Nothing to Gain with “Nothing at Stake”

Mikheil Zghuladze
Jun 28, 2019 · 8 min read

Comparing Casper Proof of Stake and Proof of Authority

Proof of Work and Proof of Stake

Most currencies including Bitcoin run on PoW protocol. In short the process goes like this: The miner solves cryptographic puzzles to “mine a block”. This requires an immense amount of energy and processing power. When the puzzle is solved, the block is added on the blockchain, which means that the transaction is verified. Then you have to check if the block belongs to the chain.

The fact that there are many other consensus algorithms tells us that there must be some problems and incompatibilities with PoW. What are these problems? First of all, the biggest drawback of PoW is its extreme inefficiency due to the sheer amount of power and energy it eats up. The next problem is that powerful and big ASICs have a higher chance of mining than individual miners. Theoretically, large mining farms can team up and launch a 51% attack on the network. As a result, we get not so verry decentralized cryptocurrency.

These are some serious problems. In order to solve them, Ethereum is implementing a Proof of Stake protocol called Casper. Let’s take a look at it. PoS makes the entire mining process virtual and replaces miners with validators. Here is how it goes: The validators lock up some of their coins as stake, and only after that do they start validating blocks by placing bets on them. If the block gets verified, then the validators get a reward proportionate to their bets.

Suppose malicious miner Alice wants to mine on the red chain. Even if she dedicates all of her hash power to it, she won’t get any other miner to join her on the new chain. Everyone else will still continue to mine on the blue chain because it is more profitable and risk-free to mine on the longer chain.

In PoS if you are a validator, then you can simply put your money in both the red chain and blue chain without any fear of repercussion at all. No matter what happens, you will always win and have nothing to lose, despite how malicious your actions may be.

This is called the “Nothing at Stake” problem, and this is something that Ethereum had to address. They needed a protocol which could implement POS and mitigate the “Nothing at Stake” problem.

Ethereum Casper

Vitalik Buterin and Virgil Griffith have introduced a proof of stake-based finality system, which is capable of overlaying an existing PoW blockchain. It’s called Casper. With the help of Casper, they can punish and exterminate all malicious elements. Now, let’s take a look at how it works: Validators put a portion of their Ether as a stake. After that, they start validating bocks by betting on them. If the block gets approved then they get a reward proportionate to their bet. Everything looks just like as it is in a normal PoS, right? Not really, there is one final element which changes the whole process — If a validator acts maliciously, he immediately gets reprimanded and loses all of his stakes. It’s obvious that Casper works in a trustless system and is more Byzantine Fault Tolerant.

This is one way to solve this problem but there also is another one which has nothing to do with Ethereum, and it’s called Proof of Authority.

Proof of Authority

PoA consensus mechanism first conceived by Ethereum developers is an alternative version of the Proof of Stake (PoS), but instead of wealth, the authority’s identity is put at stake. It is mostly suited for private blockchain networks. Proof-of-Work is a Sybil-resistance mechanism that leverages computation costs to self-regulate the network and allow fair participation. This works great in anonymous, open networks where competition for cryptocurrency promotes security on the network. However, in private/consortium networks the underlying ether has no value. An alternative protocol, Proof-of-Authority, is more suitable for permissioned networks where all consensus participants are known and reputable. Without the need for mining, Proof-of-Authority is more efficient while still retaining Byzantine fault tolerance.

· In Proof of work (PoW), trust is attached to the amount of computational effort from miners.

· In Proof of Stake (PoS), trust is attached to the validators highest collateral, their own wealth is at stake.

· In Proof of Authority (PoA), trust is attached to an authority´s proven reputation and identity, their own identity is at stake.

In short, Proof of Stake eliminates the need to spend a huge amount of electric power to validate the blocks. In PoS participants with the most stake are selected by the algorithm in order to validate bocks. The assumption behind Proof of Stake is the following: „those who hold a stake in a network are incentivized to act in its interests. All else equal, the more stake one has, the higher should be his or her interest in preserving the system“.

