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An Overview of Proof-of-Authority Consensus Mechanism in Crypto

Key Takeaways

  • Proof-of-Authority (PoA) is a consensus algorithm that uses the validator’s authority to give rights to verify transactions. A node must first pass a preliminary authentication to become a validator. 

  • It is taught to be an upgraded form of proof-of-stake; instead of a stake, the validator’s authority is used to give rights to verify transactions. Furthermore, PoA has higher throughput and scalability as compared to PoS.

  • PoA is a highly scalable solution for private blockchains as it only supports a limited number of validators, and the validators are also preapproved, making the system fault-tolerant. Although PoA is compatible with public blockchains, it is preferable to employ it in private blockchains due to privacy issues associated with the identity of validators.


14 Jan 2023 By : Anirudh Trivedi
An Overview of Proof-of-Authority Consensus Mechanism in Crypto

Consensus mechanisms are a crucial evolving aspect of blockchain technology. Choosing the consensus algorithm is one of the most important decisions while designing a blockchain system. In addition to the well-known Proof-of-Work (PoW) and Proof-of-Stake (PoS) algorithms, other consensus mechanisms have emerged. 

Proof-of-authority (PoA) is one such consensus algorithm that requires fewer computing resources than Proof-of-Work and has been presented as a better energy-efficient alternative to Proof-of-Stake. Let’s have a detailed look at it. 

What is the Proof-of-Authority?

Proof-of-authority is a consensus algorithm that provides a scalable solution for blockchains (especially private ones). It is taught to be an upgraded form of Proof-of-Stake; instead of a stake, the validator’s authority is used to give rights to verify transactions. This term was coined by Gavin Wood, co-founder of the Ethereum blockchain. VeChain (VET) along with Ethereum testnets such as Kovan, Goerli, and Rinkeby are some of the popular platforms that employ a PoA algorithm. 

The Proof-of-Authority (PoA) consensus method grants a limited number of blockchain actors the authority to validate transactions or interactions within the network. Nodes that have demonstrated their authority in PoA get the right to generate new blocks. A node must first pass a preliminary authentication to get this power and the ability to verify transactions and add new blocks. These reliably validated machines, or validators, are pre-approved and safeguard PoA blockchains by validating blocks and transactions. 

Why do we need Proof-of-Authority?

PoA, like PoS, has similar benefits to PoW; they both eliminate the need to spend a large amount of electricity to validate the blocks. However, in PoS, the blockchain participants with the greatest stake in it are chosen by the algorithm to validate the blocks. Proof-of-Stake is based on the assumption that those with a stake in a network are incentivized to act in its best interests. All else being equal, the greater one's stake, the greater one's interest in preserving the system.

Accordingly, the major flaw in such a concept is that the same-sized stake may be valued differently by different actors. For example, consider Person X, who is an early adopter of blockchain technology with a sizable portfolio of digital assets, and Person Y, is a newcomer who is just getting started in the emerging token economy. 

Assume that they both have 500 Coin Gabbar Tokens (CGT). When we compare their other holdings in detail if 500 CGT represents only 1–5% of Person X's total wealth while representing nearly 40–50% of Person Y's. Even though they both have a stake in Coin Gabbar, Person X may be less concerned with it than Person Y. As a result, X’s desire to act in the best interests of the network may not be as strong as Y's, or any one of them could be a bad actor. Hence, this makes the staking algorithm of PoS uncertain and unreliable as it is unable to find bad actors. 

Proof of Authority (PoA) uses the validator's identity as the stake instead of a monetary value. Identity refers to the correspondence between a validator's personal identification on the platform and officially issued documentation for the same person, i.e. the certainty that a validator is who they claim to be. PoA is an alternative consensus mechanism in which nodes are explicitly allowed to validate blocks while ensuring that all validators value the network similarly, regardless of other circumstances.

The identity mechanism brings the essence of certainty that a validator's identity is correct. This cannot be a simple or easily abandoned process. It is highly capable of filtering out bad actors. Finally, ensuring that all validators follow the same procedure ensures the integrity and reliability of the system.

How does the Proof-of-Authority work?

