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September 28, 2023

Exploring the Benefits of Permissioned Blockchain Networks

This blog post examines permissioned blockchain networks and explores their benefits, security features, consensus mechanisms, scalability solutions, and real-world applications.

Blockchain technology has evolved significantly since its inception with Bitcoin in 2009. While public blockchain networks Bitcoin and Ethereum have gained immense popularity, other types of networks have been making massive strides of late.

One example of blockchain infrastructure increasingly finding its footing in institutional finance is the “permissioned blockchain”. This category of blockchain – which includes the public permissioned blockchain Polymesh – is rapidly gaining recognition for its ability to meet the stringent regulatory and institutional requirements of traditional finance.

This blog post examines permissioned blockchain networks and explores their benefits, security features, consensus mechanisms, scalability solutions, and real-world applications. 

What is the difference between permissioned and permissionless blockchains?

Before we look at the benefits of permissioned blockchain networks, let’s first clarify the fundamental differences between permissioned blockchains (like Polymesh) and permissionless blockchains (like Bitcoin and Ethereum). 

Permissioned blockchains are characterized by controlled access. On permissioned blockchains, only select participants have the authority to validate transactions and add new blocks to the chain. In contrast, permissionless blockchains are open to anyone for participation. 

How do permissioned blockchains enhance security compared to public blockchains? 

For financial institutions, which may execute and manage transactions worth millions of dollars, security is paramount. Security is especially vital when using decentralized technology, including blockchain, where institutions have to relinquish sovereign control. 

Permissioned blockchains address the security concerns of participants through three primary mechanisms. 

1. Access control

Permissioned blockchains restrict participation to trusted entities, reducing the risk of malicious actors gaining control. For example, Polymesh Node Operators (the entities who validate new blocks) must be licensed financial entities.

2. Identity verification

Participants in permissioned networks have to provide identity data in order to pass through access layers. For most networks (including Polymesh), this includes identity verification, where a third party attests that an individual is who they say they are. Just as identity verification does in traditional finance, identity verification on blockchain further enhances the security of the network and reduces the potential for fraud.

3. Data security

For private permissioned networks, sensitive data can only be accessed by authorized participants. While blockchain data on public permissioned networks is available for anyone to view, it’s still securely stored thanks to the immutability of the ledger. Encryption methods can protect sensitive information, such as personal identity information, and ensure that only authorized parties can decrypt it. For example, protocols like Polymesh’s MERCAT use cryptography to provide confidentiality in transactions. 

How do blockchain consensus mechanisms differ in permissioned blockchains? 

Consensus mechanisms play a pivotal role in blockchain networks. Permissioned blockchains offer flexibility in designing consensus mechanisms tailored to specific needs, as various access layers can be used to permission on-chain actors with specific roles. 

Two popular consensus mechanisms on permissioned networks are Proof of Authority (PoA) and Proof of Stake (PoS). In PoA networks, participants are known and reputable. This system leverages reputation risk to enhance network security. In PoS networks, participants are economically incentivized through staking

Polymesh uses a consensus mechanism called Nominated Proof of Stake, or NPoS. This innovative approach combines the decentralized model of PoS systems with the known reputation of PoA for extra security and trustworthiness. 

NPoS on Polymesh involves the nomination of validators, known as Node Operators, by token holders through bonded POLYX. Node Operators are responsible for verifying transactions and maintaining the blockchain’s proper operations, ensuring a robust and efficient system for tokenization applications. 

How do permissioned blockchains handle scalability and transactions?

Permissioned infrastructure can provide the necessary efficiency for scalable, enterprise-level implementation of blockchain. 

A finite number of trusted validator nodes reduces computational overhead and leads to faster transaction processing at lower costs. Permissioned networks can also implement techniques through blockchain governance to handle increasing transaction volumes. 

Multiple transactions can be processed simultaneously, increasing the network’s capacity to handle a high volume. On Polymesh, NPoS optimizes consensus by selecting a set number of validator nodes through token holder nomination to further enhance transaction speed and ensure network integrity. 

What are the real-world applications for permissioned blockchains?

Permissioned blockchains have found applications in various sectors, from financial services (e.g. cross-border payments) to supply chain management, healthcare, and government. 

Built specifically for regulated assets, Polymesh has extensive applications for tokenization. Tokenization involves converting real-world assets such as real estate, stocks, bonds, and commodities into digital tokens representing ownership on the blockchain.

Blockchain enables the fractional ownership of assets, making them accessible to a broader range of investors. These tokenized assets can be traded easily and efficiently, further enhancing liquidity in traditionally illiquid markets. 

What really sets permissioned networks apart in tokenization, however, is their compatibility with compliance. For example, Polymesh facilitates compliance with regulatory requirements by leveraging a unique identity system and a sophisticated compliance engine that can both automate and enforce compliance on-chain and ensure transparent, auditable transactions. 

What future developments or innovations can we expect in the realm of permissioned blockchains? 

New developments and innovation are solidifying permissioned blockchains as compelling alternatives to permissionless networks. Permissioned blockchains excel in security, scalability, and tailored consensus mechanisms, making them particularly suitable for enterprise projects in tightly regulated environments. 

As for what’s next, we can expect an increase in interoperability as permissioned networks integrate more and more with existing systems and other blockchains. As ongoing research and development efforts bolster blockchain security and scalability, innovative new consensus mechanisms or parameters will also emerge that better optimize network integrity and performance. Finally, permissioned blockchains will evolve to meet and exceed changing regulatory requirements, ensuring transparency and compliance in an ever-fluctuating legal environment. 

Ultimately, the future is promising for permissioned blockchain networks such as Polymesh. Its commitment to interoperability, secure consensus mechanism, and compatibility with regulatory compliance leaves the network well-positioned to address the complex needs of regulated industries and institutional tokenization.

For more information on permissioned blockchains, visit polymesh.network/permissioned-blockchain.

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