In the last years, blockchain technology has gained quite a popularity with the emergence of multiple motley projects developed by private and public agencies.
Nevertheless, blockchain is still a pretty new concept, and there could be a misunderstanding of some of its aspects — for example, the difference between permissioned and permissionless chains.
This guide will tell you everything you need to know about blockchain to understand how two of these approaches work. It will help you decide what network to choose for future blockchain-based projects.
What is blockchain technology?
For the first time, blockchain technology hit the spotlight thanks to bitcoin. Bitcoin is an innovation and a pioneer of blockchain technology, paving the way for new cryptocurrencies and making them attractive.
In short, a blockchain is a distributed ledger (DLT) or registry based on cryptographic protocols. Due to cryptography, it is immune to data tampering, i.e., forgery or any other change of already recorded data. It ensures high data safety. Consensus protocols, either proof of work or proof of stake, drive blockchains. The technology enables data exchange without intermediaries, so any transactions are peer-to-peer (P2P). In simpler words, the technology eliminates the need for a third party or intermediary for any transaction or deal.
Blockchain employs a new layer of trust since all network users can access data on the ledger and verify and authenticate any transactions.
To date, the full potential of blockchain is yet to be discovered. It may be hard to understand where it can be applied as the technical explanation doesn’t mention technology uses. So, where can blockchain be applied? First of all in our unique application for motorcyclists CryptoMoto.
Currently, it is considered that it can bring great benefits to such spheres as:
- supply chain management
- food safety management
- stock markets
- and many more
For businesses, using blockchain means a higher level of trust between parties and unhindered access to any relevant and true data in real time. This is possible due to the historical recording of all transactions by the blockchain.
It is forecasted that blockchain will radically change B2B/user transactions in the future. The impact will be even greater than it could possibly be due to the introduction of other technologies such as artificial intelligence, process automation, and the Internet of Things.
Types of Blockchains
Although the nature of blockchain makes its uses practically limitless, a single blockchain type cannot satisfy all needs and users; hence, multiple different networks based on blockchain have been created. They all have the same essence but can use different protocols or sets of protocols.
To date, all blockchains are divided into permissionless (public) and permissioned (private). What are they, and how do they differ? Let’s figure it out.
Permissionless or Public Blockchains
The majority of crypto currency-driven blockchains are public ones. Permissionless blockchains allow any user to join the network and create a personal address to interact within the chain. Any user can participate in transactions, thus, adding records to the ledger.
Besides, any user can create a node within the network and participate in mining to earn the chain’s cryptocurrency for the computational power the node provides to verify transactions.
For example, in the case of the bitcoin blockchain, anyone can mine bitcoins by providing computational power for the solution of mathematical problems which verify the transactions.
Some blockchains, for instance, Ethereum, also support smart contracts, i.e., P2P transactions that automatically execute when certain criteria are met.
In a permissionless blockchain, anyone can create smart contracts and add them to the network.
Besides the fact that anyone can join the public blockchain, it has several other characteristics.
High level of decentralization
Public blockchains welcome anyone; hence, there are numerous users. A great number of users allows implementing a consensus protocol where each transaction is verified only if more than 50%+1 users agree. It ensures a great level of decentralization, i.e., the system where there is no single governing body that can alter the data on the ledger, chage the game rules, or shut down the network.
Presence of digital assets
Permissionless blockchains have their financial systems to incentivize users with tokens. The value of tokens depends on the relevancy and state of their blockchain.
Complete or partial anonymity
Privacy of personal data is one of the attractive attributes of blockchain technology. Users don’t have to provide their personal data in many blockchain transactions or when creating a crypto wallet address. However, the bitcoin blockchain requires partial data disclosure since user identity is directly linked to the address the user has private keys of.
Blockchains have to be transparent since they have to ensure a high level of trust for their users. The users have the ability to see the public addresses of other users, how transactions are processed, and all of the transactions on the ledger. Transparency is crucial to building trust as it is only possible when users can have unhindered access to all information in the network except the private keys of other users.
Permissioned or Private Blockchains
Permissioned blockchains, contrary to permissionless blockchains, are not open to the general public. Only some people can join the network or see the records of completed transactions on the ledger. Such private blockchains are used by centralized organizations that want to have complete control over the network. For example, permissioned blockchain can be used by a private company to record internal operations. Company consortiums also can benefit from using such blockchains to keep track of all transactions and exchange data through highly protected protocols.
One of the most prominent examples is the Ripple blockchain. It is a semi-permissioned blockchain owned by Ripple Labs.
Permissioned blockchains are created by a limited circle of people, for instance, companies or consortium members, who opt-in to create such a network.
Naturally, to validate transactions, enter data into the ledger, execute smart contracts, and read transaction history, the network needs nodes. To add nodes, new users have to be invited and approved to join a permissioned blockchain.
What other characteristics does a permissioned blockchain have?
Different levels of decentralization
A permissioned blockchain can be semi-decentralized or completely centralized based on how its creators decide since they are the central authority here. They cannot be completely decentralized since some degree of centralization is ensured by the fact that the blockchain is created and launched by businesses.
Private blockchains can also employ different consensus algorithms. However, the choice highly depends on the governance model since in private blockchain, users are not equal in decision making. This resulted in the division of users into tiers, i.e., when a user is enabled to do only the job they are entitled to.
Transparency & Anonymity
Transparency for private blockchains is a choice rather than an obligation. As for privacy, it is also not necessary on the central level and can be provided individually for separate users. Permissioned blockchains regularly store a lot of information on transactions with user details. However, since such blockchains do not have their economy and tokens, the need for detailed token tracking is eliminated.
As we have mentioned, a permissioned blockchain cannot be completely decentralized. Thus, all decision-making and governance are in the hands of a closed circle, and there is no need for a consensus algorithm where the majority must agree for a change to be implemented.
Based on the provided information on permissioned and permissionless blockchains, you can already understand that public networks are open to basically anyone but have stricter protocols.
On the other hand, private blockchains are great for internal business operations. They are quite centralized and governed by a few creators rather than all network participants. Consortiums or a closed circle of individuals decide on the protocols, changes, what users can do, and so on. Permissioned blockchains can have very different dynamics and rules in contrast to public ones.