In PoA, the working is quite similar to other consensus mechanisms, the only difference is in the selection process of validators. In PoW, the validators, or miners, mine native cryptocurrency with their computational power; conversely, in PoS, the validators are selected based on their stake in the network. However, in PoA, the validators are selected by going through the process of personal identity authentication. 

Depending on the scheme chosen, one or more validating machines are in charge of generating each new block of transactions that will be added to the blockchain. By reaching a uniform agreement among the majority authority nodes, or validators, the new block is accepted directly without any further verification. 

Transactions and blocks in PoA-based networks are validated only by approved accounts. Validators use software that allows them to validate and group transactions into blocks. The process is automated, so validators do not need to constantly monitor their computers. Validators generate blocks in a sequence at predetermined time intervals.

After validating a block, validators earn incentives by associating a reputation with an identity. Unlike PoS, the incentives are balanced. PoA only permits non-consecutive block approval from a single validator, implying that the risk of serious damage is centralized at the authority node. It requires keeping the authority node uncompromised to receive incentives. 

Advantages of Proof-of-Authority

  • PoA has a higher transaction volume as compared to other consensus mechanisms i.e. more transactions can be executed per second. It is due to the fact that authorized network nodes generate blocks in a sequence at predetermined time intervals. This accelerates the validation of transactions. 

  • In contrast to PoW consensus, fewer computational resources are required. It is not necessary to have high-performance hardware. PoA consensus does not necessitate the use of computational resources by nodes to solve complex mathematical tasks, which makes it far more sustainable.

  • PoA provides assured network security against 51% Attacks. Risk tolerance is high as long as the majority of nodes are not acting maliciously. 

  • Because PoA only supports a limited number of validators, it is highly scalable. This makes the PoA protocol an excellent choice for permissioned or private blockchain networks.

Limitations of Proof-of-Authority

  • PoA is considered a centralized mechanism as validators are preapproved. This consensus algorithm model was developed primarily to improve the efficiency of centralized systems. While this makes PoA an appealing solution for large corporations with logistical needs, it does raise some concerns in the cryptocurrency context of decentralization. 

  • Another common and critical issue is that the identity of PoA validators is accessible to anyone. Knowing the identity of the validator may allow third parties to control and manipulate the system. For example, if a competitor wishes to disrupt a PoA-based network, he may attempt to persuade publicly known validators to commit fraud to compromise the system from within.

  • The system is heavily reliant on validators. As a result, they must be chosen deliberately rather than at random. Hence, it is not recommended for use in public networks or permissionless blockchains.

  • Because reward collection in a public network is visible to everyone, it is easy to predict an account's balance, making it less secure.

  • On a permissioned network based on PoA, becoming a validator is also difficult.

Applications of Proof-of-Authority

  • The PoA consensus algorithm can be used in various scenarios and is thought to be an excellent choice for logistical applications such as supply chains. The PoA algorithm's transparency and speed enable logistics operators to track any product in real time for maximum delivery efficiency.

  • One of the use cases identified by the PoA algorithm is the development of online games that can be scaled significantly while achieving authority consensus. Microsoft has integrated a PoA-based protocol into Xbox Live to manage content rights and royalties.

  • The Proof of Authority model allows businesses to maintain their privacy while benefiting from blockchain technology. Another example of PoA implementation is Microsoft Azure. The Azure platform provides solutions for private networks with a system that does not require native currency such as ether gas on Ethereum. Azure nodes have already been chosen.

  • Proof-of-Authority favor private blockchains, which are frequently used by players in the banking sector, such as JP Morgan with the JPMCoin, which use this technology to facilitate the audit of their fund's movements, primarily for accounting purposes, at a lower cost.

Conclusion

Each consensus mechanism has its own set of benefits and limitations. PoA is compatible with both public and private blockchains, but it is preferable to use PoA only in private blockchains due to privacy issues related to the identity of an individual.

The inherent characteristics of PoA systems are in stark contrast to how blockchains have previously operated. Proof-of-Authority as a consensus mechanism sacrifices decentralization to achieve high throughput and scalability. Nonetheless, PoA is an intriguing approach that should not be overlooked as an emerging blockchain solution that is well-suited for private blockchain applications.


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