limit adoption by traditional banks.

Supply chain management

• Permissioned network: Preferred for supply chain management due to its ability to control access and ensure privacy while providing transparency within a trusted network of participants. Facilitates tracking and verifying goods without exposing sensitive business information.
• Permissionless network: Suitable for public verification of supply chains where transparency is crucial. May face challenges in scalability and privacy that are critical for large-scale supply chains.

Decentralized finance (DeFi)

• Permissioned blockchain: Generally not used in decentralized finance due to its centralized nature. However, it could be considered in scenarios where regulatory compliance is essential.
• Permissionless blockchain: The foundation of DeFi, enabling decentralized exchanges, lending platforms, and other financial services without intermediaries. Offers transparency and security but may face scalability and regulatory challenges.

Government and public services

• Permissioned networks: Ideal for government applications where privacy, control, and compliance are necessary, such as digital identity verification, land registries, and voting systems.
• Permissionless networks: Can be used in public services that require transparency and trust, such as public records or tamper-proof voting systems. However, the lack of control and potential regulatory issues can be a barrier.

Digital identity and data management

• Permissioned blockchain networks: Suitable for managing digital identities within a trusted network, offering privacy and control over personal data. Allows for compliance with data protection regulations like GDPR.
• Permissionless blockchain networks: Could be used for decentralized identity solutions where users control their data. Challenges related to privacy and regulatory compliance may arise.

Real-world case studies

Let's explore some real-world case studies that highlight how these technologies are being used in different industries.

IBM Food Trust: Permissioned blockchain in supply chain management

IBM Food Trust is a blockchain-based platform designed by IBM to improve transparency and traceability in the food supply chain. The platform is built on the Hyperledger Fabric, a permissioned blockchain framework that allows multiple organizations to participate in a secure and controlled environment.

IBM Food Trust enables participants to track the journey of food products from farm to table, providing real-time data on the origin, condition, and movement of goods. Its permissioned platform allows IBM to select only authorized participants, such as farmers, distributors, retailers, and regulators, to access the network. This controlled access helps to protect sensitive data while ensuring that all parties involved have accurate and up-to-date information.

The platform has been adopted by major companies like Walmart, Nestlé, and Dole, who use it to improve food safety, reduce waste, all while attempting to enhance consumer trust. For example, Walmart uses IBM Food Trust to trace the origin of fresh produce, enabling the company to quickly identify and remove certain products from its shelves if necessary.

Bitcoin and cross-border payments: Permissionless blockchain in financial services

Bitcoin, the first and most well-known cryptocurrency, operates on a permissionless blockchain and has revolutionized the way people think about money and financial transactions. One of the key use cases for Bitcoin (BTC) is cross-border payments, where it offers a faster, cheaper, and more transparent alternative to traditional banking systems.

Traditional cross-border payments can be slow and expensive, often involving multiple intermediaries, each taking a fee for their services. In contrast, Bitcoin allows users to send money directly to anyone, anywhere in the world, without relying on third party institutions. Transactions are processed within minutes, and the fees are typically much lower than those charged by traditional payment systems.

Bitcoin's permissionless blockchain ensures that all transactions are transparent and verifiable by anyone, providing a high level of trust and security. This feature is particularly valuable in regions where access to traditional financial services is limited or where trust in the local banking system is low.

Which blockchain network should you use?

When choosing between permissioned and permissionless blockchains, users can consider the following factors:

• Purpose: If your crypto project requires high security, control, and privacy, a permissioned blockchain may be more suitable. On the other hand, if decentralization and transparency are your priorities, a permissionless blockchain might be the way to go.
• Scalability: If your application requires high scalability, consider the limitations of both types of blockchains. Permissioned blockchains might offer faster transactions for a smaller participant pool, but could struggle as the network grows.
• Privacy: For industries that require greater privacy, permissioned blockchains may be more appropriate due to their controlled access and governance structures.

Getting started with blockchain

No matter which type of blockchain network you choose, the first step to exploring them is owning cryptocurrency.

MoonPay makes it easy to purchase crypto required by different blockchains, like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), USD Coin (USDC), and 100+ other tokens. Just enter the amount of crypto you wish to buy, and use your preferred payment method like credit/debit card, bank transfer, Apple Pay, and more.

When you decide it's time to cash out to fiat, you can sell crypto using MoonPay's off-ramp. Simply input the amount of cryptocurrency you wish to sell, and enter the details where you'd like to receive your funds.