Which blockchain consensus mechanism is the best fit for enterprises?
Recently we had been discussing the differences and nuances of existing blockchain consensus mechanisms that are Proof of Work, Proof of Stake, and Proof of History. You can check the coherent part here, here, and here.
⚙️ Briefly about PoW, PoS, PoH
Blockchain consensus mechanism by their inherent the way for the decentralized and distributed to function. Without a consensus, the majority of network participants cant agree on the current and further state and condition of decentralized networks like blockchain.
These mechanisms are responsible for the proper and safe transaction management within a blockchain and creating the new blocks that are being added to a chain.
Proof of Work is the most reliable consensus mechanism currently existing within systems. However, it has plenty of downsides regardless of its low level of scalability and tremendous energy consumption.
Proof of History is an innovative way of having the consensus running within blockchain networks. The way how it works has shown us that we can use cryptographic time-stamped that are hashed together with a transaction inquiry in order to verify the transaction consequence and keep a network running further.
Though, blockchains like Solana, which are running on a Proof of History, are making a huge step forward into processing transactions significantly faster. Proof of History hasn’t shown yet the actual downsides that can be potentially crucial, so developers are being careful with that.
Proof of Stake instead of cryptographic stamps and computing power from miners is using a stake of the value from actual blockchain validators.
Instead, PoS offers to every digital asset holder to put their coins at stake (in other words — to lock them in a network pool. That process is controlled by the smart contracts) in order to become a transaction validator on a blockchain network with PoS. Hence, networks as Ethereum blockchain require their validators to put at least 32 ETH at stake in a network pool in order to be chosen as a validator.
While the PoS method is bonded with a native coin currency of a blockchain it can be not that suitable for enterprises to go for it.
📝 Enterprises, blockchain adoption and PoS
Some blockchains do not need the creation of a native coin. Private blockchains, not public ones like prominent networks of Cardano, Ethereum, or Solana, strive for a mechanism that is going to work safely and efficiently for them. Therefore, there is nothing to stake for Private blockchains with a PoS mechanism.
We highly recommend you to read our post about the differences between Public and Private blockchains here, just to understand the important differences.
But here comes the solution. The Proof of Authority.
🔒 Proof of Authority
Plainly, the key idea of Proof of Authority (PoA) consists of the process of transaction validation by already pre-approved validators.
We could explain in really short, that instead of staking coins in PoS, in PoA validators stake their reputation. Validators nodes become pre-approved by a group of trustworthy entities within a network. So that is why Proof of Authority can be more efficient for private blockchains.
Validating pre-approved nodes put their identity at stake while the process is being governed by a Byzantine Fault Tolerance algorithm. BFT is this case can be possibly compared to an algorithm that helps to reach a consensus in a distributed system by ensuring all the participators of the chain that all decentralized nodes on-chain are not incorporating faulty transactions data. And if they possibly do, it helps to determine a malicious node and exclude it from the network.
So, it is not an easy thing to incorporate a bad actor node in a system like that.
However, in PoS staking of coins is something that incentivizes nodes’ trustworthiness by making an option of incorporating a faulty transaction completely useless, due to the number of coins staked, which is required to be by far highly valuable.
Whereas, in PoA the value of identity is hard to assess.
To conclude, PoA is better going for private blockchain, since it suits permission-based approval of nodes. Permission-based approval hence should be following an already existing trust to a particular group of nodes.
PoA is always based on these specific conditions:
- Only valid and confirmed identities of real validators. Validators cannot be anonymous conversely to PoS, PoW, and PoH
- Difficult and permission-based selection of validators by trustworthy entities on a network. A future validator must put his reputation at stake and be willing to long-term and reliable committing.
- Uncompromising validators selection process. All the validators should be assessed absolutely equally before approving them to perform within a network.
PoA and blockchain adoption in enterprises
PoA is continuously approving the assumption, that it is more suitable for enterprises. Although the PoA is permission-based, that is what enterprises need in order to keep their transaction data private and safe. When validators are being chosen without permission, there is no guarantee for enterprises to avoid data disclosure.
Many respectable enterprises are busy with blockchain adoption since the technology actually brings them immutable benefits. Supply-chain, Real-estate tokenization, and insurance business-main segment on board of blockchain adoption.
Almost in every blockchain adoption case, there was a use case of PoA in particular in order to run a network. For example, Microsoft Azure runs with PoA, Distributed Ledgers in banking and financial institutions like HSBC use PoA too, and the list goes on.
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Article author: Mariia Zavtur