Kryptolesson #32

What is Proof of Authority (PoA)?

If engaging within the blockchain space, one likely has heard about Proof-of-Work ↗ (PoW) and Proof-of-Stake ↗ (PoS) consensus mechanisms. Yet a noteworthy third consensus mechanism is the so-called consensus mechanism of Proof-of-Authority (PoA). Consensus mechanisms specify how a new block of data is created and is approved. Generally, a new block is proposed by one network node, and then needs to be agreed upon by all other network participants before added to the chain. Therefore, is of imperative to secure that nodes fulfilling these tasks are good-willing and trustworthy (i.e. behave in the sense of the network and do not attempt to manipulate transactions on blocks).

This KryptoLesson will guide you through the evolutionary origins of today's three major concepts of proposing and agreeing on blocks. Beginning with a review on Proof-of-Work and Proof-of-Stake, it ultimately leads to explaining Proof-of-Authority as mechanism for block validation and extension in comparison to those.

Back at square one, there was Proof-of-Work...

Bitcoin was the first implementer of blockchain, and constituted Proof-of-Work. Here, the right to propose a block is potentially available to every node in the network - what fosters decentralization. However, the PoW mechanism consumes large amounts of electrical power, as it requires these nodes to compete in completing a computationally intensive task in order to be entitled to propose a new block to the blockchain. Also, although block mining is theoretically accessible for everyone, it poses some limitations for average network users as:

  1. Particular hardware is required to effectively participate in the mining process, resulting in high entry barriers.
  2. due to high energy consumption, mining is only profitable where electrical energy costs are low, bringing forth some geographical concentration.

‍…then, to solve issues of PoW, Proof-of-Stake was invented…

‍The Proof-of-Stake consensus mechanism was developed as partial solution to the named critiques of PoW. PoS substitutes electrical power with the power of capital as a basis for the incentive system. In PoS, block proposers are selected based on how much capital (in the currency of native tokens of the blockchain) they lock in (i.e. stake ↗) for this purpose. The higher amount of tokens someone is willing to stake, the higher become chances of being selected to propose the next block.

The idea beind PoS is that the more financial capacity someone locks in for the purpose of keeping up a system, the more unlikely it is that this person's intent is to harm this system. Here, we come to the major critic point of PoS consensus mechanism: Is this assumption reasonable? If, for example, two users each hold 100 coins, there is no rational proof possible that it has the same subjective value to them. For example, if person A holds additional 1 million euros in other investments, he may deal differently with it than person B, who holds no more financial assets besides the 100 coins.

…and now, Proof-of-Authority is a prosecution of the idea behind PoS.

Proof-of-Authority is a continuation of the presumption behind PoS that suggests the more resources someone is willing to devote for supporting a system, the more unlikely is this person's intending to harm this system. What PoA does is that it replaces financial capital with one that might possess more equal worthiness in-between nodes: identity.

To become a validator node in a PoA network, a node must pass a predefined application procedure that is backed pre-approved participants (i.e. moderator nodes). The applying candidate node must submit its real identity and pass an impartial process to qualify as trustworthy. Once accepted, the node becomes a validator node and can thus verify blocks and transactions. If the node processes a fraudulent or malicious transaction, it is losing its status as validator node and its identity is revealed as a negative reinforcement, resulting in reputational loss.

‍The reveal of real identity in combination with the risk for reputational loss sets a hurdle for participants with malicious or fraudulent intentions. As a result, the mechanism of PoA for block proposing and validation is generally viewed as comparably secure, however there is no true guarantee that the loss of reputation serves as “enough” downside to deter network nodes from attempting manipulation attacks. The computational power required for this algorithm is far lower than in PoW and typically also lower than in PoS, resulting in less energy consumption. Unlike to PoS, no staking of coins is required in order to participate in the transaction validation process, which shapes participation conditions equal to users regardless of amounts of capital. PoA relies on a limited number of block validators increasing efficiency, scalability, and reducing the degree of decentralization. It is for this reason that PoA tends to get employed in private blockchains. With that said, PoA has other specific use cases than PoW and PoS that are rather deployed in public blockchains. We today face a legitimate co-existence of PoA with PoS and PoW within the blockchain space, as each suits the particular needs of users.

Photo by Denys Nevozhai