Classification of blockchains by groups, the detailed explanations of permissionless (public) and permissioned (private) blockchains and the ways of their application in business
Finrazor readers have already got familiar with the role of the blockchain and its areas of application, now the time has come to learn about the difference between permissionless and permissioned blockchain models. This article will help our readers to understand key distinctions and clarify the purpose of different types of blockchains.
The first ever blockchain has found its use in Bitcoin. As time passed, people thoroughly studied it and created their own. Now if your business needs a shared database, you can have yourself your own blockchain customized to fit your precise needs.
Blockchains can be classified in two groups: permissionless (open, public) and permissioned (private). Though there are some in the middle, those that combine their features in unique ways to meet specific requirements of a project, such as Chicago’s Cook County’s blockchain-based property title transfer system.
Permissionless blockchains, as their name suggests, do not require users to have permissions to interact with the system. Bitcoin, as the most common example, is free for anyone to join and participate. If you have a computer with an online access, you can become a bitcoin user at once: you can send and receive bitcoins, view the entire history of transactions, build blocks, get rewards, leave the network at any time, and join again. You can create and execute smart contracts if you are a node on Ethereum network, which is also a great example of an open blockchain. And nobody can forbid you to do any of that.
Public blockchains usually have an incentive for you to participate. In exchange for your computing power, the system gives you a chance to win some coins (cryptocurrency) by finding blocks for the blockchain. These coins are valuable even outside the system, and you can exchange it for real money. Or you can choose to wait (HODL) until they appreciate and more services and retailers start accepting them. This kind of incentive proves to be a major factor in the success of cryptocurrencies, as their predecessors failed to come up with a relevant incentivizing model.
Permissionless blockchains are mainly used by customer-to-customer (C2C) or business-to-customer (B2C) companies due to their decentralized, transparent design. This, however, entails certain limitations. Scalability of public blockchains is often talked about as the main stumbling block of open blockchains. Hopefully, it is only a matter of time until public blockchains can catch up and even outperform server-client databases and private blockchains.
Permissioned blockchains, as you may have already guessed, do require certain authorization for a node to read the data and write new records. Private blockchains can be very different, as they are utilized in many areas of business. Some blockchains need you to pass a verification to become a fully authorized node, others may allow you to join and will restrict your actions depending on your specific functions in the system. Ripple, a system of global transactions used primarily by banks, is the first example that comes to mind when speaking about permissioned distributed ledger. Though you can hold Ripple tokens (XRP), the system runs on a group of validating nodes, and you cannot simply join the network.
If two or more companies need a universal source of truth, a shared database, they can use a private blockchain. A private blockchain can be created from scratch, or you can use a blockchain platform, such as Multichain, Corda, and Hyperledger Fabric, and configure it as a private blockchain. Entries in these blockchains will be added only if the node has proper authorization. This is why permissioned blockchains are mostly used in business-to-business (B2B) relationships. For example, Walmart uses a blockchain-based supply chain system to trace its pork from sources in China.
Private blockchains do not face scaling issues because they do not rely on individuals to run it. Businesses can set up powerful nodes that will maintain the blockchain and ensure its smooth performance.
Permissionless blockchains usually do not have an internal incentivizing scheme, as they are most commonly used only as systems of record and databases. Private blockchains do not have a built-in reward system for nodes because they do not need to encourage people to join the network.
Though terms private and permissionless blockchains were used interchangeably in this article, people now believe there are certain distinctions between the two. For example, participation in private blockchains is by invitation only, whereas permissioned blockchains can accept new nodes after a process of verification or authorization.