Proof of What? Consensus Algorithms Explained

centrumcoin
Mar 1, 2019 · 6 min read

In distributed systems, such as cryptocurrency networks, there is the need to coordinate participants in an effective manner resulting in decisions that represent the wishes of the majority. The mechanism used within distributed networks to reach an agreement is called consensus mechanisms.

In this article, you will discover several of the most popular consensus mechanisms used in blockchain networks, their history, their advantages, and disadvantages as well as in which networks they are employed.

Proof of Work (PoW)

When Satoshi Nakamoto introduced bitcoin to the world in 2009, he pioneered the use of proof of work in an online payment network. PoW is most known for being the consensus mechanism utilized in the world’s first cryptocurrency. Additionally, it is also the most utilized consensus mechanism in the digital currency sector.

While many erroneously believe Nakamoto to be the inventor of the mechanism, it was actually created by a duo of scientists, Dwork and Moni Naor, in the early nineties. PoW involves the use of computational power to find the solution to arbitrary mathematical puzzles. Due to the complex nature of the puzzles, they require a significant amount of resources to solve.

In the Bitcoin network, nodes that attempt to solve the puzzles and verify the validity of transactions are rewarded with new bitcoin when they are successful. Thus, in the Bitcoin network, PoW functions as both a consensus mechanism and a distribution mechanism. This is similar to other networks, such as Litecoin and Dogecoin, that also employ PoW.

Source: dogecoin.com

Due to its need for a significant amount of resources to power the devices utilized in the PoW mechanism, the mechanism has come under fire for its energy-intensive nature. Because of the global concerns surrounding the state of the environment, many are calling for more responsible use of global energy resources. Additionally, a number of networks which employ the mechanism have fallen victim to 51 percent attacks, casting major doubts on the robustness of the mechanism, especially in smaller networks.

Proof of Stake (PoS)

Proof of Stake was first seen in the digital currency Peercoin. In contrast to PoW, which uses the ‘work’ done by nodes to validate transactions, PoS does not require the solving of any puzzles. Instead, PoS networks make use of nodes named validators.

Validators are parallel to miners in PoW in that they validate transactions. However, that is where the similarities end. In PoS, for a node to achieve validator status, it must hold a certain amount of the native cryptographic asset of the network in its wallet.

There is usually a minimum amount a node must hold in its wallet to be able to participate as a validator. This is where the protocol gets its name, as the nodes must give up a stake in order to authenticate transactions. Validator nodes will win awards in proportion to the amount of stake they hold in their wallets. Thus, while there is a non-negotiable and mandatory minimum amount to qualify for validator status, these nodes also have the choice to increase their stake in order to have a claim to larger block rewards.

An important feature of the PoS protocol is that it incorporates punishment. In contrast to PoW where nodes are only incentivized to remain honest because of the promise of block rewards, in PoS nodes can be punished if they engage in dishonest behavior. The punishment can take the form of a slashed stake. Depending on the severity of the behavior, a node may have its entire stake taken away.

Proponents of PoS believe this to be a major advantage of the protocol. Rewards and punishments are opposites but important features of any crypto economic system. Additionally, because there is no need to use computing power, PoS is considered energy efficient. PIVX and Qtum utilize proof-of-stake. Additionally, Ethereum is working towards implementing a PoW and PoS hybrid algorithm called Casper.

Proof of Authority (PoA)

Following the success of PoS, a number of developers began to experiment with the idea of stake-based consensus algorithms. In March 2017 a group of developers attempting to mitigate spam attacks on the Ethereum test network, Ropsten, developed a protocol they named Proof of Authority.

Proof of Authority is a modified version of PoS where instead of units of the native cryptographic asset is the network held as stake, identity is used instead. The protocol was revealed to the public through a whitepaper.

In Proof of Authority, there is a group of validators who are pre-approved to authenticate transactions. These validators must provide information pertaining to their person before they can achieve validators status. Using PoA DApps, the would-be validators provide information linked to their real-life identity. In the event of any dishonest behavior, this information can be used to take legal actions against the validators.

The major advantages of the PoA algorithm are the significant slash in energy requirements and that validator nodes on a network do not have to communicate in order to achieve consensus. This increases settlement times within the network. Additionally, because of the difficulty involved in becoming a validator, it is assumed that validators are especially incentivized to remain honest.

PoA is employed in Kovan as well as in the VeChain network. Additionally, a number of private and commissioned networks run a version of the PoA algorithm. The Hyperledger Fabric network combines practical Byzantine Faulty Tolerance with the PoA model. Similarly, Ripple works on a modified version of PoA.

Proof Of Burn (PoB)

Invented by scientist Ian Stewart, Proof of Burn involves the destruction of a small number of units of the native cryptographic asset of a network to authenticate transactions. PoB was developed as an energy efficient alternative to PoW.

Within PoB, nodes will send a small amount to an eater address with every transaction. An eater address is an address which cannot spend the tokens held therein. It is created differently from normal addresses as it does not have a corresponding private key, because of this, every token sent to the eater address cannot be spent and is essentially non-existent within the cryptosystem.

The algorithm is energy efficient and encourages long-term engagement with a network as miners must participate within the network for extended periods in order to get rewards. Additionally, it also encourages the growth of the value of the token as it decreases the number of circulating tokens with each transaction.

Some networks that implement PoB include Slimcoin and Counterparty. It is also utilized heavily to get rid of any unused tokens after ICOs such as in the Neblio project.


CentrumCoin

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Thanks to Krisztián Pályi

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CentrumCoin, the bridge between individual investors, entrepreneurs and the cryptocurrency market. centrumcoin.com

CentrumCoin

CentrumCoin, the bridge between individual investors, entrepreneurs and the cryptocurrency market.

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