Bitcoin Mining and alternative Consensus Mechanisms

Most of our readers have probably already heard about Consensus Mechanisms and their purposes in general. Therefore we would like to refresh your memory about this topic in our today’s blog post and talk about various alternatives.

 

Proof of Work

The most widely known Consensus Mechanism is the one that Bitcoin is using, called “Proof of Work” (PoW). A short and simplified explanation of PoW with Bitcoin would be the following one: With PoW, computational power is used to secure the blockchain and to create new blocks. So-called “miners” (mining devices) are trying to calculate the hash of the next block. A hash is a word for a cryptographic algorithm that repeats a nonreversible, repeatable string of numbers & letters. Every block contains block header data and transactions. When a miner’s node receives new transactions inside the network, they include them into the actual block and go on with hashing. The first miner that finds the right solution (target hash) gets rewarded with a block reward in Bitcoins (actual reward is 12.5 BTC/block). Approximately every 10 minutes a new block is generated. Because of the increasing difficulty-level over time, miners need a lot of processing power and mining has really become a high electricity consuming activity nowadays. Of course, this energy consumption phenomenon of Bitcoin has attracted a lot of criticism lately but there are already a few alternatives to PoW that are far less energy consuming, although it is sometimes still controversial if other consensus mechanisms can meet the same security standards as PoW.

 

Proof of Stake

Another quite well known Consensus Mechanism after PoW is “Proof of Stake” (PoS). PoS is an alternative method by which a blockchain network aims to achieve distributed consensus. With PoS, the “forger” of the next block is usually selected with the help of one of the two most common block selection variants: “Random block selection” & “Age-based selection”. As the name already suggests, with “Random block selection” the forger of the next block is selected randomly by a formula that looks at the combination of the lowest hash value + the size of the user’s stake, for example, NXT. With the “Age-based selection”, the time span during which some coins have not been spent has to be multiplied with the size of the stake to determine who will forge the next block. Peercoin was the first cryptocurrency to implement “Age-based selection”. A sole selection of the next forger by account balance would not really be a good idea because in that case people with the highest balance would sign blocks all the time and this would lead to a quite centralized system. Compared to PoW there is no block reward in PoS and forgers earn only the transaction fees of the block they have signed. The good news is that PoS is far less energy consuming than PoW and therefore forgers do not have big energy expenses like PoW miners do. The more people participate and run a node, the more decentralized the system gets. One major (security) flaw that can actually be found in PoS is called the “nothing at stake” problem: “The ”nothing at stake” problem is grounded in the fact that voting on a particular version of a proof of stake blockchain requires no resources and therefore has no opportunity cost. Since there’s no opportunity cost to mining on a particular chain, the miners have ‘nothing at stake’. So rational miners should simply mine on every competing branch they see, so as to maximize the amount of mining returns they get.” – (Medium – @abhisharm)

 

Proof of Stake – Casper (Ethereum)

As most of you have probably already heard, Ethereum is planning to incorporate a new PoS protocol called “Casper” as a new consensus system for its blockchain. The goal is to switch away from energy-intensive PoW mining. Of course, this switch has to be executed carefully in order to not put Ethereum at risk. Additional security measures have to be taken into account in order to be able to implement PoS, for example by solving the “nothing at stake” problem that we already mentioned above. With Casper, validators stake some part of their ETH as collateral and start to validate blocks. They will then be rewarded proportionally according to their stake, but if they act in a malicious way, they will lose their ETH as a punishment. That is one of the main differences between Casper compared to other PoS protocols – malicious actions get punished and potential attackers have something to lose, so they cannot act like there is “nothing at stake”.

 

Delegated Proof of Stake

A quite interesting alternative form of PoS is called “Delegated Proof of Stake” (DPoS). With DPoS, not everyone can directly participate in the creation/forging of new blocks unless they get voted by the community to do so. Let us have a look at the example of Lisk to better understand how DPoS works: With Lisk, everyone can register in exchange for some fee as a delegate. But this does not mean yet that you will be able to participate in the creation process of new blocks. To qualify as an active forger you need to be voted by the community (all Lisk users can vote their delegates of trust and have a certain voting weight depending on their account balance). Only the top 101 most voted delegates are then allowed to forge new blocks. Every delegate who is actively forging can choose the percentage of his forged Lisk he will be sharing with his voters, and this, of course, provides an incentive for people to vote. The advantages of DPoS are a more democratic & efficient system to achieve consensus. Compared to Bitcoin with its 10 minutes average block time, Lisk’s current block time is only around 10 seconds to validate a new block with transactions. One of the disadvantages that may have to be considered in this system is that most of the top delegates form big groups together and oblige voters to vote for the whole group in order to get fully rewarded. If a voter does not do so, he will get a smaller percentage of rewards for not having voted the whole group. The result of this procedure only leads to an economic incentive but does not really support a democratic system.

