When it comes to blockchain consensus you might have stumbled across “Proof of Work” or “Proof of Stake” but have you ever heard about “Proof of Burn”?
Blockchain technology is widely known for its integrity and consistency of shared data. In order to be safe from corruption, it needs a mechanism to ensure a consensus throughout the whole network.
The purpose of such a consensus protocol is to make the process of adding a new block to the chain so difficult, that it is not economical to create more than one block at a time. Users should be able to participate actively in establishing a consensus and get a reasonable reward for supporting the integrity and consistency of the network.
To ensure this approach is working, there are several different methods that can be applied. A very well-known method is the Proof of Work, which is used by Bitcoin. In the following article, you will find out how networks are protected from forks and manipulation.
Proof of Work
Bitcoin, the first implementation of blockchain technology, was a paradise for tech-enthusiasts when it first started. The consensus-driven algorithm Proof of Work (POW) made it possible to earn money, only using the CPU of a private computer.
How POW works is pretty simple. To add a list of transactions in the form of a block there has to be proof that the miner fulfilled a complicated task. This means the miner has to solve a cryptographic puzzle. The task is to compute a SHA256-hash using the data of the block. At the same time the hash has to be in a specific format, for example it has to start with “0000”.
Every 10 minutes on average, a miner can form a block that fits these requirements. Since the number of miners and their computing power has grown quite drastically in the last few years, the difficulty of the task had to be increased as well.
Some examples of where POW is/was used:
Proof of Stake
While Ethereum used POW at the beginning it later changed to Proof of Stake (POS). The basic idea of this blockchain consensus is that it is not a miner who did the computing that gets the rewards, but a miner who has invested more money. A dictatorship of the rich? Not completely.
In contrast to the Bitcoin network, mining Ether does not produce any coins. It is the so-called validator who earns Ether for a mining process that is quite different. Validators have to make a security deposit to start their work. The chance to complete a block rises according to the amount of the deposit.
Nevertheless, the winner is picked by default, so it is not clear from the beginning, who will be able to generate the block. Once the winner is picked, the whole network decides, whether the block is added or not.
To prevent validators from creating more than one block and collecting the transaction fees for all of them, they only get paid when the block has been added to the chain. As a result the manipulation of blocks should lose its charm.
Some examples of where POS is used:
Delegated Proof of Stake
Delegated Proof Of Stake (DPOS) is a very fast blockchain consensus-driven mechanism. It is renowned for its implementation in EOS. It is often referred to as digital democracy, thanks to its stake-weighted voting system.
In a DPOS system, users can stake their coins to vote for a delegate. The weight of their vote depends on their stake. For example, if stakeholder A stakes 10 coins for a delegate and stakeholder B only uses 1 coin, the vote of A is 10 times more powerful than B’s.
Anyone, who wants to create a block is called a delegate. The delegate who receives the highest amount of votes will produce the next block and get the reward for creating it. Just like with POS, they are either paid from the transaction fees or they are paid a fixed amount of coins, which is created through inflation.
Some examples of where DPOS is used:
Proof of Elapsed Time
The Proof of Elapsed Time protocol (POET), created by Intel, is part of the open-source project HyperLedger of the Linux foundation. The way it works is comparably easy to understand: In a trusted execution environment a lottery is started in which everyone can participate. The winner is picked based on who first finishes the waiting time. The winner is called ‘Leader’ and will be allowed to create a new block.
For this to work, two requirements must be fulfilled. Firstly, did the lottery winner actually generate a random waiting time, as a participant could intentionally choose a short waiting time and win. Secondly, did the lottery winner finish waiting for the specified amount of time?
In comparison to decentralized networks, a lot of trust in the provider of the service is needed, but it also has one big advantage: While it works similarly to the POW it only needs a fraction of the amount of electricity. Instead of being resource intensive, it allows a miner’s processor to sleep and switch to other tasks for the specified time, thereby increasing its efficiency. To cut a long story short, while the POET protocol offers a cheap service it heavily depends on trust throughout the network.
Other blockchain consensus models
There are many more blockchain consensus models, too many in fact to explain them all in detail. While the ones mentioned above are the most used models, there are smaller projects and protocols, some of which are not in use at all. Proof of Burn for example. In this system operating miners have to destroy coins by transferring them to a wallet, which can only accept coins. The more coins that are spent, the greater chance of being chosen as the winner.
Another not well known but interesting protocol is called Proof of Authority (POA). In networks using the POA protocol, miners need a good reputation when they want to build a new block. These block validators act as moderators of the network. This system is extremely scalable because of the limited number of needed block validators.
The POA algorithm can be used in many different cases and is very popular in logistics. For companies that especially want to keep their privacy while using the blockchain, the POA is an option.