Authorized Blockchains: A Beginner’s Guide

@Philip_SalterPhilip Salter

Philip Salter is the chief of mining operations at Genesis Mining.

Bitcoin is built on a trustless and permissionless blockchain, which is why it is as safe and reliable as a cryptocurrency. In other words, anyone can use it and you don’t need to trust a person or entity or get permission from them to do so. It’s what makes the Bitcoin ecosystem so strong: the idea that no one is in charge.

But recently there has been an increase in the popularity and use of licensed blockchains. Doesn’t that seem to go against the whole reason for having a blockchain?

The Bitcoin Blockchain without authorization

First, what is a blockchain? Think of it as a bank ledger, where you record every transaction you make and keep a running tally. A blockchain is simply a series of blocks that contain transactions, linked together one after the other in a chain.

But there are other aspects that make a blockchain different from a simple ledger. Each transaction is validated and confirmed – essentially someone who did not carry out the transaction confirms it as some kind of third party – before it can be added to the block. A blockchain is also immutable. Once a block has been created, it is locked. It is also public, which means anyone can see any transaction.

Blockchain technology was created at the same time as Bitcoin, in Satoshi Nakamoto’s white paper. The concept was that the blockchain would function as a decentralized ledger, which means that transactions are verified by a worldwide network of nodes and that copies of the blockchain exist outside a central location. Anyone can set up a node and anyone can start mining to validate transactions – nobody needs to be certified or get permission to do so.

Why an authorized blockchain?

But what happens when that trustless nature is altered? Since 2017, there has been an increase in licensed blockchains, which seem to go against the decentralized nature of blockchain technology. We have seen private blockchains emerge, which are used internally by companies to keep transaction records, monitor supply chains, or keep data private.

But an authorized blockchain is not simply another private blockchain. It is a blockchain where an owner controls who has access and the ability to validate transactions.

On an authorization-less blockchain, such as the Bitcoin blockchain, anyone with the hardware can become a miner and start validating transactions. Or anyone can set up a node to “look” at the blockchain and confirm transactions. On an authorized blockchain, however, only certain persons or entities who have received the authorization can validate transactions and the owner of the blockchain can decide who and how many validators they can be.

Also, on an authorization-less blockchain, the public is able to view all transactions, but on an authorized blockchain, the public may or may not have visibility into transactions, it depends on how the owner wants to set them up.

Concessions authorized and without authorization

As you can already see, there are a number of trade-offs with authorized blockchains. One of the challenges with a decentralized and permissionless blockchain is that it is difficult to scale because there are so many transactions that need to be verified and so many miners involved. Yet licensed blockchains are easily scalable. There may only be a handful of entities validating transactions and they are probably not using proof of work like the Bitcoin blockchain (which is more secure), just simply an algorithm of their choice.

The same thing goes for its electricity consumption. Due to the number of miners validating blocks around the world, a permissionless blockchain uses a lot of electricity or hash power. But since only a few designated computers can validate transactions in an authorized blockchain, it is more energy efficient with lower costs, which also helps with its scalability.

But trusting only a few entities to essentially oversee the entire blockchain can cause a security problem, the kind that is virtually non-existent on a highly visible, permissionless blockchain like Bitcoin. For the Bitcoin blockchain, there are so many miners that it is nearly impossible to stage a 51% attack or system overthrow in which an entity gains 51% of the ecosystem’s hash power. If only a few nodes are allowed to validate, it is much easier to overthrow the system if two or three validators are enough to “transform evil” instead of thousands.

Another thing a licensed blockchain does not offer is decentralization or being independent from centralized supervision. Bitcoin and its blockchain were created in response to the 2008 misdeeds of centralized financial systems. Authorized blockchains come back to the idea that someone is responsible who can control who accesses, what policies to implement and how to execute it.

Where to find authorized blockchains

However, a licensed blockchain may be just what you need. For example, a bank, shipping facility, or grocery store may want to maintain their authorized validation processes, but may allow or even want public visibility in its blockchain. They would be able to maintain control over how their data is stored and processed, but give customers or customers the ability to track transactions, produce, products or even certain records to support the chain.

But could a licensed blockchain ever work with Bitcoin? No, because the Bitcoin blockchain was not designed this way.

The Bitcoin ecosystem relies on decentralized, unauthorized and unauthorized public consensus to remain a truly digital global currency, unregulated by any entity. It relies on anyone around the world being able to fire up a miner and jump right in, and it relies on everyone in the Bitcoin ecosystem to run it together. There are certainly circumstances where a licensed blockchain would be an advantage, but a licensed Bitcoin blockchain would no longer be Bitcoin.