Proof of Work Explained

As the cryptocurrency space continues to evolve at an accelerated pace, experimentation and implementation of a variety of consensus models is inevitable.

Proof of Authority (PoA) consensus is not necessarily a new consensus mechanism (has been around since March 2017), but has been implemented in some interesting platforms as a compromise between consensus models targeting complete decentralization and more efficient, centralized models.

First, PoA was proposed by a group of developers in March 2017 (the term was coined by Gavin Wood) as a blockchain based on the Ethereum protocol. It was developed primarily as a solution to the problem of spam attacks on Ethereum’s Ropsten test network. The new network was named Kovan and is a primary test network available to all Ethereum users today.

PoA consensus is essentially an optimized Proof of Stake model that leverages identity as the form of stake rather than actually staking tokens. The identity is staked by a group of validators (authorities) that are pre-approved to validate transactions and blocks within the respective network. The group of validators is usually supposed to remain fairly small (~25 or less) in order to ensure efficiency and manageable security of the network.

The main characteristics of a PoA network are a low requirement of computational power, no requirement of communication between nodes to reach consensus, and continuity of the network is independent of the number of the available genuine nodes since they are pre-approved and verifiably trustable through cross verification in the public domain.

PoA is designed to be less computationally intensive than PoW models that require expending electricity to solve algorithms. Further, PoA removes a primary concern within the PoS model that although stakes between two parties may be equal, their value to each party may vary significantly depending upon their holdings. For instance, Alice may have 1,000 XYZ tokens staked and Bob may also have 1,000 XYZ tokens staked, however, Alice has $10 million outside of her stake and Bob only has $10,000 outside of his. Therefore, Bob is much more likely to invested in the success of the XYZ network than Alice since his stake represents a substantially larger portion of his overall finances.

There are 3 basic requirements to become a validator which have important implications on the incentive structure driving their actions towards honest behavior.

1.    Their identities need to be formally identified on-chain with the ability to cross-reference these identities through reliable data available in the public domain (such as a public notary database).

2.     Eligibility to becoming a validator must be difficult to obtain in order to ensure the long-term prospective position of the validator is one of clear incentive, both financially and reputationally, to remain an honest validator.

3.     There must be complete uniformity in the process for establishing validators.

There are a few platforms that implement slightly different variations of the above requirements that all focus on providing a financial incentive for the validator to remain as part of the network in the long-term and reputation as the disincentive to act dishonestly. Any validator who acts maliciously can easily be removed from the validation process and replaced. The end result for that validator would be a public hit to their reputation as well as a loss of future financial earnings. The use of reputation through identity is of especially particular relevance to contemporary times.

From a consensus model designed to overcome some of the inherent problems with the Ropsten test network to a formal validation method of public blockchains focusing on smart contracts, sidechains, and the immense industry of global supply chain tracking, Proof of Authority consensus is an important development in the further advancement of testing and implementing different consensus mechanisms.

Whether or not PoA consensus ultimately ends up primarily used in private and permissioned blockchains, or as a crucial sidechain to a public and decentralized network, is yet to be seen.