Proof-of-Authority (PoA): A New Way to Power the Blockchain
Blockchains have always needed a way to verify transactions, but figuring out the best way to achieve that has always been tricky. First there was proof-of-work, then proof-of-stake, but now there’s a new kid on the block: Proof of authority. What’s it all about, and is it likely to take off?
Cryptocurrencies couldn’t exist without consensus mechanisms to verify transactions. If you’re clued up about the crypto world, you might have come across proof-of-work and proof-of-stake already, and we’ve compared the two. Yet proof-of-authority still remains relatively unknown.
If you’re curious about what the method involves and if it could be the “next big thing,” we’re here with all the answers. We’ll run through what proof of authority is, current examples, and how it compares to other consensus mechanisms.
Blockchain technology relies on decentralized ways of verifying transactions. While banks and payment processors use centralized authorities to oversee payments and check everything is legitimate, blockchain leaves this responsibility to “nodes” (different computers in the network) to ensure it can remain decentralized.
This is usually achieved by giving nodes an incentive to make the right choices and negative consequences for misbehaving. However, there are a few ways to achieve this.
Bitcoin relies on proof-of-work, which involves nodes mining using computer power, but this method has largely fallen out of favor due to its energy inefficiency. Then there’s proof-of-stake, which remains popular (more on this later). But for now, we’re focusing on PoA.
What is proof-of-authority (PoA)?
PoA gives the ability to validate transactions to a select few nodes (also known as validators). These are preapproved users who may be selected in different ways. When they validate transactions, these nodes are effectively staking their own identity and reputation—if they misbehave (i.e., adding fraudulent transactions), it will reflect poorly on them.
This can be implemented differently between blockchains. Some may require the validators to vote on transactions, while others let any validator implement any change. However, because there is usually more than one node with the ability to validate—and each validator monitors the others, they can effectively shame each other into acting honestly.
Under this system, validators aren’t in competition with each other. This is a far cry from proof-of-work, and it helps to make PoA more energy-efficient (especially considering the validators don’t need any expensive equipment to do their jobs). A portion of the energy “saved” can then be channeled into processing transactions and updating the blockchain more quickly.
On one hand, the efficiency of PoA is one of its greatest advantages. Yet some may see the lack of nodes involved as a potential threat to decentralization, which is one of the primary aims of blockchain technology. By design, only a few people validate transactions under PoA, rather than the entire network playing a role. Plus, the approval process raises more questions. Would a protocol have to know a node’s true identity and check their criminal record to determine whether they’re reliable and put their reputation on the line?
These are the challenges PoA faces if it wants to be embraced by the crypto community.
Examples of PoA
PoA is an unknown and under-discussed consensus mechanism for the most part—due to its lack of decentralization, it’s not particularly popular in the blockchain world. However, there have been a few use cases.
One of the main cryptocurrency protocols using PoA is VeChain. Unlike most other cryptocurrency projects, the protocol aims to find a balance between centralization and decentralization to achieve its aims, meaning it wasn’t fazed by the downsides of PoA. In fact, VeChain has bypassed the need for anonymous block producers and opted for a few so-called Authority Masternodes to validate all transactions, who are handpicked by the project’s committee.
Another potential example of PoA is JPMorgan’s JPM coin. Although the finer details of the projects are mostly under wraps, JPM was built on the blockchain Quorum, which is similar to Ethereum but “permissioned” rather than permissionless. Like VeChain, the project embraces centralization, and uses a consensus system similar to proof of authority. Governments and banks looking to adopt blockchain technologies in some form are some of the most likely candidates for using PoA, as they’ll want their own teams to be able to maintain control over transactions.
Then there are protocols with similar ideas. IOST’s proof-of-believability calculates a believability score for validators based on their past performance, but maintains some decentralization by choosing validators at random. Clearly, it’s still all to play for when it comes to the proof-of battle.
PoA vs PoS
To understand PoA and figure out if it’s bringing anything worthwhile to the table, it’s important to compare it with PoS. PoS is generally viewed as the gold standard in transaction verification (sorry PoW, you’re too slow).
PoS and PoA both rely on some forms of staking. But while PoA is all about putting your reputation on the line, PoS involves risking your finances. In PoS, nodes are tokenholders of a particular cryptocurrency, and when validating transactions, they’re staking their own holdings. They’ll receive a reward if they make the right decision, and a penalty if they’re dishonest.
Although PoS is mostly viewed as a more decentralized option, it faces its own set of challenges. If one individual holds a high amount of tokens, they yield disproportionate power in the network, threatening decentralization. This becomes especially problematic when the identities of these individuals are unknown.
Ultimately, they both have their pros and cons. PoA can work well for smaller projects or more traditional or institutional organizations that want to maintain centralization, like banks. However, its lack of decentralization will likely always make it unpopular among crypto enthusiasts.
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