Cryptocurrencies come in different designs, mainly varying based on how the network verifies transactions. This is called the consensus mechanism of the particular crypto blockchain. The consensus mechanism is also the way by which the network is secured.
Most people are familiar with Bitcoin’s consensus mechanism known as proof-of-work (PoW), but many don’t know that there are many more consensus mechanisms used by crypto projects. For example, Ethereum uses both PoW and proof-of-stake (PoS), which also has variations such as delegated proof-of-stake.
But one of the not so known consensus mechanisms is proof-of-authority (PoA), which is a consensus mechanism that leverages the reputation of validators rather than their assets as is the case with PoS. In this guide, we explain what PoA is, how it works, as well as its advantages and disadvantages.
What is PoA?
Imagine you wish to become a validator on Ethereum’s PoS network. You’ll need a certain minimum number of ether to stake, and you earn staking rewards on the assets you stake. Not so with PoA. You’ll need a minimum level of authority – or reputation – to qualify.
This reputation-based consensus algorithm brings a practical and efficient solution for blockchain networks, especially the private ones. The name was first proposed by Ethereum co-founder and former CTO Gavin Wood in 2017.
Validating nodes are selected as trustworthy entities with good public reputation, who help to verify blocks and transactions and also act as moderators of the system. PoA uses a limited number of blocks, which makes it highly scalable.
Some people consider PoA to be a modified version of PoS, but not exactly. PoS may be suitable for decentralized blockchains such as Ethereum but when it comes to private blockchains, PoA is more suitable because of its considerably higher performance.
To become a validator, you must have a valid and trustworthy identity. This requires that you confirm your real identity. Secondly, you’ll need to invest money and put your reputation on the line. This filters out people with questionable character and lack of commitment.
The selection criteria is the same for all candidates, so no candidate has a better chance at being selected.
When to use PoA
PoA can be used for a variety of cases, especially in private blockchains such as in logistical applications. For example it can be applied in the supply chain as an effective solution for managing the entire supply chain line.
Through this consensus algorithm, companies can adopt the use of blockchain technology while maintaining their privacy. An example is Microsoft Azure, a platform that provides solutions for private networks, with a system that does not require a native currency like the ether ‘gas’, since there is no need for mining.
Limitations of PoA
While PoA is perfect for centralized systems because of its high performance, there are major concerns surrounding the algorithm. For instance, it almost entirely eliminates decentralization, even though it is a blockchain system.
Although it retains the attribute of scalability, other aspects of blockchain such as immutability are thrown out the window. This allows for censorship and blacklisting to be easily achieved on the network.
Secondly, because the identities of validators are known publicly, a competitor can try to influence one to disrupt the system by getting them to act dishonestly and mess up the system from within. This is a major concern for blockchain experts who believe in the integrity of blockchain systems.
Conclusion
Indeed, PoA has all these limitations. However, the goal is to provide high throughput and scalability for private blockchains and compromising on decentralization is a small price to pay to achieve this. Although not very popular now, PoA will likely become an attractive consensus algorithm for business organizations looking to improve on efficiency in the future.
There are many blockchain use cases such as supply chain management that are coming up every day, and these companies will need PoA to scale and improve their productivity, making it an inevitable system in production.
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