In a blockchain governed system all the transactions have to be recorded on a distributed ledger, the copy of which is carried by all the participating nodes. Miners or the validating nodes authenticate the transactions and record them on the global LEDGER by a process called mining and get rewarded with cryptocurrency to offset their cost of operation.
Once the block (or transaction structure) is mined all the nodes reach a common agreement about verification & security of the transaction and the consensus is reached. For BTC (Bitcoin) it takes approximately 10 minutes for a transaction to be confirmed or mined.
The Consensus algorithm is a way in which all the nodes reach a common agreement about the state of the global distributed ledger through the process of mining. It is a set of rules by which the whole group of nodes agrees to and it's the basis of updating the ledger which is distributed transparently amongst all the participating nodes.
A good consensus mechanism should be agreement seeking, collaborative, cooperative, egalitarian, inclusive, and participatory. As time has progressed new ways of consensus have been proposed in the industry the first one was Proof of Work (PoW).
PoW (Proof of Work)
The participating nodes solve a complex mathematical problem to authenticate a transaction. Once it's solved, the transaction is recorded in the blockchain. The node which solves the puzzle first gets the advantage of mining the next block and earning more cryptocurrency. It’s followed by major cryptocurrencies of the world: Bitcoin (BTC), Litecoin (LTC), Etherium (ETH), Monero (XMR), Dogecoin (DOGE). As all the nodes simultaneously try to solve the mathematical equation PoW requires extensive energy consumption.
Limitations of PoW
- Extremely high resource consuming: as the mathematical puzzles are complex by nature, it requires a lot of resources (hardware, energy, space, money) to mine. A lot of energy is required to keep the whole network of validators up & running, it is estimated that Bitcoin mining alone consumes ~0.5% of the world's electricity supply.
- 51% risk: if an entity owns 51% or more nodes they can corrupt the blockchain by gaining majority of the network
- Time consuming: miners have to solve the puzzle multiple times to match with the required nonce value, which also wastes energy for the unsuccessful attempts
- High transaction time: it takes 10-60 minutes to authenticate a transaction, so this does not support an instantaneous transfer of funds
PoS (Proof of Stake)
This consensus mechanism is based on the node’s coin stake. The nodes hold or lockup coins to validate the authenticity of transactions. Mining nodes having a higher percentage stake of total coin supply will get to mine more percentage of blocks. Mining rights are in proportion to stake in cryptocurrency. As the nodes get randomly selected for validation, they keep on attesting the transactions and when a required number of transactions are completed a block is formed. Cryptocurrencies using this mechanism are Peercoin (PPC), Nxt (NXT), BlackCoin (BLK), NovaCoin (NVC), CloakCoin (CLOAK), BitShares (BTS), NEM (XEM), Storj (STORJ), VeriCoin (VRC), ReddCoin (RDD).
Limitations of PoS
- Lack of initial Liquidity: The initial validating nodes are reluctant to transfer coins to other nodes as the opportunity to mine is directly proportional to the value of coins accumulated by the node
- Second Spend Chain: There is a possibility that the second spend may get recorded as a valid transaction. If a corrupt node build an alternative chain in secret and makes it public once it grows in size forcing the network to accept it as the main chain
- 51% risk: if an entity owns 51% or more of the currency they can corrupt the blockchain by gaining majority of the network
- Restricted Liquidity: As the network of miners grows more, native cryptocurrency becomes idle and can’t be traded as it is held by more nodes for mining
PoB (Proof of Burn)
Burning is a process of destroying a coin by sending it to a verifiable address that is unspendable. This method relies on the validating nodes burning their own coins to win the block rewards. Validators are granted access to authenticate transactions in proportion to the coins burned. It is implemented in conjunction with PoW, mostly to seed other coins by destroying the first one. This approach is used by Slimcoin (SLM) cryptocurrency.
Limitations of PoB
- Burning valuable BTC: At the initial stages nodes are reluctance to burning BTC to mine a young cryptocurrency
- Ecological Cost: It is not the most eco friendly mechanism as the BTC burnt are mined by utilising a lot of energy
- Higher Transaction Time: It takes more time to validate than PoW based blockchain
- Lack of Transparency: The unspendable address is not easily verifiable hence transparency is lacking, raising questions of decentralisation as a whole
A step towards sustainability: Proof of Transfer (PoX)
For consensus to be long term sustainable above shortcomings of PoW, PoS, PoB will have to be worked upon. Constructive progress has been made by Blockstack in Stacks 2.0 blockchain and Proof of Transfer (PoX) has been invented.
Introduced in 2020, PoX combines the merits of PoW, PoS, and PoB in one protocol. It has two types of participants:
- Validating nodes: they transfer BTC to the network & earn STX token as a reward for mining
- Stackers, or STX token holders: they receive BTC from validating nodes, an incentive to keep HODLing STX and receive more BTC in future
The process of mining is energy efficient and does not require large investments to set up hardware as at the primary level it uses consensus of the existing Bitcoin blockchain as base cryptocurrency, the mining is done through the following steps:
- Validating nodes transfer bitcoin to protocol defined address (Stackers). The coin holdings are maintained in a separate address which is not part of the consensus network.
- The bitcoin amount is used as input to a Verifiable Random Function (VRF)
- The output of VRF is used to elect a leader miner who appends the new block to the chain and earn STX as a reward
As it happens in PoB that a leader is elected to mint the next block, in PoX also a leader is elected. Instead of burning the coins they are transferred to Stackers which are nominated by the protocol itself. PoX leverages the existing PoW consensus of Bitcoin and enables smart contract & token creation on top of Bitcoin blockchain which was not possible earlier.
The traditional PoW based mining has a large economic & environmental cost. It is too costly for small players to participate in consensus because of the high costs. PoS suffers from a lack of initial liquidity making the adoption of technology difficult. In PoB miners fear burning BTC due to its higher future perceived value.
To ensure longevity & mass adoption of the digital ecosystem mining has to be made sustainable. Adapting to newer improved consensus mechanisms such as Proof of Transfer (PoX) used in the STX ecosystem can lead us in that direction. Combining the merits of the pre existing mechanisms can be helpful in countering the shortfalls and help in creating a powerful consensus protocol. Creating a conducive environment for micro & mini miners would be decentralization in a true sense.
This article is a repost of my recent Steemit article.