Blockchain Governance Models: Achieving Consensus in a Decentralized System



Group projects are common practice in many classrooms. What is a group project really? A number of individuals are tasked to work together on an assignment often times delegating segments to each member of the group. In a perfect world, once each person completes their task they all come together to compare and compile each segment to come to some agreement on how to proceed. Before the assignment is turned in, some form of consensus between team members must be made to determine if their completed project meets their teacher’s expectation. But what if each group member had to rely on a third party to relay information to the other in order for final consensus? What if the third party individual decided to spread misinformation between group members to sabotage their project?

The above scenario is a conundrum that has plagued computer scientist and computer network engineers for decades. In relation to computer science, this issue was first explained in “The Byzantine Generals Problem”, a paper published in 1982 that compares distributed computer consensus to isolated generals trying to agree on a plan only using messengers. In this example, the Generals must decide whether to attack or withdraw from the potential conflict. Since communication can only occur through messengers, there is the potential that the other generals may not receive the message or that a traitor could manipulate the consensus.

Ever since “The Byzantine Generals Problem” was published, much work has been done to solve this problem. The invention of Bitcoin and blockchain technology proved to be the first solution to the Byzantine General’s Problem. Proof of work is the governance model used for consensus in Bitcoin’s blockchain

Proof of Work

Proof of work (PoW) is the first consensus mechanism used in a blockchain (Bitcoin’s blockchain being the first). It is a protocol, originally designed to deter spam email but is a widely adopted mechanism used in trustless, decentralized systems. PoW requires computational power (hash rate) to provide the work required to solve complex algorithms (hash function) to form blocks of transactions to add to a digital ledger (by nodes) and prevent double spending. In this system, the competition between miners ensures block validity and the nodes are responsible for maintaining the ledger of blocks. The node containing the longest string of blocks processes the most updated copy of the ledger.

PoW becomes more resilient to attack as the overall network hashrate increases. This is because the resources required to gain 51% hashrate for an attack increases accordingly.

Proof of Stake

In an effort to reduce burdens that Proof of Work creates, developers devised a consensus mechanism called Proof of Stake. Proof of Stake (PoS) is a consensus protocol in which blocks are produced by nodes chosen at random proportional to the amount of coins held or “staked” relative to the rest of the network. For example, a node with 1% of the total supply of coins staked has a 1% chance of being chosen to produce each new block, receiving the block reward for doing so.

Both Proofs of Work and Stake consensus mechanisms yield the potential for a 51% attack. Proof of Work protocols are susceptible to this attack if a miner or mining pool seize over 50% of total mining capability, allowing them to potentially double spend. The same issue may occur with Proof of Stake if a Validator owns more than 50% of that blockchain’s current total of currency.

Another complication that may arise in PoS governance is called the “nothing-at-stake” problem. The idea is that a node is both able to and has financial interest in staking across all forks of the parent chain. This creates an incentive structure that does not necessarily prioritize the parent chains integrity.

Proof of Activity

This form of consensus marries the proof of work with proof of stake consensus mechanisms. This mechanism is semi-random because validators with more of the native currency (stake) have a greater chance of being selected by the network. With the proof of activity protocol, blocks are mined as they are in proof of work systems (no stake required), however, initially, the blocks serve as a template hosting the miner’s address until validation is complete. Instead of a network of nodes, proof of activity uses validators causing a shift from PoW to PoS. Once the block is validated, the block template switches to a block of transactions and is added to the chain. The incentive for this process is in the form of the blockchain’s native cryptocurrency and is divided between the miner and validator. If a validator randomly chosen is not available to sign off on the new block, the system will select a new set of validators and the next winning block.

Criticism of this consensus mechanism is that the blend of PoW and PoS does not mitigate the burden of power required for mining. Both Pow and PoS are competitive consensus algorithms leading the multi-competitive nature of PoActivity. Miners compete with each other to generate blocks while validators compete for an increased stake to raise their chances of becoming a block validator. The competition between validators to increase stake is limited by preventing a group to compile their computational power. Another benefit of this system is the reduced potential of a 51% attack since validators are randomly selected and challenging to predict.

Proof of Authority

With stake in mind, proof of authority is a modified version of Proof of Stake. Proof of Stake relies on a node owner’s monetary stake as leverage to keep them honest. At first glance, monetary stake appears to be enough incentive for a node owner to ensure the sanctity of the blockchain. However, two node owners with equal native currency ownership may not have equal overall cryptocurrency wealth in their portfolio, thereby reducing the balance in stake between the two: increasing the probability that the node owner with more wealth in other cryptocurrencies will act maliciously. Proof of Authority works to mitigate this problem by making node owners reveal their identity. Node owners have a personal stake if they choose to act maliciously.

Proof of Elapsed Time

The proof of elapsed time (PoET) consensus algorithm developed by the microchip production giant Intel. This mechanism is designed to work in closed blockchain networks and utilizes a truly randomized lottery system for node participation. Each node in the network is assigned a waiting duration at random and the first node that has the shortest wait time (activates first) adds a new block to the chain. The benefit of using this protocol is its cost-effectiveness for participants and the network as a whole. Also, the node selection process may be audited to ensure legitimacy. The downside of using PoET is the required hardware need to participate hinders its adoption. This consensus algorithm is not intended for public blockchain use.

Proof of Reputation

The philosophy behind proof of reputation is that a network participant tasked with signing a block will suffer substantial financial and legacy loss if they choose to abuse their position. A hierarchy of nodes determines the node signing a block which is based on a rating system. Think of it as a tree where the reputation of a node increases as more, less reputable, nodes vote to increase that node’s reputation. This system based on reputation ensures that a group of malicious nodes or botnets can not corrupt the system. “The more iterations, the longer “chain of trust”, the better protection is.”

A few other consensus mechanisms worth mentioning are:

  • Delegated Proof of Work
  • Delegated Proof of Stake
  • Proof of Capacity
  • Proof of Importance
  • Proof of Identity
  • Proof of Weight

What consensus requires, in a network where the participants are anonymous, is leverage. In a Proof of Work system, the algorithm known as a hash algorithm is leverage: participants are required to provide computing power to participate. Without some form of leverage over a blockchain’s participants, it just couldn’t exist. Stake, Elapsed Time, Weight, Authority, and Reputation are all a form of leverage designed to ensure a blockchain’s success. Simply put, a consensus mechanism is a fulcrum that tips the balance in favor of the effort required to maintain a blockchain by decreasing the burden of its resistance.

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