Each blockchain has to choose a mechanism that ensures that all participants agree with the truth about their data. You can think of it as a standardized way by which all the politicians in the Duma can be brought to an agreement of opinion as quickly as possible. Since politicians will probably have to discuss this, all participants in the blockchain network do this by communicating with each other over the network.
Communication protocols are implemented in software that runs on all the devices involved. However, communication is not based on political beliefs, but rather on the status of blockchain data, such as transaction history in a currency such as Bitcoin.
Recognition of some of these mechanisms, which are listed in the projects on Coinmarketrate.com, currently dominates, while others remain unknown, or still little used.
Proof of Work – classic “mining”
We know the term “mining”, from the example of the king of cryptocurrencies – Bitcoin. For the Ethereum network, transactions must also be packaged in blocks using mining and, thus, confirmed.
The correct name for this consensus mechanism is Proof of Work (POW). It simply describes the condition under which a network participant must perform honest and verifiable work in order to be able to confirm a number of transactions. For this, it receives an appropriate reward for each calculated block.
This award is intended to compensate for the electricity consumed and the use of special equipment (ASIC miner or GPU), as well as to make a profit. The distribution consists of the current block reward and transaction fees approved in transactions.
Proof of work has been the most common method so far, especially for cryptocurrencies. This is probably the case, since it has been proving its reliability and safety since 2009. In addition, high mining rates also ensure that the coins generated have a real equivalent in the form of paper money.
No matter how reliable and proven this process is, it is also sharply criticized. The disadvantage of Proof of Work is that the necessary electrical energy and partially specially manufactured equipment are consumed at the expense of the environment. Many cryptocurrency fans and critics would like the consensus not to have such a strong impact on the environment.
Another disadvantage is the split in the community of these projects. There are always two groups. Users who have to pay a transaction fee and wait for confirmations, and miners who monitor profits, and mostly want to have a politically beneficial influence on the project. Suggestions on how to improve the project and its implementation of the source code usually cause discussions in which both camps vigorously defend their interests.
Proof of Stake – partner with voting rights
As in the case of a joint-stock corporation, for example, in Proof of Stake (POS), all shareholders have the right to express their opinion when a consensus is reached. This right to check a block of new transactions is granted deterministically each time.
Shareholders with more assets in their wallet have a slightly better chance of being selected. On the one hand, they are ultimately more interested in the functionality of the network and, therefore, should contribute more to it themselves. On the other hand, if the choice of shareholders is too heterogeneous, there is a risk that the confirmation of the block will become too central, and gives the rich parties broader powers.
In most cases, in Proof of Stake-based blockchains, all tokens have already been “pre-mined” (i.e. created) instead of being slowly brought to the market by searching for blocks, as in the case of Proof of Work, up to the specified maximum. PoS blockchains have usually already released all tokens into circulation, and shareholders who have won blocks can only pay a transaction fee.
Currently, this process is successfully used in some blockchains and projects, as well as in the world of cryptocurrencies, and is becoming increasingly popular. At least because it does not need to spend electricity. Consumption is limited to simple use by participants and does not increase due to unnecessarily complex calculations.
Proof of Work vs Proof of Stake, or looking to the future
Now it is very noticeable that Proof of Stake focuses on the shortcomings of Proof of Work. Consequently, the stability of blockchains should be enhanced by significant savings in electricity and equipment, and at the same time facilitate the further development of projects by the community, avoiding conflicts of interest.
However, Proof of Stake also raises questions: is it possible to guarantee that the rich will not get richer? When is the algorithm for selecting validators confirming a block ideal and as fair as possible?
It would be useful to look at other options based on these two ideas and who want to improve them.
- Delegated Proof of Stake (DPoS) – algorithm for honest block selection
Unlike PoW, the owner of the coin gets the right to vote, the weighting of which is based on the number of coins stored (a procedure that is used, for example, on the Cosmoc and EOS platforms). A validator is elected with this voting right. A validator is an object in the network that can create a new block. So these should be particularly reliable participants.
Another group in this process is the “delegates”. They cannot mine blocks and take part in the management of the system. Delegates do not make their own decisions, but make proposals for changes to the entire community, which, in turn, votes for changes.
- Proof of Activity (POA) – hybrid approach
This approach is not the result of optimizing a single consensus mechanism, but is a combination of PoW and PoS. It is assumed that miners will continue to solve cryptographic puzzles with a lot of energy and equipment. The blocks found in this way contain only the identity of the block winner and his reward transaction. Then the Proof of Stake stage begins, and the validators (shareholders selected to verify transactions and blocks) confirm the correctness of the block. If the block has been checked often enough, validators activate it before the finished block. Only at this step the block will contain transactions from the network that need to be confirmed.
Proof of Importance (POI) – VIP first
The concept presented by NEM is based on Proof of Stake, and also has delegators and validators. However, they are selected according to a certain algorithm, and not just randomly and by stack size. Their importance to the network and the importance that the network seems to have for them are also reflected in the formula.
In the definition of the Proof of importance (POI) of NEM, this is implemented by enabling usage. Participants who frequently send transactions are more likely to use blocking. Of course, it is necessary to ensure that manipulation models are quickly recognized, and therefore spam transactions that are intended only to increase the importance of the shareholder are not included.
Proof of Elapsed Time (POET) – eco-mining through innovation
This mechanism was invented by the Intel chip manufacturer and refers to the technological achievement of SGX (Safe Guard Extensions). SGX includes a set of CPU instructions that allow processes to use their own CPU resources. This is intended to create trusted runtime environments in computing for which there is no danger of manipulation from the outside.
What does the confirmation of transactions have to do with it? The goal is to implement a real random mechanism with this innovation at a low level of software and hardware. Compared to Proof of Work, it is not determined by chance which participant can be the first to solve the puzzle with their resources. PoET replaces the cryptographic riddle with the fact that only the CPU architecture, combined with the amount of mining equipment, knows how often and when a participant will win a block.
This approach is to significantly reduce energy consumption during mining. Unfortunately, this increases the dependence on the supported CPU architecture in mining hardware. The equipment used can be significantly reduced in size or connected to conventional computers, but only participants with an SGX processor can participate.
In this article, we have reviewed the concept of some popular consensus mechanisms that can be used in the development of blockchain. It can be assumed that the success of these systems depends, among other things, on the quality and fairness of their consensus procedures. Therefore, global efforts should continue to be made to find even more effective methods of protecting blockchains in the long term, and even make them more scalable (more possible transactions per unit of time).
Currently, the choice of consensus procedure should depend on the requirements of the project. One should think about how crushing the disadvantages are and how useful the advantages of each concept are for the desired result.
In the end, it has not yet been possible to find a universally perfect concept that could surpass competitors.