 

Proof of Importance

“Proof of Importance” (PoI) is very similar to PoS and has been introduced by NEM. With PoI “forging” of new blocks is called “harvesting”. The main advantages compared to PoS are claimed to be “an importance score” and a security system that prevents the “nothing at stake” problem. The “importance score” does not only take the balance of some user into account but also his transactions frequency/ behavior, which leads to a final result that determines the chance of harvesting a new block. With this method users are encouraged to use and spread their coins instead of holding them and only concentrate wealth.

 

Proof of Burn

“Proof of Burn” (PoB) is an alternative to PoW & PoS that implies the “burning” of some PoW-mined currency by sending coins to an unspendable (not recoverable) address. These transactions are recorded on the blockchain and users get rewarded for doing this. The incentive mechanism of this method is to motivate users to sacrify some currency in the short run and to profit later on through the PoB reward mechanism by earning in the long run. The more currency a user is willing to lose at first, the bigger are his chances to mine a new block and get rewarded. On the one hand, an advantage of PoB could be seen in the long-term commitment for a project that users probably accept when participating in PoB activities. On the other hand, disadvantages are, for example, the fact that the more money you are able to burn, the more you will probably get, although there is no guarantee for a positive outcome, and that it only makes rich people richer. Furthermore, the burning process of some PoW coins can be considered as some waste of energy (first you use electricity to mine them, then you burn and make them unusable). An example for a coin that implemented PoB as consensus mechanism would be Slimcoin.

 

Proof of Authority

“Proof of Authority” (PoA) is an alternative form of PoS where identity & reputation count as a stake instead of monetary value. With PoA, validators have to be personally identified within the platform and it is necessary that their identity is true. With this form of consensus mechanism, validators reveal their identity in exchange for the right to forge new blocks, which means that all the benefits that validators earn from their activities are publicly visible but malicious actions are visible, too. This can be seen as a good incentive mechanism for validators to secure & preserve a network in the long-term because all their actions and activities are tied to their reputation.

 

Proof of Elapsed Time

“Proof of Elapsed Time” (PoET) is a consensus mechanism that has been introduced by Intel. “PoET relies on a special CPU instruction set called Intel Software Guard Extensions (SGX). SGX allows applications to run trusted code in a protected environment.” – (Medium – @kynan.rilee) Compared to PoW, this consensus mechanism tries to achieve the same result of distributed consensus without implementing an energy-consuming mining part. PoET works in the following way: First of all, there is a number of nodes in a blockchain network that create a random waiting time and start to wait. The node with the smallest random waiting time will be allowed to commit a new block to the blockchain and the “round” is finished. Then this process is repeated over and over again and in every round another node creates a new block. This is a similar workflow like PoW except that there is no mining activity and therefore far less electricity consumption.

 

Proof of Capacity

“Proof of Capacity” (PoC) works by allowing mining devices to use free available hard drive space to mine and commit new blocks to the blockchain. Mining devices can store lists of potential solutions on their hard drives even before the actual mining process begins. The more free space is available, the more solutions can be saved, and therefore the chance to find the target hash and to mine a new block is higher. Depending on how much free hard drive space is made available by a node to the network, rewards are granted proportionally in the form of native currency. Blockchain projects that use PoC as consensus mechanism are, for example, Filecoin, Storj & Burstcoin.

 

Tendermint (PoS)

Tendermint can be seen as a protocol for building blockchains that are Byzantine Fault Tolerant (BFT). It consists of two main technical components: “A blockchain consensus engine and a generic application interface. The consensus engine, called Tendermint Core, ensures that the same transactions are recorded on every machine in the same order. The application interface, called the Application BlockChain Interface (ABCI), enables the transactions to be processed in any programming language. Unlike other blockchain and consensus solutions, which come pre-packaged with built in state machines (like a fancy key-value store, or a quirky scripting language), developers can use Tendermint for BFT state machine replication of applications written in whatever programming language and development environment is right for them.” – (Tendermint Docs – Introduction). A project example using Tendermint would be Cosmos. 

 

Author:

Jean-Antoine Parrer, June 2018. If you have further questions regarding the content, please send an E-Mail to: jean.parrer@blockchainhub.net


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