Blockchain Consensus Protocols – A Guide for Investors
Public blockchains have become quite popular in the world of binaries as Satoshi Nakamoto, creator of Bitcoin, made everyone aware of its benefits. However, it doesn’t mean that a trader should not search for less centralized and faster algorithm. Due to the global functionality of blockchains, efficient and secure consensus algorithm is required, as it helps in making sure that each block (a set of transactions) in the blockchain is one and only version. It also keeps attackers at bay so that they cannot disrupt the system.
Consensus algorithm is just like proof of work, wherein, miners compete with one another to form the next block in a blockchain by solving a really difficult cryptographic puzzle. However, proof of work is criticized for not scaling well and also for mining in the regions with cheap electricity.
Keeping in mind the need to have less centralized, energy efficient and faster consensus algorithm, there are a few alternatives that can be used.
Proof of Stake
It is the most common alternative to proof of work. In case of “Proof of stake”, a validator or a person who holds a stake in the system put his money in the coins of this system instead of wasting it on computer equipment for mining block.
The term validator is used because there is no existence of coin mining in proof of stake. A validator with 400 coins will have more chance to be selected as compared to the one with 200 coins, because the selection is done on the basis of how many coins you own in a system. Once a block is created by a validator, it has to commit to a blockchain. It is handled differently in proof of stake as each system varies from the other.
Proof of Activity
To keep the currency from flooding the system, bitcoin will only ever create 21 million bitcoins, which means, the block reward subsidy will eventually stop and the only thing miner will receive is a transaction fee. It is also speculated that it may cause security issues. This is why proof of activity is created, which serves as an alternative incentive structure for bitcoin. It is a combination of proof of work and proof of stake.
In this system, mining occurs in a traditional manner (proof of work) and mined blocks do not contain any transaction. At this point, the system switches from proof of work to proof of stake, wherein, a random validators’ group is selected to sign a new block. If any validator is not available for block completion, the next block is chosen along with a new group of validators. This cycle goes on in a similar fashion until the correct amount of signatures is received from a block.
Just like proof of work and proof of stake, it consumes a lot of energy and discourages a validator from signing more than once.
Proof of Burn
In this system, coins are burnt by being sent to address where they cannot be retrieved. Since the coins are irretrievable, it gives a miner lifetime privilege to mine on the system via a random selection process. The more coins burned by miners, the better are their chances of being chosen for the next block. Although, it is a reasonable alternative to proof of work, yet, it needlessly wastes resources. Moreover, only those miners get to mine on this system who agree to burn their coins.
Proof of Capacity
In case of proof of capacity, miner pays with his hard drive space. The miner with the highest hard drive space has the most chances of being selected for mining the next block and winning a block reward. Before a miner begins mining in the system, the algorithm creates huge data sets called “plots” that are stored on a hard drive. Miner with most plots has a higher chance of finding next block in the blockchain.
Proof of Elapsed Time
Chipmaker Intel has created its own alternative known as the proof of elapsed time. It is similar to a proof of work, but consumes relatively less energy. Moreover, its algorithm uses TEE (Trusted Execution Environment) to make sure that production of blocks happens in a random lottery manner and does not require work. This algorithm scales to hundreds of thousands of nodes and runs effectively on any Intel processor with SGX installed. Its approach is dependent on a guaranteed wait time offered via TEE. However, the only issue with this system is that it asks you to rely on Intel and does not put trust in third parties.
(Guestpost by Coinbanks platform)