Most blockchains use well-established and reliable proof-of-work (PoW) and proof-of-stake (PoS) consensus algorithms, but many networks have been implementing alternatives for several years. Cryptocurrency experts believe that these alternative consensus mechanisms will help to solve some of the problems that plague the blockchain, particularly the decrease in performance that emerges as network loads increase.
Proof-of-authority (PoA) is a consensus algorithm proposed in 2017 by Gavin Wood, a co-founder of Ethereum. Increased pressure to move away from the energy-intensive PoW and discovering specific issues with PoS – primarily scalability, pushed the developer towards this idea for a new algorithm. According to Wood, PoA can be a highly effective solution for closed, private networks.
PoA: A brief guide
Proof-of-authority is a reputation-based consensus mechanism and is most suitable for private blockchains, also known as permissioned blockchains.
Blockchains can be public or private. In both cases, everything is built on the same basic technology and differs only in access. Anyone with the appropriate equipment can join a public blockchain as a miner or validator, but this isn’t true with private ones. These are closed networks, so all nodes must be identified, and the blockchain can only be used by those who have obtained the relevant access rights. These networks are often used by companies that need to create a reliable database.
In contrast to PoW blockchains, you don’t need to buy powerful computing equipment to become a participant in a PoA network. All you need for proof-of-authority networks is reputation.
No mining or staking takes place on private PoA blockchains. New blocks are added to the chain after most authorized nodes sign them.
To become an authorized node, you must first prove that you have a fantastic reputation and fulfill certain criteria to demonstrate your desire to work for the benefit of the blockchain in the long term. All kinds of conditions can be set, such as a specific geographic location or an association with a PoA blockchain company.
The identity of each new validator candidate (on PoA networks, they are also called network moderators) is fully verified, reviewed, and approved by a central authority. That means this type of network doesn’t meet the criteria for decentralization, but PoA offers a perfect blockchain model for many companies.
Every node on a proof-of-authority network has an ID that represents its reputation. The better the node’s reputation, the greater its chances of becoming a validator.
- Network moderators are individual users who have confirmed their identity.
- To become a moderator, you must confirm your credentials and contribute some assets to fund the blockchain's development.
- You must also prove professional suitability and ability to deploy a productive node.
- All actions carried out by validators are recorded in the reputation system.
The validators are handpicked, so they must all comply with a unified standard that has been put in place on the network. The requirements for nodes are quite stringent, so their number is limited. The benefit of this approach is that it solves the problem of scalability.
At the same time, there is a disadvantage in that the organizational structure of these networks strays very far from decentralization, which is one of the fundamental principles of the blockchain. For this reason, this algorithm is effective for private networks or networks with a high degree of centralization.
For example, proof-of-authority has proven to be very workable in logistics and supply chain planning. The Microsoft Azure platform also uses the algorithm, facilitating software operation for private blockchains that do not use native tokens or mining.
Key advantages of the PoA algorithm
- Simplifying the validation process. A small number of validators is sufficient to operate a proof-of-authority network effectively. Additionally, there is no mining or staking on PoA networks, so serious computing power, expensive equipment, and high energy costs can all be avoided.
- Energy efficiency. This blockchain solution is less energy-intensive compared with other consensus algorithms.
- Reduction in the risk of blockchain attacks. Network moderators are carefully vetted when authority is verified. Because they are reliable, they are almost guaranteed not to carry out attacks on the network.
- High network speeds. New blocks can be created in around 5 seconds on PoA blockchains.
Disadvantages of proof-of-authority
- Network centralization: For most cryptocurrencies, keeping the number of verified moderators to a small pool of people whose credibility is based on their reputation isn’t an option, not to mention forgoing mining and staking.
- Lack of anonymity: The identities of the network moderators are known to everyone. This prevents them from abusing their position but also makes them a target for hacker attacks by scammers.
- Potential for abuse of power: Reputation is no guarantee that a network moderator will not commit fraudulent acts. They may sacrifice their reputation and cause damage to the network. Ultimately, it comes down to whether they would benefit from doing so.
Where is PoA most applicable?
Blockchain technology is evolving daily, with more and more companies realizing its benefits.
Proof-of-authority is an excellent solution for industries that put a premium on security and privacy, require identifying and defining roles, and need transactions to be carried out quickly.
For example, PoA can be implemented in supply chain management, with network moderators recruited from logistics companies, financial organizations, and suppliers. Each subdivision can set its own permissions and level of transparency. This will optimize business processes, from inventory tracking to invoicing.
Proof-of-authority can also be used on sidechains and testnets to create a controlled environment where new systems can be tested before deployment to the main blockchain.
The proof-of-authority consensus algorithm lacks some advantages of classic blockchains, such as decentralization, anonymity, and immutability. On the other hand, it offers high performance, low fees, and significant tools for legal security, which is of tantamount importance for private networks.
PoA is ideal for companies that want to enjoy the benefits of blockchain technology while maintaining familiar hierarchies and organizational structures regarding how their systems operate.