Permissioned and Permissionless Blockchains
Blockchains function as the simplest decentralized way of storing information. For every block in the blockchain network, there are a number of transactions. Every time a new transaction occurs, every participant’s ledger records it. As such, this type of decentralized database is called distributed ledger technology (DLT). Blockchain operates as a type of DLT, and transactions are recorded through a hash (Cryptographic signature). DLTs encompass a variety of technologies and frameworks that allow for a distributed design. Two paradigms that are key here are permissionless and permissioned blockchains.
What is a Permissioned Blockchain?
They comprise a type that is closed or has an access control layer. As such, some level of security only allows participants to perform their authorized actions. Simply put, one has to have permission from the network owner to read and write information on the blockchain if given access. They are also called private blockchains, as they are considered partially decentralized. This is because the network is distributed across known participants.
What is a Permissionless Blockchain?
On the other hand, the DLT paradigm is the permissionless blockchain in which significant cryptocurrencies like Bitcoin operate. Permissionless blockchain allow for participation and access to the information in a blockchain for any individual in the network. However, the openness it offers to the public may often lead to slower transaction speeds compared to permissioned blockchains. This is because permissioned blockchains have a restricted number of participants. Despite the many positive aspects that blockchain technology has for us, it faces several challenges.
Challenges of Blockchain Technology
Since its inception, blockchain technology has been instrumental in developing smart contracts, non-fungible tokens (NFTs), and decentralized finance (DeFi). However, along with blockchain’s advantages come some significant challenges. For the space to reach its full potential, these issues need to be overcome.
Blockchain Trilemma
It is also known as the scalability-security-decentralization trilemma. It constitutes the challenge blockchain networks face in simultaneously optimizing the three critical aspects of scalability, security, and decentralization.
Scalability
Scalability involves the ability of a blockchain network to process transactions, store data, and reach consensus as additional users are added to the network. Many networks have a high computational requirement as users are flooding the digital space. This leads to a surge in the number of people, transactions, and applications. As a result, the blockchain network becomes strained when trying to process and validate the surge in a timely manner. In the world of cryptocurrencies, blockchains like Bitcoin and Ethereum rely a lot on consensus algorithms such as proof-of-work and proof-of-stake. The catch here is, these mechanisms are known for their slow processing speeds and demand a lot of resources to operate. Consequently, the networks face transaction throughput challenges, leading to congestion and high transaction fees. There are attempts to try to overcome scalability issues. One such step has been scaling systems to create off-chain channels that allow faster and more cost-effective transactions. Massive progress has been made in the steps towards achieving scalability. However, achieving scalability, efficiency, and decentralization for blockchain networks remains an ongoing challenge.
Security
Blockchain’s security measures have often been touted as key strengths of the technology. However, the move to secure blockchain networks is also faced with several challenges. You may have encountered a number of reported security breaches and hacks in the space. Such cases always result in instances of losses and compromise to the integrity of the overall network. As a response, companies are continuously trying to incorporate several security efforts to mitigate risks. Such measures include using multi-signature wallets to store and manage digital assets and formal verification of smart contracts to help identify potential vulnerabilities. As the space continues to evolve, it is necessary to ensure users’ security, assets, and transactions.
Decentralization
It mainly refers to how control is dispersed from a centralized authority to several participants or nodes across a network. As such, it means that no single entity has absolute power, be it a government or company. In terms of blockchain technology, it means that individual nodes have control rather than a singular authority. Many believe that blockchain is not yet in a position to attain a desirable level of decentralization.
Interoperability
Interoperability encompasses the ability of a variety of blockchain networks communicating and interacting with one another. The space has been crowded with many blockchain platforms, each with its protocols and standards. When interoperability becomes an issue, there may be concerns of inefficiencies within the network. This may come from the decision of individuals and companies moving to navigate multiple platforms and use a number of tokens or cryptocurrencies to interact with different networks. The division that comes with this may mostly deter collaboration and harm innovation while preventing the seamless exchange of data and value between different blockchain ecosystems.
Energy Consumption
When any user in a blockchain is trying to validate transactions, there must be a lot of computing power involved. Such computing powers often means that there must be an intensive amount of energy needed. Many people have the concern on carbon emissions as well as an increase in the focus of assessing the environmental impact of blockchain technology. Some blockchains have been able to substitute their usual consensus mechanism with those that consume significantly less energy, such as the proof-of-stake mechanisms. For instance, the development of Ethereum 2.0 aimed to reduce the energy consumption of Ethereum’s network.
Low Workforce Availability
The blockchain industry has recently experienced some spark in the DeFi and NFTs projects, directly impacting the labor market. Top blue-chip firms, including Google, Amazon, and DBS group, have hired blockchain specialists by the hundreds, creating labor shortages. As a result, many blockchain firms need help to meet their hiring needs. As a result, blockchain projects have slower development as a high number of qualified people are locked in job contracts in other companies.
Final Thoughts
We may not know how the blockchain industry will turn in a few years. However, one thing’s for sure: it is here to stay as it has revolutionized many industries. However, the technology is still in its infancy and continues to evolve. Therefore, it is essential to note that the challenges it faces may yet be fully addressed. It will be an interesting industry to watch as capital inflows will increase as more innovative blockchain technologies take center stage.