Permissioned vs Permissionless Blockchain Platforms: Tradeoffs in Trust and Performance

Abstract

The prevalence of blockchain technology is increasingly evidenced in blockchain-based platforms, which can employ either permissioned blockchains (typical in supply-chain applications such as IBM Food Trust) or permissionless blockchains (common in Decentralized Finance platforms such as Compound). It is generally agreed that permissioned blockchains can improve on the operational cost and performance of permissionless blockchains, but it is usually assumed that this improvement comes at the cost of transaction security, especially in low-trust environments. We develop a model of transaction safety in permissioned and permissionless blockchains to study this tradeoff and find that in several settings there may be no tradeoff at all. With a minimal level of trust in the blockchain operators and the supporting institutions, well-designed permissioned blockchains can offer both higher operational efficiency and higher transaction security. While this minimal trust in the ``system'' is essential to the functioning of permissioned blockchains, it is also inherent in most business relationships, making permissioned blockchains well suited for enterprise applications of the technology. We explore the implications of our analysis for the design of permissioned blockchains, such as the reputation or bonding implications for their validators. This analysis is directly relevant to blockchain-based platforms in selecting an appropriate technology.

Keywords: blockchain platforms, permissioned blockchains, permissionless blockchains, transaction safety in blockchains, comparison of blockchains

JEL Classification: D85, D89