The world of cryptocurrencies has changed a lot since the first transaction recorded on the Bitcoin Blockchain network. Along with the already known Proof of Work and Proof of Stake algorithms, other mechanisms were presented, seeking an alternative for reaching consensus in Blockchain networks.
The PoW consensus algorithm currently used by Bitcoin is the most reliable and secure in existence today. Although it's not that scalable. Bitcoin, as well as other Blockchains based on the PoW system, have very limited performance when it comes to the number of transactions per second (TPS). This limitation is linked to the fact that Bitcoin depends on a distributed network of nodes, which need to reach consensus and agree on the current state of the Blockchain. This means that before a new block of transactions is confirmed, it needs to be verified by the majority of existing nodes on the network. Therefore, the decentralized aspect of Bitcoin is not only delivering a secure and reliable economic system, but also limiting the potential for large-scale use.
Regarding the number of transactions per second, Blockchains that use the PoS algorithm usually perform better than Bitcoin. However, the difference is not that big. PoS systems have not yet managed to solve the scalability problem satisfactorily. In this context, the Proof of Authority algorithm is currently being implemented as a more efficient alternative because it is capable of processing a much greater number of transactions per second.
How it works?
Proof of Authority (PoA) is a reputation-based consensus algorithm that introduces a practical and efficient way to solve problems with Blockchain networks (especially private ones). The term was proposed in 2017 by the co-founder and chief technology officer of the cryptocurrency Ethereum, Gavin Wood.
The PoA consensus algorithm places more value on identities, meaning that validators of new blocks are not putting their coins at risk, but their reputations. Therefore, PoA Blockchains are protected by validation nodes arbitrarily selected by trusted entities.
The PoA model is dependent on a limited number of block validators, making it a highly scalable algorithm. Blocks and transactions are verified by pre-approved participants, who act as system moderators.
Therefore, it can be applied in various scenarios and is considered a valuable option for logistics applications. When it comes to the distribution chain, for example, PoA is considered a reasonable and effective solution.
The model allows companies to maintain their privacy while enjoying the benefits of Blockchain technology. Microsoft Azure is another example where PoA is being implemented. In a nutshell, the Azure platform provides solutions for private networks with a system that does not require a native currency like Ethereum's 'Gas', as there is no need for mining.
Proof of Authority vs Proof of Stake
Some consider PoA to be a modified and adapted version of PoS, prioritizing reputations over currencies. Due to the decentralized nature of most Blockchain networks, it is not always that the PoS algorithm can fit the needs of some companies and corporations. On the other hand, the PoA algorithm can represent a good solution for private Blockchains because its performance is considerably higher.
Conditions for Proof of Authority Consensus
Although conditions may vary from system to system, the PoA consensus algorithm is typically dependent on:
Valid and trusted identities: Validators need to confirm their real identities.
Difficulty becoming a validator: the candidate needs to be willing to invest money and put their reputation at risk. A difficult process reduces the risks of selecting questionable validators and encourages long-term commitment.
A standard for validator approval: the selection method must be the same for all candidates.
The essence behind the reputation mechanism is the certainty of a validator's identity. This cannot be an easy process nor can it be abandoned quickly. Need to be able to eliminate malicious participants. Finally, by making sure that all validators go through the same selection process, it is possible to guarantee the integrity and trust of the system.
Limitations
The perception that the PoA mechanism conveys is that it gives up decentralization. Therefore, it can be said that this consensus algorithm model is just an effort to make centralized systems more efficient. While this makes PoA an attractive solution for large companies and corporations with logistical needs, it also brings hesitation – especially in the field of cryptocurrencies. The systems have high performance, but aspects such as immutability are questionable when censorship and blacklists can be used easily.
Another very common criticism is that the identities of PoA validators are publicly visible. The argument used against this particularity is that only courageous and stabilized participants would be interested in the validator position (as a publicly known participant). Furthermore, knowing the identity of the validators could potentially lead to external manipulation. For example, if a competitor wants to change the functioning of a PoA system, he may try to influence publicly known validators to act dishonestly in order to compromise the functioning of the system from within.
Conclusion
PoW, PoS and PoA systems have their specific advantages and disadvantages. It is well known that decentralization is a very valuable factor for the cryptocurrency community, and PoA as a consensus mechanism sacrifices decentralization to achieve greater scalability. The characteristics inherent to the PoA system are a great contrast to what we know from the Blockchain world. Still, it presents an interesting approach and should not be remembered as a low-quality solution, as it can serve very well for Blockchain applications for private companies.