Proof of Work | Proof of Stake | Effective Proof of Stake | Other Proofs
The is increasing discussions about the energy that is used for sustaining blockchain transactions and security as well as the desire for a fairer and decentralised blockchain.
Blockchain systems use various leader election schemes for consensus-driven ledger updates.
This article will explain the differences between the 3 most popular proofs that exist in the blockchain world today.
· Proof of Work — POW
· Proof of Stake — POS
· Effective Proof of Stake — ePOS
· Other Proofs
Proof of Work (POW)
The most well known and original cryptocurrency in the world is Bitcoin. Bitcoin cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.
Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoins are created as a reward for a process known as mining.
Bitcoin is an example of a cryptocurrency that uses Proof of Work (POW).
To be accepted by the rest of the network, a new block must contain a proof-of-work (PoW).
This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try solving computationally intensive puzzles to validate transactions and create new blocks.
Blockchain applications that rely on the Proof-of-Work (PoW) have increasingly become energy inefficient with a staggering carbon footprint, leading many environmental / climate change activists to become increasingly vocal about its use and the impact that it is having on the environment.
The University of Cambridge Centre for Alternative Finance (CCAF) studies the burgeoning business of cryptocurrencies. It calculates that Bitcoin’s total energy consumption is somewhere between 40 and 445 annualised terawatt hours (TWh), with a central estimate of about 130 Terawatt-hours of energy (TWh), which is roughly 0.6% of global electricity consumption. This puts the bitcoin economy on par with the carbon dioxide emissions of a small, developing nation like Sri Lanka or Jordan.
Staggeringly, this is MORE electricity than Argentina consumes!
Proof of Stake (POS)
The main technical mechanism that powers staking is something called Proof of Stake (PoS). This is an evolution of Proof of Work (PoW), a key component that allows blockchains to function as they do. PoS was introduced as a solution for reducing the computational power required to validate blocks. while maintaining the core value of cryptocurrency — decentralisation.
By allowing ordinary participants to lock their stake and the protocol to use these holdings to randomly validate blocks as opposed to miners using high energy cost hardware to compete for them, a higher level of scalability can be achieved, while keeping the blockchain decentralised. Instead of relying on the hash rate produced by individual miners to determine who validates a block, PoS determines it by the number of tokens a participant is staking.
POS stake systems are energy-efficient consensus protocols which use a lot less power.
An example of a blockchain that uses POS is Cardano (ADA).
Fundamentally, Cardano works like any other cryptocurrency staking system. By holding and staking its tokens, you will assist the network with validating blocks on the protocol and receive a return on your investment. However, Cardano does not allow solo staking. Instead, you can either opt to run a staking pool that other participants can join, or delegate your holdings to someone else’s pool. The reason for this is to ensure that there are enough node operators within the network.
Cardano has validator nodes that ensure that have to actively participate in transactions validation and propagation of ADA coins. Every once in a while (depending on the number of coins in the node), that node will “win” a slot, which means that it has a right to create a single block a certain time, and the node will be rewarded as such.
Large pools will tend to pay out more consistent rewards, as there is lower variance in the number of blocks they mint per epoch. Small pools will have much more variation in the amount of blocks they produce per epoch, and so the rewards will vary significantly.
A pool which has a relatively small amount of ada staked to it is unlikely to earn many rewards.
Proof-of-Stake (PoS) may cause centralization and unfairness in the blockchain system. Selection by account balance would result in (undesirable) centralization, as the single richest member could have a permanent advantage.
Effective Proof of Stake (ePOS)
To address the challenges of POS / POW, there is a modular version of PoS-based blockchain systems called ePOS that resists the centralisation of network resources by extending mining opportunities to a wider set of stakeholders.
Moreover, ePOS leverages the in-built system operations to promote fair mining practices by penalising malicious entities.
ePOS ensures fairness and decentralisation, and can be applied to existing blockchain applications.
An example of ePOS is Harmony ONE
Harmony ONE is one of the first production mainnets to feature a fully sharded PoS architecture.
Harmony’s Effective Proof-of-Stake (EPoS) is the first staking mechanism in a sharded blockchain that achieves both security and decentralisation. EPoS allows staking from a thousand+ validators and with the unique effective stake mechanism reduces the tendency of stake centralisation.
Meanwhile, stake delegation, reward compounding, double-sign slashing, and unavailability checking are also supported.
In most Proof of Stake networks, the voting power is determined by the total stake (validator stake + delegated stake). Within the Harmony Network, the voting power is determined by the effective stake. The effective stake of each validator is calculated at the end of each epoch (staking cycle). Validators with more stake than the median stake amount across all validators are being “punished”, whereas validators with less stake than the median stake amount are being “subsidised”. This mechanism incentivises large staking providers to decentralise their operations by setting up multiple validators. And it incentivizes token holders to delegate their stake to smaller validators. Delegating your stake to a smaller validator will effectively increase your rewards.
I have touched upon the 3 most popular Proofs currently available but there are other consensuses out there. I will summarise some of these below and I am sure new ones and combinations will emerge before this article is published!
Proof of Capacity
In Proof of Capacity method, solutions to complex mathematical puzzles are stored in digital storages such as hard disks. This entire process is called plotting. After a storage device is filled with solutions for mathematical puzzles, users can utilize it for producing blocks. Users who are fastest in finding the solutions get a chance to create a new block. Hence, users with the highest storage capacity will have to higher chances of producing a new block.
Proof of Elapsed Time
Proof of Elapsed Time process randomly and fairly decides the producer of a new block based on the time they have spent waiting. For this purpose, the mechanism provides a random wait time for each user and the user whose wait time finishes the earliest will produce a new block. This consensus mechanism only works if the system can verify that no users can run multiple nodes and the wait time is truly random.
Proof of Identity
Proof of Identity compares the private key of a user with an authorized identity. Basically, Proof of Identity is a piece of cryptographic evidence for a user’s private key that is cryptographically attached to a specific transaction. Any identified user from a blockchain network can create a block of data that can be presented to anyone in the network. Proof of Identity ensures integrity and authenticity of created data. Additionally, smart cities can use blockchain consensus mechanisms like Proof of Identity to verify the identity of their citizens.
Proof of Authority
Proof of Authority mechanism is a modified version of Proof of Stake where the identities of validators in the network are at stake. In this scenario, the identity is the correspondence between validators’ personal identification and their official documentation to help verify their identity. These validators stake their reputation on the network. In Proof of Authority, the nodes that become validators are the only ones allowed to produce new blocks. Validators whose identity is at stake are incentivized to secure and preserve the blockchain network. Also, the number of validators is fairly small (i.e. 25 or less).
Proof of Activity
Proof of Activity mechanism is the combination of Proof of Work and Proof of Stake. In Proof of Activity, miners try to find the solution to a puzzle and claim their reward. However, the blocks created in Proof of Activity mechanism are simple templates with mining reward address and header information. The header information is then used to choose a random group of validators for signing a block. The validators with larger stakes will have greater odds of being selected to sign a new block. Once the selected validators sign a new block, it becomes a part of the network. In case the block stays unsigned by some validators, it gets discarded and a new block is utilized. The network fees generated in the process are distributed between the winning miner and the validators.