With Facebook’s Libra project set to launch next month, there has been a lot of talk around permissioned and public blockchains.
While blockchain networks were originally designed to be open, public, and accessible to anyone, their permissioned counterparts serve a somewhat different purpose while still providing value for participants.
And, in this article, we will take a look at how the two blockchain types operate along with the key differences between them.
What Is a Blockchain?
Before we deep-dive into our topic, let’s first explore the basics of blockchain technology.
A blockchain is a digital ledger that is duplicated and distributed across all participants in the network transparently.
Every time the blockchain is updated or modified (e.g., a new block is added to the chain), it is recorded on the ledger of all participants in real-time.
As they have access to the same distributed ledger, users can trace back and audit transactions, which allows them to determine the origins and the authenticity of digital assets.
Individual participants cannot modify or tamper with a transaction recorded on the chain, which makes the blockchain immutable. To update the ledger, members have to reach a consensus through a mechanism, such as Proof-of-Work (PoW) or Proof-of-Stake (PoS).
Unlike traditional computer systems where data is hosted on a central server, blockchain solutions are maintained by an extensive network of computers (the miners or validators) that verify transactions and generate new blocks in exchange for compensation (e.g., block rewards, transaction fees).
Doing so eliminates a single point of failure, which makes blockchain networks more resilient against cyber threats. Another layer of security is added via encrypting all transactions via public-key cryptography.
Due to the fact that there is no central authority (e.g., a company, institution, or a government body) present in the network, blockchains are decentralized by nature.
Furthermore, as an important feature, blockchain networks operate on a peer-to-peer (P2P) basis via automated processes, meaning there is no need for third-parties to get involved in a transaction.
What Is a Public Blockchain and How Does it Work?
Examples: Ethereum, Bitcoin, Litecoin
A public or permissionless blockchain is the form of distributed ledger technology (DLT) crypto users are most familiar with.
Here, anyone can access and participate in the network without geographical or other restrictions. Users can send transactions to each other, inspect records on the ledger, and become validators.
As they lack a centralized party with increased authority or control over other users, public blockchains feature a high level of decentralization.
The community is the one responsible for participating in governance decisions and maintaining the ecosystem.
As anyone is free to access a public blockchain without submitting Know Your Customer (KYC) documents or confirming (or revealing) their identities, users have increased (pseudo-)anonymity in these networks.
As a downside, permissionless blockchains need all validators to reach a consensus before adding new blocks to the chain. For that reason, they are less speedy and scalable than their permissioned counterparts.
Furthermore, the community has to work together for the network to remain efficient. If that’s not the case, a heated debate could split both the blockchain and its community during a hard fork (a major network upgrade that is not compatible with previous versions).
What Is a Permissioned Blockchain and How Does it Differ from a Public Chain?
Examples: Hyperledger Fabric, R3 Corda, ConsenSys Quorum, Facebook Libra
Contrary to public blockchains, permissioned DLT networks have restrictions in place to limit who can participate and how (e.g., some users are only allowed to interact with a specific type of transactions).
Permissioned blockchains are usually operated and governed by a business in which only its stakeholders, employees, and partners participate. By limiting access to the network, enterprises can keep their sensitive information safe while harnessing blockchain technology’s benefits.
Since the number of participants is limited, consensus can be reached with only a few validators, meaning that permissioned blockchains feature much better performance and scaling capabilities than their public counterparts.
Furthermore, as businesses can set their own rules in permissioned networks; they can control the infrastructure and comply more efficiently with the appropriate laws, policies, and regulations.
The level of decentralization in permissioned blockchain networks varies, which can be anywhere from very low to high. Apart from governance and the mechanism to approve participation, permissioned blockchains can choose to operate all their other processes on a fully decentralized basis.
However, a centralized authority (a system administrator) is present in the system responsible for granting or denying access to new users.
For that reason, permissioned networks lack the (pseudo-)anonymity of public blockchains since users are known for the administrator, and they might have to submit documents and other information to confirm their identities.
Knowing the identity of each user is vital for the effective operation of permissioned blockchains. Being aware of each participant’s role and the organization they are associated with forces users to behave in a fair way (or face the consequences in their companies for non-compliance with the network’s rules).
For the same reason, permissioned blockchains can avoid major debates and issues (e.g., chain splits) among stakeholders and validators.
Both Blockchain Types Create Value
Leveraging the benefits of DLT, such as increased transparency, traceability, and the lack of intermediaries, both permissioned and public blockchains provide value to participants.
Maintained by the community and operated in a decentralized way, public blockchains serve a universal purpose by providing anyone access to the network.
On the other hand, permissioned networks are specialized solutions built to suit the preferences of businesses, governments, and institutions.
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