Permissioned and unpermissioned blockchains, part 1

Tuesday 02 February 2016

The new battleground is permissioned vs unpermissioned blockchains - and they couldn’t be more different.

There’s been a lot of interest in blockchains from the legacy banking industry, with many big players from UBS to Goldman Sachs researching the benefits of what is increasingly being called Distributed Ledger Technology (DLT). Blockchain technology was aired at Davos, and a number of articles on the World Economic Forum website unpack the benefits it offers.

Read also: Blockchain comes to Davos

But whilst bitcoin and other ‘true’ cryptocurrency networks are unpermissioned, these guys are almost always talking about permissioned blockchains. Permissioned blockchains are blockchains designed for the financial industry: a form of the technology we’re all familiar with, but given a twist to make it suitable for the cultural and regulatory frameworks of the big guys. The two are very similar in architecture, but the differences could not be more profound.

Unpermissioned

Bitcoin is an unpermissioned blockchain. Anyone can submit a transaction and take part in validating the network. It’s open to all. This is precisely what has made bitcoin so ground-breaking: it allows the transfer of value to anyone, anywhere in the world that has an internet connection, outside of the control of banks or other payment processors. In ensuring that no one owns the network, you give it to everyone. That’s why the people who use bitcoin trust it. They know a transaction, once executed, is effectively irreversible.

Gates

Permissioned blockchains are reliant on gatekeepers - and all that means for their users

Permissioned

A permissioned blockchain, by contrast, allows only specified actors (banks, approved individuals, etc) to submit transactions or validate the network. There is a control layer built into it. It’s obvious why banks would want to go down this route. They need to comply with regulation, and using an unpermissioned blockchain would effectively make KYC impossible. It would also make it impossible to reverse transactions.

Similar but very, very different

Either way, what you have is a permanent, transparent ledger - even if a bank can reverse a transaction, what has happened is still visible on the blockchain. That brings accountability, at least in theory. Arguably you also have the same benefits of speed and low-cost international transfers that helped popularise bitcoin. But the addition of the control layer has some major implications.

These differences don’t just encompass the ideological. Admittedly, a permissioned blockchain is anathaema to the bitcoin mindset; the whole point of bitcoin is financial freedom. More than that, though, it has implications for cost, for security, and even whether it works as intended at all.

We'll be exploring the differences between permissioned and unpermissioned blockchains in a coming article.


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