Consensus 101: What is Proof-of-Authority Consensus Algorithm?

2021/07/02 00:15:41

A consensus algorithm is a mechanism that lets network participants agree on the current state of the network and commit new data to the blockchain. This ensures that participants conform to the set rules and regulations, without the need for a centralized source of trust.

Proof-of-Work (also known as the Nakamoto consensus) has been the first and still one of the most widespread blockchain consensus mechanisms. However, the crypto market witnessed the development and implementation of at least thirteen consensus algorithms for blockchain networks in less than thirteen years since the Bitcoin network first appeared. One of those is Proof-of-Authority. Before we move on to explaining this consensus mechanism let us first dive a bit into what Proof-of-Work is.

The Birth of the Consensus Algorithm

The idea of embedding cost (or digital scarcity) into a system using Proof-of-Work was first conceived by Cynthia Dwork and Moni Naor in 1993 to protect Internet services from spam. In 1997, Adam Back, an English Cypherpunk applied this concept into his project Hashcash, a service directed at limiting spam and DDoS attacks. Sending Spam emails to naive users was inexpensive and lucrative just as it is today. Therefore, Dr. Back set out to increase the cost of sending an email, whereby the cost would be minimal for honest actors, yet expensive for offensive actors.

Hashcash requires a sender to generate a Hashcash token by solving a PoW riddle. This token is sent with an email to its intended recipient. If the token is valid, the email will be delivered; if it’s invalid, the email bounces. For a regular user, the cost to generate a Hashcash token would be minuscule, but for a spammer, generating Hashcash tokens in bulk would be very expensive.

Hashcash showed that digital scarcity could be created amid abundance. Soon, the concept of digital scarcity would be applied to the creation of money. A PoW riddle requires computational energy in order to be solved (finding a ‘nonce’ a number only used once), which, if directed towards minting coins, would pass on the energy value of such efforts onto the coins being minted. This makes Bitcoin comparable to traditional gold which requires an even larger amount of energy to extract it from the earth, segregate it purify it, and mint it into bullion (check our article on why Proof-of-Work mining is not as energy-consuming as it appears).

In 2004, Hal Finney created a cryptocurrency system he named Reusable Proof-of-Work (RPoW). Finney’s RPoW system similarly used Hashcash’s PoW to mint new tokens. However, the system compromised decentralization for simplicity by relying on a centralized server to protect against the double-spending problem. It would take five more years before Bitcoin combines these developments together into ‘new-age money’ – decentralized money.

Proof-of-Work, Proof-of-Stake, and Proof-of-Authority

We’ve explained the origin of the first consensus algorithm, the Proof-of-Work consensus algorithm where a consensus over the validity of a new block has to be reached by the majority of the network nodes, thus compromising transaction time and cost. To get to Proof-of-Authority, we also need to explain another consensus algorithm called Proof-of-Stake, designed to address the pitfalls of PoW. Proof-of-Stake removes the need to spend a huge amount of electricity to validate the blocks. Instead, blockchain participants with the most stake in it are selected by an algorithm for the right to validate the blocks

Proof of Authority (PoA) is a modified form of Proof-of-Stake (PoS) where, instead of staking monetary value, a validator stakes his own identity. Staking identity means purposefully disclosing who you are in exchange for the right to validate the next block. Unlike PoS, in a PoA consensus, identity as a form of stake is scarce, in other words, there’s only one identity per person. Unlike the Proof-of-Work mechanism, there is no mining mechanism involved. What’s truly at stake here is the validator’s public reputation. The incentive is to not play dishonestly because your identity is known so your reputation may get ruined if you try to fool with the network. In case of dishonest behavior, the validator uses his stake but also loses much more than that. If you lose a stake in PoS, it is possible to reclaim it. If you lose reputation by abusing the validator’s role, getting it back is not as easy.

Proof-of-Authority Use Cases

One notable example of a blockchain using the PoA consensus mechanism is the Binance Smart Chain. BSC features a hybrid delegated Proof of Stake and Proof of Authority design resembling that of the EOS blockchain. Like most competing chains, BSC swaps true decentralization for higher transaction throughput and lower processing fees. The PoA is mainly used by private networks focused on transaction speed rather than immutability. Microsoft Azure is another notable example where the PoA is being used. The Azure platform provides solutions for private networks, with a system that does not require a native currency like the ether ‘gas’ because technically there is no need for mining.

Final thoughts

There is no such thing as a one-size-fits-all type of consensus algorithm. Each of them makes a compromise somewhere along with the value of decentralization, immutability, and transaction speed/cost. PoA, as a consensus mechanism, surrenders decentralization on the account of higher transaction throughput and scalability.

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