Crypto Simplified: Explaining permissioned blockchains

IBM and other major players market blockchains as a panacea to cure all the issues in an enterprise’s value chain. Problems with your lettuce supply? Track it with a blockchain. Patients asking for their medical data? Send it to them through the blockchain. Need an international ID that is immutable? Blockchain again.

As enterprise blockchain players try desperately to frame blockchains as innovative technology equivalent to that of the Internet is anything actually happening?

Many believe that the future of these enterprise plays are in “permissioned blockchains,” blockchains that are restricted to a certain group or company. And in a space where forecasters are calling for a $3.1 trillion blockchain market, based on the belief of permissioned blockchains, it is to our benefit — and our sanity — to take a level-headed approach is understanding what permissioned blockchains.

What are permissioned blockchains?

The primary difference between permissioned blockchains and public (permissionless) blockchains is the ability for members to restrict access. Permissioned blockchains are essentially distributed databases that enable its members to decide who can participate in the consensus mechanism of the network and who can validate transactions on the network. Nodes on permissioned blockchains are given full authority over the network by verified and registered members of the permissioned blockchain.

On public blockchains, there are no restrictions that prevent participants from accessing the blockchain. Any individual or group can set up a node and participate in the consensus mechanism of a public blockchain. Permissioned blockchains are like the private networks of old – designed to keep corporate data inside a walled garden.

What are the benefits of permissioned blockchains?

Because this piece examines permissioned blockchains, we are not going to discuss the benefits or drawbacks of blockchain systems as a whole. Instead, we are going to compare the benefits of permissioned blockchains versus public blockchains.

  • Permissioned blockchains offer more efficient performance compared to public blockchain networks. In a blockchain network, all nodes on the network must compute and validate transactions on the network. These nodes often perform redundant computations to validate transactions on the network. Because permissioned blockchains only require its member nodes to validate transactions, they offer better performance relative to the amount of computation used for validation.
  • Permissioned blockchains have clearly defined governance structures compared to public blockchain networks. Public blockchains operate like public forums where any individual operating a full node would have a say in the governance and the rules of the network. As a consequence, updates and developments on these networks are incredibly slow as multiple independent nodes, acting in their own self-interest, would need to come to a consensus to activate an update to the network. Nodes on permissioned blockchains, however, are capable of moving forward with updates much faster. While at times there may be debates on updates to a permissioned blockchain’s network, these debates are easier to settle between a consortium of businesses compared to a public arena of hundreds of thousands of individuals and entities.

What are the drawbacks of permissioned blockchains?

  • The security of permissioned blockchains is entirely reliant on the integrity of its members. Compared to public blockchains, permissioned blockchains carry higher risks of collusion. If an inner-group of members in a permissioned blockchain collude to change data points in that blockchain, the can ruin the integrity of the network to their benefit. As M.I.T. professor Christian Catalini notes “if you’re a regulator, maybe you wouldn’t want a set of banks or a set of financial institutions to be able to collude and rewrite the ledger.” Catalini also cites the LIBOR Scandal, in which major banks colluded to manipulate interest rates to give the impression that they are creditworthy, as a risk of permissioned blockchain.
  • Compared to public databases, permissioned blockchains are more prone to censorship and regulation. Because permissioned blockchains are run by a consortium of businesses they must adhere by the same regulations that their members do. A regulator could then, in theory, force their laws on a permissioned blockchain — censoring transactions as they see fit. While the threat of regulation may not impact the day to day operations of businesses that already comply with existing laws, it would prevent businesses that need the uncensorable features of public blockchains from operating on permissioned blockchains. An example of a business that would not work on permissioned blockchains is Augur, the decentralized prediction markets where individuals can place bets on market events.

While there has yet to be a breakout moment for permissioned blockchain application or service, many enterprises are still actively launching pilots and testing permissioned blockchains. IBM has launched countless blockchain supply chain solutions, and J.P. Morgan is actively developing Quorum, its blockchain banking application. Permissioned blockchain proponents promise products that will change how businesses operate, whether they keep that promise is to be seen.

The post Crypto Simplified: Explaining permissioned blockchains appeared first on The Block.

Crypto Simplified: Explaining permissioned blockchains written by Steven Zheng @ December 10, 2018 Steven Zheng

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