Summary of cryptocurrency consensus mechanisms

Summary of cryptocurrency consensus mechanisms
on June 4, 2018

There are currently two mainstream consensus mechanisms used by cryptocurrencies: proof of work and proof of stake. But other consensus mechanisms also exist and others are being researched. Here we present a short summary of each consensus mechanism.

It should be noted that all consensus work based on the same idea: it must be more expensive to defraud the consensus than the potential rewards presented by the block reward system. How exactly this is achieved is what differentiates each consensus mechanism. In all cases, participants must present proof of some value, whether it’s high energy consumption or proof of ownership of a stash of coins, participants offer the network a proof of their capacity to generate valid blocks or pay a high price for fraud attempts.

Proof of Work (PoW)

Using a brute force approach, miners compete to find block hashes beginning with a certain number of zeroes. The more zeroes, the more difficult it is to find such hashes.

All the computational power used in Proof of Work schemes which does not solve a block is wasted, which generates some criticism of this system at a time when renewable energy and conservation are being debated all around the world.

Basically PoW makes it too expensive to defraud the system by requiring expensive hardware and high electrical consumption during the mining process. While one Bitcoin block yields approximately U$ 100k in rewards at the time of the writing (June 2018 with Bitcoin at U$ 7800) it would currently cost around U$ 350k in electrical energy alone to defraud a block and there is a high probability that this attack would not succeed. Therefore attempting to hack a Bitcoin block would not yield any profits for scammers. By some estimates, the total cost of a Bitcoin hack attempt could pass the U$ 1 million mark for just 10 minutes. This fact is at the root of the Bitcoin blockchain integrity.

Most currencies currently use Proof of Work, a consequence of Bitcoin being the most popular crypto and having introduced this system in 2009. All first generation cryptocurrencies forked ideas off of Bitcoin, or forked the source code completely, then changed the cryptographic hashing function. For example Litecoin and Dogecoin changed Bitcoin’s SHA256 to scrypt.

Proof of Stake (PoS)

In a Proof of Stake system, participants stake a certain amount of cryptocurrency in order to mine transactions smaller than or equal to this amount. A staking user could stake 100k coins and mine transactions under 100k. If this user attempted to defraud the system, he would lose his 100k coins.

PoS is considered a much more ecofriendly mechanism than PoW since it does not involve high energy expenditure.

Examples of Proof of Stake coins include Cardano ADA, Dash, NEO, PIVX, OkCash, NavCoin, Stratis and others.

Proof of Authority (PoA)

Proof of Authority is a consensus mechanism where members of a cryptocurrency network are identified and receive delegated powers to solve blocks. If they defraud the system their identity is at stake and they will either be prosecuted or booted from the network.

This is a centralized system where a higher authority delegates mining powers to trusted parties. This system cannot work among anonymous parties and requires identification and trust in a group of people.

PoA is also more environmentally friendly than PoW as it does not use large amounts of energy during its operation.

POA Network uses PoA implemented in the Ethereum blockchain.

Proof of Space (PoSpace)

Proof of Space uses hard disk space as a value used to guarantee a participant’s stake in mining. By allocating disk space, the network participant provides value to the network which uses this space to solve computational problems.

Given low network bandwidth for a lot of regions, making it difficult to transfer large amounts of data to allocated hard drive space quickly, and considering the relatively inexpensive hard drive space, this system is not currently used on many mainstream cryptocurrencies.

BurstCoin uses the Proof of Space consensus algorithm.

Proof of Trust (PoT)

In a Proof of Trust system, users in a network gain trust as they participate in special activities within the network.

If a user tries to defraud the system, the trust is lost and they lose an equivalent amount in value (the cryptocurrency or token employed).

In a Proof of Trust system, “trust” is staked instead of tokens or coins.

Some Proof of Trust systems, such as COTI, combine Proof of Work and trust staking as a hybrid system of consensus.

Proof of Location (PoL)

Proving that you are at a certain location at a certain time, using a trusted location tracking device, can signal value to some cryptocurrency networks.

For instance if a blockchain application were to award users for being present at an event, a Proof of Location application would allow users to mine cryptocurrency for as long as they stayed in that location.

This is roughly the idea behind Geomining.

The Geon project, for example, uses Geomining to reward users who get close to a Geon, which is a virtual beacon that rewards Geon Coins to participants who get close enough to a specified geographic location.

If users were to attempt to defraud the network, an equivalent amount of Geon Coins would be lost when verified by other participants who were also close to the same geographic location.

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Proof of Beer Illustration Credit: National Numismatic Collection, National Museum of American History.