The problem with this concept is the fact that the evaluation of staked amount is subjective and it can be valued differently by different nodes. A blog offers an example for simplicity: take Alice, an early adopter of the blockchain technology with a massive portfolio of digital assets, and Bob, a newbie who is just exploring the emerging token economy. Let’s say they both hold the same stake in a hypothetical network, Elixirium, 1,000 ELX each. In isolation, we could assume that Alice and Bob are equally interested in Elixirium’s success. We cannot be as confident, however, when we take their other holdings into consideration. If 1,000 ELX is only 1% of Alice’s total wealth, while for Bob it represents nearly 50%, their incentives are tough to compare. Alice might care about Elixirium much less than Bob does, even though they have the same stake. Consequently, her desire to act in the interest of the network might also not be as strong as Bob’s.

Actually, there is a way to solve this problem by implementing a new consensus algorithm, called — Proof of Authority. To put it bluntly, it is a consensus mechanism in which the nodes validating blocks are the ones explicitly allowed to do so. Proof of Authority (PoA) is a modified form of Proof of Stake (PoS) where instead of the stake with the monetary value, a validator’s identity itself performs the role of the stake. Like in PoS, in PoA consensus, identity as a form of the stake is also scarce. But unlike PoS, there’s only one identity per person.

With Proof of Authority, authorities have to earn the right to validate transactions by maintaining a reputation. And to verify the legitimacy of identities companies like POA Network in the U.S. authorities are required to acquire a notary public license. Trusted individuals become eligible by presenting proof of address, and no criminal records. All authorities are known people, again, no anonymities.

· Identity must be true: meaning there needs to be a standard and robust process of verifying that validators are indeed who they claim they are.

· Eligibility for staking identity should be difficult to obtain: so that the right to be a validator becomes earned, valued, and unpleasant to lose.

· The procedure of establishing the authority needs to be the same for all validators: to ensure that the network understands the process and can trust its integrity.”

Misconduct from authorities are easily exposed, and the member is explicitly banned from the network. By this, all others are motivated to take care of their identity.

In order to prove their identity users, who already are verified by public notaries, have to go through the on-chain identity verification via the POA Network DApps. As public databases of licensed notaries and the POA Network verification DApps are independent of each other, forging information on either side will prevent a candidate from becoming a validator.

Even if one steals a license and somehow becomes a validator pretending to be someone else, the fact that staking is public will expose a nefarious actor. Even so, a single user can not manipulate the whole network, so it’s safe and still decentralized (not distributed).

To make it even harder candidates for validators have to pass notary exams. In the process people with the criminal accord, bad moral standards and lack of commitment are filtered out. With their real names at stake, validators are unlikely to act nefariously to threaten their own social standing.

Fulfilling the notary requirements on top of going through the DApps verification process makes the procedure of gaining the reputation/authority more trustworthy and transparent, this helps the network participants trust that everyone has the same means to earn the status.

Current Implementations

VeChainThor

One implementation of PoA consensus is with the VeChainThor blockchain network. Their network focuses on being an enterprise-grade public blockchain for the transparent flow of information and tracking, especially in the supply chain and logistics realm. VeChain selects the validator nodes through their own proprietary verification process and elucidates the significant advantages afforded to them by using PoA consensus in their network as being the efficiency with which it confirms transactions and the state of the blockchain.

If Vechain relied on PoS or PoW for their consensus model, they would not be able to launch their platform, as scalability solutions for PoW protocols are still under development, while PoS is yet to be researched, optimized and implemented properly. Allowing companies that are already participating in the supply chain industry to become validators within their network also align their self-interests into a collective that helps enhancement of network security, which is often seen as easier to achieve in private and permissioned blockchain networks.

Other implementations of optimized versions of PoA consensus include Hyperledger and Ripple. Hyperledger Fabric’s consensus is predicated on Practical Byzantine Fault Tolerance but employs PoA consensus as part of its open-source umbrella framework for consortium blockchains. Ripple uses an iterative form of PoA consensus. In the end, we can conclude that PoA solves many problems of PoW, which makes it a much more safer consensus protocol.

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