Evaluation of Blockchain Consensus Algorithms

Since the dawn of the Internet, value transmission has always been a problem. The open nature of the Internet allows anyone to copy and propagate information without repercussions. Because of the infrastructure that involves the transfer of packets in a predefined protocol, it is easier to copy stuff on the Internet than to gulp down water. There arose a need for a protocol that could propagate with the same speed but does allow replication. A protocol for transferring value was needed.

On the face of it, a digital currency sounds impossible. However, suppose some person – let us call her Alice – has digital money she wants to spend. If Alice can use a string of bits as money, how can we prevent her from repeatedly using the exact bit string, thus minting an infinite supply of money? Alternatively, if we can somehow solve that problem, how can we prevent someone else from forging such a string of bits and using that to steal from Alice?

Bitcoin’s Proof-of-Work solved just that impossible problem. Moreover, the solution was so elegant that nobody could explain why it was not thought of earlier because nothing in the solution was new. On the contrary, it was a mixture of everything that had already been discovered.

Innovation did not take much time for innovation to start on PoW itself. Several interesting ideas were proposed in rapid successions that either solved some more problems or cut through hassles.

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With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.” – Satoshi Nakamoto, Bitcoin open-source implementation of P2P currency

Let us understand a little bit about each consensus algorithm first to decide for ourselves!

POW vs. POS vs. POI vs. dPOS

What is Proof-of-Work (POW)?

By combining an authentication of work with information transfer, Satoshi Nakamoto outlined a system for discouraging duplication in his original Bitcoin whitepaper and incentivizing the gatekeepers who keep the network in check. Proof-of-Work solved diversity in the only remaining void that needed to be filled on the Internet.

The PoW idea was originally published by Cynthia Dwork and Moni Naor in 1993, but the term “proof of work” was coined by Markus Jakobsson and Ari Juels in a document published in 1999.

Proof of work is a consensus protocol introduced by Bitcoin and used widely by many other cryptocurrencies. This process is known as mining, and as such, the nodes on the network are known as “miners.” The “proof of work” answers a mathematical problem that requires considerable work but is easily verified to be correct once the solution has been reached. The proof of work system is designed to be difficult and requires significant computing power. As a result, more and more users come in to ensure that too many Bitcoins are not mined too quickly, preserving a consistent supply and incentive for miners to maintain the network.

Essentially, the security of the network is enforced physically by specialized hardware. As such, proof of work can be seen as not being an infinitely scalable protocol since the hardware and the electricity spent to power that hardware is limited in resources.

What is Proof-of-Stake (PoS)?

In proof of stake, besides incentivizing honesty, dishonesty is discouraged. – Mohit Mamoria, Is Proof of Stake the solution?

Proof of Stake takes away the energy and computational power requirement of PoW and replaces it with a stake. A stake is an amount of currency an actor is willing to lock up for a specific time. In return, they get a chance proportional to their stake to be the next leader and select the next block.

PoS uses a time-stamping method to reach a consensus about a block by betting on it. This process alone opens a variety of criticisms. The betting amount is said to be 10,000 ABCoin, and the average holder has about 20 ABCoin. Therefore, anyone with the minimum betting requirement is bound to get richer with each block while the others wait for the chance to place a bet. Not everyone can afford to be a staker. It can be argued that over a period, the gap will become significant; therefore, the power to influence the ABCoin network will lie in the hands of a few, not unlike the current state of the Bitcoin PoW network.

What is Proof-of-Importance (PoI)?

Proof-of-Importance (PoI) can be considered New Economic Movement’s (NEM) most standout innovation. PoI, as a reward structure, is different from Proof-of-Work and Proof-of-Stake as it removes all the perceived drawbacks both algorithms carry, such as mining monopolies and significant stake hoarders. PoI algorithm calculates the weight of an address’s contribution to the network, i.e., the stake, transactional history, and amount of time spent on the network. Each transaction (above a minimum size) contributes to the POI score and increases the chances of harvesting a block and collecting rewards. To relegate the risk of artificially increasing transactions and importance score by going back and forth between the same wallets, the algorithm takes only net transfers into account. 

Say ABC, a registered user on the NEM blockchain, has more than 10,000 vested tokens (the amount unspent and unmoved for a few weeks) transacts on the network. The Proof-of-Importance algorithm ranks ABC based on his vest and traffic contributed to the network, using it to delegate the process of computing transactions, verifying the block, and collecting rewards called Delegated Harvesting. ABC’s importance also allows him to push his transactions and messages ahead of accounts with lower importance scores, meaning PoI can also be used as a reputation metric.

Each account has a Proof of Importance (PoI) score determining its chances of harvesting a block. With delegated harvesting, ABC is lending its POI score to a remote node, increasing its chances of gathering a block on its behalf.

What is delegated Proof-of-Stake (dPoS)?

“Delegated Proof of Stake (otherwise known as DPoS) is a consensus algorithm maintaining irrefutable agreement on the truth across the network, validating transactions and acting as a form of digital democracy.” – Lisk.io

At its core, DPoS seeks to speed up transactions and block creation while not compromising the decentralized incentive structure at the heart of the blockchain. DPoS proclaims itself to be an improvement to the highly flawed Proof-of-Stake consensus mechanism.

There are three main characteristics in the DPoS system; Witness, Voting, and Delegation.

In essence, Users are asked to ‘delegate’ their ‘voting’ power to other users they trust to vote for ‘witnesses’ on their behalf. By claiming that their incentives and structures enhance their blockchains’ security and integrity, and each user is incentivized to perform their role honestly, PoI proclaims its higher ground against PoW and PoS. It requires no specialized equipment to become a user, witness, or delegate. A typical computer with sufficient GPU is more than enough to participate in the campaign. Most importantly, PoI is energy efficient compared to power-hungry Proof of Work hashing algorithms.

Conclusion

This question has been the central point of a lot of fiery debate. Everyone seems to have an opinion of their own. The stage is not unlike a street fight, where members of both sides go down to calling each other names, exchanging abuses, and branding the other side as un-visionary. Most bitcoin maximalists side with PoW, recounting the game-theoretic incentive structure it implements to solve the age-old Byzantine Generals’ Problem. Other skeptics argue that PoW isn’t worth all the energy consumption it brings along. But, then, the other side proudly proclaims the simplicity and elegance of Proof-of-Stake, Proof-of-Importance, and similar concepts that implement all of PoW’s infrastructure, excluding its infinite appetite for energy.

Without constructive criticism, moving ahead and leaving behind all the flaws is impossible. To side with a particular mechanism cannot be seen as the right thing to do, as many intellectually capable people are behind each side. Numerous research papers, articles, and discussions have been put forward, arguing for both sides of the debate.

Experimentation had been steadily going on, such as Ethereum’s much-awaited Casper FFG, with its planned shift from PoW to PoS, making all the hardware devices dedicated to the network obsolete. It would also mean an increase in adoption as it becomes more cost-effective to be a part of the network. Similar advancements are also being implemented by EOS, NEO, XEM, Reddcoin, and so on, trying to sway the market toward the staking mechanism. Some algorithm iterations, such as delegated Proof-of-Stake (dPoS) and Hybrid PoS + PoW, are also being experimented with.

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It remains to be seen which way the market sides and which algorithm pushes itself toward the top. Nevertheless, one thing is for sure. The general audience will benefit from the community’s internal fights, bringing about greater competition and higher prospects.