Public blockchains hold immense potential to revolutionize various industries. However, for them to operate effectively on a global scale, they require robust, efficient, and secure consensus protocols. This guide provides a concise overview of these protocols, essential for maintaining the integrity and security of decentralized ledgers.
A consensus protocol, such as Bitcoin’s well-known Proof of Work (PoW), performs two crucial functions: it establishes a single, definitive version of the truth for each new block added to the blockchain, and it safeguards the system against malicious actors who might attempt to disrupt or manipulate the chain.
In Proof of Work, miners engage in a competitive process to add the next block of transactions to the chain. This involves solving a computationally challenging cryptographic puzzle. The first miner to successfully solve the puzzle is rewarded with newly minted bitcoins and a small transaction fee.
While Proof of Work has proven its effectiveness, it has also faced criticism. Concerns include its high energy consumption, scalability issues (transaction confirmation times can range from 10 to 60 minutes), and the concentration of mining power in regions with inexpensive electricity.
While Satoshi Nakamoto’s invention of Bitcoin and blockchain technology opened the door to decentralized systems, the quest for faster, more decentralized, and energy-efficient consensus mechanisms continues. Several alternative approaches are being actively explored.
Proof of Stake (PoS)
Proof of Stake is a widely considered alternative to Proof of Work. Instead of investing in specialized computer hardware to compete in mining blocks, validators in a PoS system invest in the system’s coins.
It’s important to note that Proof of Stake doesn’t involve coin creation through mining. Instead, all coins are pre-existing from the beginning, and validators (also known as stakeholders) earn rewards through transaction fees.
In PoS, the probability of being selected to create the next block is proportional to the number of coins you hold (or have allocated for staking). For example, a validator holding 300 coins has three times the chance of being chosen compared to someone with 100 coins.
Once a validator creates a block, it needs to be validated and added to the blockchain. Different PoS systems implement this process in various ways. For instance, in Tendermint, every node in the network must approve a block until a majority consensus is reached. Other systems employ a random selection of signers.
However, Proof of Stake introduces the “nothing-at-stake” problem. What prevents a validator from creating multiple blocks to claim multiple sets of transaction fees? And what prevents a signer from signing off on all of those blocks? A participant with nothing to lose has little incentive to act honestly.
To address this and other challenges, the field of crypto-economics explores various solutions. One approach involves requiring validators to lock their currency in a virtual vault. If a validator attempts to double-sign or fork the system, their coins are forfeited.
Peercoin was the first cryptocurrency to implement Proof of Stake, followed by Blackcoin and NXT. Ethereum is currently based on Proof of Work but is transitioning to Proof of Stake.
Proof of Activity (PoA)
To avoid hyperinflation, Bitcoin’s design limits the total supply to 21 million coins. This means that the block reward subsidy will eventually end, and miners will only earn transaction fees.
Some fear this could lead to security vulnerabilities due to a “tragedy of the commons,” where participants act in their self-interest to the detriment of the system. Proof of Activity (PoA) emerged as an alternative incentive structure for Bitcoin. It combines elements of both Proof of Work and Proof of Stake.
In Proof of Activity, mining begins in a traditional Proof-of-Work manner, with miners competing to solve a cryptographic puzzle. Depending on the specific implementation, mined blocks might not contain any transactions (serving more as templates), with the winning block containing only a header and the miner’s reward address.
At this stage, the system switches to Proof of Stake. A random group of validators is selected based on information within the header to sign the new block. The more coins a validator holds, the higher their likelihood of being chosen. The template transforms into a complete block once all validators have signed it.
If some selected validators are unavailable to finalize the block, the next winning block is chosen, a new group of validators is selected, and so on, until a block receives the required number of signatures. Fees are shared between the miner and the validators who signed the block.
Proof of Activity faces criticisms similar to those leveled against Proof of Work (high energy consumption) and Proof of Stake (the nothing-at-stake problem).
Decred currently employs a variation of Proof of Activity.
Proof of Burn (PoB)
In Proof of Burn, instead of investing in expensive hardware, users “burn” coins by sending them to an unrecoverable address. By permanently destroying these coins, they gain a lifetime privilege to mine on the system based on a random selection process.
Depending on the implementation, miners might burn the native currency or the currency of another chain, such as Bitcoin. The more coins burned, the higher the chance of being selected to mine the next block.
Over time, the miner’s stake diminishes, requiring them to burn more coins to maintain their chances of winning the lottery. This mechanism mirrors Bitcoin’s mining process, where miners must continually invest in updated hardware to maintain their hashing power.
While Proof of Burn offers an intriguing alternative to Proof of Work, it still involves a needless waste of resources. Another criticism is that mining power is simply concentrated in the hands of those willing to burn the most money.
Slimcoin, a cryptocurrency based on Peercoin, uses Proof of Burn in combination with Proof of Work and Proof of Stake. However, it is currently only semi-active.
Proof of Capacity (PoC)
Most alternative consensus protocols employ some form of pay-to-play system. Proof of Capacity is no different, but here, users “pay” with hard drive space. The more hard drive space a user dedicates, the greater their likelihood of mining the next block and earning the reward.
Before mining in a Proof-of-Capacity system, the algorithm generates large datasets known as “plots,” which are stored on a hard drive. The more plots stored, the higher the probability of finding the next block on the chain.
By investing in terabytes of hard drive space, users increase their chances of creating duplicate blocks and forking the system. However, Proof of Capacity still faces the “nothing at stake” problem, offering no disincentive for malicious behavior.
Variations of Proof of Capacity include Proof of Storage and Proof of Space. Burstcoin is the only cryptocurrency currently utilizing a form of Proof of Capacity.
Proof of Elapsed Time (PoET)
Chipmaker Intel has developed its own alternative consensus protocol called Proof of Elapsed Time. This system operates similarly to Proof of Work but consumes significantly less electricity.
Rather than requiring participants to solve a cryptographic puzzle, the algorithm leverages a trusted execution environment (TEE), such as SGX, to ensure that blocks are produced randomly without the need for intensive computation.
Intel’s approach relies on a guaranteed wait time provided through the TEE. According to Intel, the Proof-of-Elapsed-Time algorithm can scale to thousands of nodes and operate efficiently on any Intel processor supporting SGX.
The primary concern with this protocol is the reliance on Intel as a trusted third party, which contrasts with the original goal of public blockchains: removing the need for trust in central authorities.
Conclusion
Consensus protocols are the backbone of blockchain technology, ensuring the integrity and security of decentralized systems. While Proof of Work has been the dominant algorithm, its limitations have spurred the development of various alternatives, each with its own strengths and weaknesses. The ongoing exploration and refinement of these protocols are crucial for the continued evolution and adoption of blockchain technology. As the field evolves, understanding these fundamental concepts will be essential for anyone involved in the world of decentralized systems.
