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Proof of Authority was proposed in 2015 by Gavin Wood, the co-founder of the world’s second-largest blockchain, Ethereum, and has since become a prominent consensus mechanism. There were two main drivers behind the proposal—the growing need to move away from the energy-intensive Proof of Work and addressing certain issues found in Proof-of-Stake.
Proof of Authority (PoA) is a type of blockchain consensus mechanism especially suited for private or permissioned blockchains. A consensus mechanism is a system that ensures transactions executed on the network are valid and that all participating users agree on the status of the ledger.
In the PoA method, identity and reputation are valued instead of cryptographic assets as in the case of Proof of Stake, or computational power in Proof of Work.
Blockchains can be categorized into two groups- permissionless and permissioned. Both types use the same basic technology, but they differ in terms of access and participation.
Permissionless blockchains are open access and anyone with the right equipment can participate. Permissioned blockchains, on the other hand, are private— all nodes must be pre-authenticated and network use is granted only by permission.
Where public, permissionless blockchains use consensus mechanisms such as proof of work and proof of stake, permissioned blockchains require alternative consensus algorithms.
One of which is Proof of Authority.
A permissioned blockchain running PoA doesn’t require “mining” of transactions. The purpose of mining is to provide an incentive for nodes to validate transactions and participate in maintaining an honest record of a decentralized public and permissionless blockchain.
But on a private blockchain where all the participating nodes are already identified and pre-authorized, there is no need to be incentivized. Therefore, there is no need for mining.
There is no need for nodes to solve complex mathematical problems in order to add a block to the chain. Instead, blocks are added to a permissioned chain when a majority of the pre-authorized nodes sign off on them.
To become authorized, nodes must prove their authority to do so by meeting certain conditions thus proving their long-term commitment to maintaining the blockchain.
This can be anything from being located in a particular country, being associated with the organization, having good moral standing and reputation, and having formal on-chain identification.
Proof of Work is a type of cryptographic proof in which one node (the prover) must prove to the other nodes (known as the verifiers) that they have expended a certain amount of a specific computational effort in solving the hash of a block.
When blockchain first began with Bitcoin, Proof of Work (PoW) seemed liked the perfect fit and served its purpose so well it was adopted by the majority of blockchains that followed. But as the use of blockchains has soared in recent years, it has exposed certain problems with the PoW system.
The main drawbacks are its huge energy consumption and its limited capacity to scale. It also requires specialized equipment and hardware, narrowing participation.
The time it takes to mine a new block is also much slower than other consensus methods. For example, it takes approximately 10 minutes to mine one Bitcoin block. This can cause long waiting times or expensive transaction fees.
Although there are faster PoW options such as Litecoin, with an average block time of 2.5 minutes, they are still hindered by the same environmental and scalability issues.
This consensus mechanism works by validators staking their coins in order to be in with a chance of adding a block to the chain and receiving the transaction. Instead of competing as miners do, validators are chosen at random.
Proof of Stake has been celebrated as a better alternative to PoW. It provides financial incentive for participants but without the huge computational effort of powerful computers that cause high energy consumption.
It has lower barriers to entry, is more efficient by bringing down fees and waiting times, and supports sharding which allows scalability.
BUT there is one major drawback of the Proof of Stake consensus algorithm.
It is generally accepted that the users staking coins will act in the network’s best interest, as bad actors risk losing their stake. We assume then that the bigger the stake, the more likely they are to be invested in the success of the network.
But what this doesn’t account for is that stakes of equal value may not be equally staked...
For example, say two people place a bet of $500. One has a total of $500,000 at their disposal, while the other has $1000. That $500 bet will be more valuable to the latter.
One of the main advantages of maintaining a network through Proof of Authority is that the validation process is simplified. PoA only requires a limited number of block validators to maintain the network.
Not only is this a highly scalable system, but without mining or staking, computational power and energy consumption is greatly reduced. There is also no need for expensive equipment or sophisticated hardware.
But the benefits of Proof of Authority consensus reach much further.
With POA, blocks are generated in a predictable sequence that takes into consideration the number of validators. Since validators are pre-approved, this allows for greater efficiency and a higher throughput rate compared to that of PoW or PoS.
With the PoW model, if a malicious actor took control of a majority percentage of the network’s computational power, they will be able to censor, reverse transactions or rewrite their own or other's transactions.
They would have the ability to create more hashes, i.e., do more “work”, meaning that they are able to validate transactions and add blocks quicker than the rest of the nodes. This would result in the attacker’s version of the ledger being accepted as the truth.
With the Proof of Authority consensus, an attacker would need to obtain control over 51% of the authorized entities which is much harder to do, especially when they aren’t directly connected.
A Denial-of-Service (DoS) attack on the blockchain would make it inaccessible to users. An example would be if an attacker flooded a network node by sending a huge number of transactions to crash the network. With the PoA consensus mechanism the network nodes are pre-authenticated and the right to generate blocks can be reserved only for nodes that have security in place to withstand a DoS attack.
Blockchain purists would argue that the PoA consensus mechanism strays from the key concepts of the blockchain such as decentralization, being a public ledger, and trustless.
PoA networks are typically used for private chains and participation as a validator is restricted to entities with established reputations that can meet certain criteria. This means that access is barred to most general users and the need for authorization introduces the element of “trust”.
The need to identify and trust the validators also means the consensus mechanism isn’t suitable for large public blockchains that have hundreds and often thousands of validating nodes. This smaller number of authorized nodes also makes the network less decentralized. Furthermore, validators are visible to anyone which could potentially lead to manipulation by a third-party.
As the blockchain grows, more and more businesses are realizing the benefits its technology brings. As a result, permissioned blockchains are growing in popularity, especially in industries where security, privacy, identity, and role definition are essential or where high transaction processing speed at low costs are most desired.
For example, supply chain management could utilize a PoA system with assigned validators from logistics partners, financing banks, and other involved vendors. Each separate entity could have its own permissions and a level of transparency that would streamline operations from tracking inventory to account monitoring and invoicing.
The system can also come in useful for sidechains or testnets such as Ethereum’s Kovan, Goerli and Rinkeby. They each use PoA consensus to provide a controlled environment for testing features before launching on the mainnet.
Although the Proof of Authority consensus mechanism may sacrifice some of the blockchain’s beloved characteristics. What it loses in decentralization it gains from lower energy consumption and environmental impact, higher throughput and scalability.