Permissioned Distributed Ledgers and the Governance of Money performs the first economic analysis of permissioned distributed ledger technology (DLT) in a monetary economy. A non-permissioned blockchain, such as Bitcoin and Ethereum, is a data structure with no restrictions of who can read, maintain and use the database, whereas permissioned blockchains require access control from a centralized institution. In permissioned blockchains, all user transactions are identifiable, making them less susceptible to illegal activity.
The paper examines the economic opportunities and challenges of permissioned ledgers. In permissioned blockchains, designated validators verify transactions and update the ledger. However, the correct incentive mechanism should be in place so that validators can reach the correct consensus of how to update the ledger and avoid bribes. The authors find that despite the common belief that many validators and a high supermajority threshold are necessary for strong governance, it is best to have only one trusted intermediary. This is because for a strong consensus amongst validators to be achieved, there will be larger rents required by validators. In absence of a trusted intermediary, non-permissioned designs would be preferred. The authors perform a timely analysis, as permissioned DLT is rapidly becoming an industry standard for digital currencies like central bank digital currencies and Facebook’s Libra/Diem.