CRYPTO INSIGHTS

Can permissioned and permissionless blockchains co-exist?

Does the rise of permissionless blockchains preclude a future for permissioned blockchains?
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December 3, 2020

by Seamus Donoghue, VP Sales and Business Development at METACO

Ever since we bartered the first goods, trust has been the cornerstone of our financial system. So it’s not surprising that the financial services industry has needed some time to get to grips with the implications of Satoshi Nakamoto’s Bitcoin white paper.

Over centuries, we’ve developed centralized institutions to act as gatekeepers and uphold trust in the financial system. Nakamoto proposed the complete opposite: a trustless, stateless, and permissionless blockchain.

As it became clear that the blockchain could lend itself to a multitude of applications, financial institutions, startups, and consortia started trying to bridge the gap. The result is a half-in solution: blockchains that can only be accessed by a pre-selected group.

But is it worth investing time, money, and effort creating blockchains that have gatekeepers?
Or should we embrace the argument that the whole point of the blockchain is that the maths — proof of work, or proof of stake — negates the need for them?

 

We’ve seen this movie before

The blockchain may be relatively new, but resistance to ‘public’ technologies isn’t. In the ‘90s, we had the internet vs intranets debate. And, more recently, we’ve been debating the merits of on-premise infrastructure as opposed to the cloud. 

In each case, the ‘public’ version of the technology — that is, the internet and the cloud — eventually emerged as the dominant force. Seeing as public technologies are more flexible and have lower barriers to entry, this stands to reason. 

But have intranets and on-premises technologies gone the way of the dodo?

Of course they haven’t. 

Why? Because while public technologies may dominate, this doesn’t diminish the merits of closed technologies like intranets, on-premises servers, and, indeed, permissioned blockchains. Or make their use cases any less valid.

 

Permissionless blockchains are revolutionary. But permissioned blockchains are evolutionary

There’s no denying that permissionless blockchains have the potential to profoundly change the financial services industry. 

Where an entrepreneur might not be able to access traditional financing, for instance, they could launch their business and raise funds on a public, permissionless blockchain, where there are no gatekeepers who get to decide who should or shouldn’t be onboarded. It’s all in the math, so there’s complete transparency. 

To put it in simpler terms, just as the internet has democratized information — and the cloud has democratized software development — permissionless blockchains could democratize finance.

In a decade defined by disruption, it’s not hard to see how a technology that could have such radical impact could capture everyone’s imagination and hog the limelight. But while ‘evolution’ may not be as ‘sexy’ as revolution, it has an equally important part to play in getting us where we need to be.

 

Putting permissioned blockchains to work

Where permissionless blockchains aim to solve problems by challenging the status quo, permissioned blockchains excel at creating efficiencies. Permissioned blockchains can eliminate paperwork, create a single source of truth for compliance, risk management, and other business-critical teams, or even facilitate quick, secure trading within a closed group. 

More significantly, permissioned blockchains have two advantages that give it the edge over permissionless blockchains in certain business settings.  

Firstly, because only a closed group can access them, permissioned blockchains don’t require complex computational algorithms. 

Not only is this more energy-efficient — an ever more pressing concern in the wake of the climate crisis — but consensus can be reached more quickly, while, at the same time, retaining the transparency created by the fact that the proof is in the maths. 

Secondly — and more importantly — permissioned blockchains address the elephant in the room. 

Put bluntly, understanding trustless technology on a theoretical level is one thing. Going against a long-standing culture of trust is completely different, especially when that trust is an essential ingredient.

Placing trust in trustless tech

We might know that we need to start trusting ourselves. But when you’ve only ever dealt with systems designed to offer continual reassurance, accepting that trust is a given comes with a steep learning curve. 

Bitcoin’s trajectory hasn’t helped in this regard. 

In the early to mid-2010s, crypto asset security left a lot to be desired. Meanwhile, as the market warmed up to the potential of cryptocurrencies and the blockchain, everyone wanted in. The bubble inevitably burst, and Bitcoin lost 80% of its value — worse than the dotcom crash. 

The good news is that, historically, bubbles have played a pivotal role in furthering technological revolutions. To paraphrase economists Carlota Perez and William Janeway, bubbles often provide the funds with which disruptive technologies can develop. 

The signs are pointing in this direction. 

We now have institutional-grade technology for secure key and token storage, and forensic tools that make it easy to verify ownership of crypto assets.

The environment is also changing for the better. Regulators are starting to lift some barriers to crypto asset trading. And central banks are also exploring what blockchain technology can do for them. 

These developments will help boost trust in permissionless blockchains, because they lower perceived risk and increase everyone’s confidence, which encourages more uptake. 

But while increased trust will make trustless systems more commonplace — an ironic proposition in itself — there will always be the need for systems in which trust is an inherent component.

Metaco Diagram - Permissioned vs Permissionless BlockchainsMetaco Diagram – Permissioned vs Permissionless Blockchains [click to zoom in]

 

The blockchain isn’t an ‘all or nothing’ proposition

It’s often argued that getting excited about permissioned blockchains is like getting excited about intranets. 

Well, everyone may be on the internet, but intranets still play a key role in the modern workplace, whether it’s to communicate, keep remote teams engaged, or store confidential documents so they’re easily accessible but safe from the prying eyes of strangers. 

The level of investment and number of developers on permissionless blockchains — Ethereum has four times more developers than any other blockchain — far exceeds what’s going on in the permissioned space. And with more financial backing and more mindshare, it’s inevitable that permissionless blockchains will eventually emerge as the dominant force. 

But it doesn’t follow that this makes investing in permissioned blockchains a losing proposition.

Think of it this way. 

One train route may be much more popular than all the others combined. But that’s no reason to discontinue all the other routes. 

Ultimately, which train you choose to board depends on your destination.

 

At Metaco, we’ve built secure, scalable digital infrastructure that makes it simple and straightforward for financial institutions to hold, tokenize, trade, and transfer digital assets on both permissionless and permissioned protocols.

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