Blockchain and Money 9: Permissioned Systems

Each week, I will be posting my notes from MIT’s Blockchain and Money course to keep myself accountable for my learning.

What is permissioned blockchain?

Current challenges with decentralised blockchain are scalability and privacy.

Many commercial use-cases currently favours permissioned systems for this reason.

Permissioned blockchain (private) differs from permissionless blockchain (public, examples include Bitcoin or any other public decentralised systems) in that in permissioned systems, memberships are only allowed for authorised nodes, including limiting transactions. This addresses part of the existing privacy issue where anyone in the public can join the network.

It also does not have a decentralised network consensus. Although consensus protocols can vary for permissioned systems (just like permissionless has proof of work, proof of stake and many others), it is based on this idea that since participants need permission to be in the system, the participants should be able to validate the transactions on their own.

This also allows more transactions to happen in a shorter time, which makes private blockchain more scalable.

Due to how the consensus mechanism works in a private blockchain, it does not benefit from network effect.

Permissioned systems also does not have a native currency since there is no need to incentivise decentralised individuals to validate the transactions.

Some use cases of permissioned blockchain include Hyperledger Fabric (distributed ledger solution for private enterprises) and Quorum (originally built by JP Morgan for interbank information network, acquired later).

Permissioned Blockchain vs. Traditional Database

A fair question to raise is how a private blockchain system is different from an ordinary database, since the flagship benefit of decentralised consensus is no longer present in private blockchain.

On this, the biggest distinction is that a private blockchain is still an append-only timestamped log of records, where a database can be read, updated, created and deleted by the administrator at ease.

Blockchain systems are also committed with a hash function introducing the idea of cryptography, and the information can be distributed across many nodes.

These features make private blockchain more desirable than traditional databases in circumstances where you want to track immutable settlement of value, such as transfer of money (financial exchanges) or goods (record of supply chains).

Blockchain also reduces the cost of (and the need of) maintaining and reconciling multiple data bases, since all nodes in the network will have the same ledger updated real-time.

The important distinction to understand is, when a permissionless blockchain is the most useful compared to permissioned blockchain or traditional database with no blockchain technology. This is critical for when practically assessing use cases of the blockchain technology.

Public blockchain might be the right solution if you:

  • Want to allow public write permission.
  • Want to allow peer to peer transactions.
  • Want to achieve this without a central intermediary.

Private blockchain might be the right solution if you:

  • Want data in append only log that cannot be easily edited.
  • Want public verifiability of the ledger through cryptography, while not necessary giving raw access.
  • Want to deny any points under public blockchain.

If you do not require the features above, a traditional database is probably a better solution.