Even before Satoshi Nakamoto mined the Bitcoin genesis block, his peers in the cryptography community had noted that his pioneering electronic cash system “does not seem to scale to the required size” due to the reliance on Proof of Work (PoW).
So, as long as cryptocurrencies have been around, the blockchain community has attempted to find suitable alternatives for achieving network consensus. Along with its lack of scalability and relatively slow throughput, PoW is also extremely energy-intensive to run.
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Therefore, any alternative has to provide a considerable improvement in processing speeds. Ideally, it would be more energy-efficient, ensure minimal centralization risks, and secure enough to prevent attacks by malicious actors. Proof of Stake (PoS) was one of the earliest emerging alternatives, proposed as part of a hybrid model in the Peercoin white paper.
The integrity of a blockchain relies on the fact that there are enough participants validating transactions that act in the interests of the network. Therefore, all consensus models rely on gamification principles to reward participants for their positive actions.
In Proof of Work, miners expend vast amounts of computational energy (or work) to compete to become the first to solve a cryptographic puzzle. In doing so, they win the right to add a block of transactions to the blockchain and receive mining rewards along with a share of transaction fees.
In Proof of Stake, there are validators who win the right to validate a block based on the number of network coins they stake. The precise mechanics can vary, but in general, the right to validate is directly proportional to the coins staked by the entire network. So, if a validator holds 1% of the total coins staked, they’ll be able to validate 1% of the blocks.
There are a few risks associated with PoS. Firstly, if someone acquires enough coins (51% of the total stake), they could theoretically attack or close the network. However, it’s questionable why someone would want to compromise a network in which they hold such a significant stake.
Many PoS networks also use mechanisms such as ‘slashing,’ which takes a share of a validator’s stake to deter any behavior that could jeopardize the security of the network. A challenge with slashing is that it can happen even if the validator inadvertently does something construed as unfavorable.
Because PoS isn’t necessarily perfect in its purest form, several variations exist. These often allow coin holders to delegate or nominate validators, such as the Delegated Proof of Stake model deployed by EOS or Tezos’ Liquid Proof of Stake.
Proof of Authority was first proposed in 2015 by Dr. Gavin Wood, co-founder of Ethereum and Parity Technologies, the firm developing the Polkadot blockchain. Instead of offering up a resource like computing power or a financial stake, Proof of Authority (PoA) relies on validators staking their reputation.
Most public PoW and PoS networks allow anyone to join without revealing their identity. However, by definition, PoA validators need to make themselves known and are selected based on their trustworthiness.
Therefore, PoA tends to work better when deployed in private blockchains than in public platforms. For instance, Microsoft Azure uses Proof of Authority on the Ethereum implementation on its platform.
Like PoW and PoS, PoA also comes with its own set of limitations. Because the validators have to be identified, trusted, and selected by the network, the validating group is often relatively small. This offers the benefit of very high throughput, but it also means that PoA networks tend to be more heavily centralized.
Another limitation is that the requirement for network participants to be identifiable introduces the risk of corruption and manipulation. It also makes the group of potential validators necessarily quite small.
If you consider that the block rewards are visible to everyone in a public blockchain, it’s easy to see how much a PoA validator is earning. Therefore, the validator needs to be an entity that can establish trust and safeguard its assets effectively. This scenario is likely to exclude most individuals and smaller entities.
Like the proof methods before them, both systems have pros and cons. No developer or platform has yet managed to propose a consensus model that’s immune from problems or criticisms in the entire history of blockchain.
However, PoS and PoA can be viable alternatives depending on what the network aims to achieve and the expectations of its user.
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