Proof of Authority Explained

Proof of Authority explained

Proof of Authority is a variant of the Proof of Stake consensus mechanism where instead of tokens, network participants stake their identity and reputation. Proposed in 2015 by Ethereum’s co-founder Gavin Wood, Proof of Authority has in recent years become one of the more prominent consensus mechanisms, as the blockchain world has increasingly been exploring ways to move beyond Proof of Work. PoA, or as it is also known, Proof of Staked Authority (PoSA) is seeking to resolve some of the issues found in other PoW alternatives, namely Proof-of-Stake.

Why replace PoW, anyway?

Satoshi Nakamoto’s revolutionary idea that led to the creation of Bitcoin and kicked off the blockchain revolution can be described as a perfect marriage between cryptography and decentralization. At the heart of this union was the Proof of Work algorithm – the ingenious invention underpinning the Bitcoin network and ensuring its immutability and resistance to malicious actions. 

PoW seemed so perfectly suited for the purpose it was meant to serve that naturally it became the go-to consensus algorithm for many of the major blockchain protocols that came after Bitcoin. However, as blockchain technology started to gain traction, it revealed some limitations of PoW that hadn’t been immediately apparent. Chief among them were PoW’s energy-intensive nature and the fact that it limited blockchain networks’ ability to scale. These drawbacks prompted many in the blockchain community to start looking for alternatives.

The problem with PoS that Proof of Authority aims to solve

Amid the drive to move away from PoW, Proof of Stake algorithms have emerged as one of the most popular consensus options. The strengths of PoS are clear: it provides an even stronger financial incentive for network validators to behave; it’s not require a lot of computational effort  and specialized equipment; it opens the door for sharding, which helps to make a blockchain network more scalable.

With all these advantages, it is not surprising that Ethereum, the world’s second most popular blockchain network, is currently in the process of transitioning from Proof of Work to PoS. However, the PoS also has one significant drawback that often remains overlooked. 

Proof of stake algorithms work on the assumption that people with staked tokens in a network will be incentivized to act in the network’s interest, otherwise they risk losing their stake. So it seems logical to assume that the bigger the stake of a person is, the more motivated they are to look after the success of the network. However, this assumption fails to take into account that while identical stakes may be equally valuable from a monetary standpoint, they might not be equally valued by their holders. For example, a person who has 20% of their total holdings staked in a network is likely to be much more invested in that network’s success than a person who has 1% of their holdings staked, regardless of the actual stake size. 

This is what Proof of Authority aims to improve. The idea behind the algorithm is that instead of tokens, network participants stake their identity. This means that unlike most blockchain protocols where anyone can join without disclosing their identities, validators in PoA systems are known entities that put their reputations on the line for the right to validate the blocks. This tweak to the PoS model removes the need to consider potential monetary discrepancies between the validators and ensures that all network participants are equally motivated to work for their network’s success.

Proof of Authority – advantages and limitations

The identity requirement makes PoA impractical for public blockchains like Bitcoin and Ethereum, which have hundreds or even thousands of validating nodes. That’s why PoA networks typically have a relatively small number of validating nodes, which makes them less decentralized. On the positive side, they also have high throughput capacity.

Like PoS, proof of authority requires minimal computational effort and does not need specialized equipment. However, PoA networks typically accept entities with established reputation as their validators, which means that attaining that role is typically out of reach for an ordinary person.

Proof of Authority – use cases

Because of the relatively small number of validators, PoA is best suited for enterprise-level networks like blockchain consortia and other private networks where some level of trust already exists among the members. It’s telling that Hyperledger Besu, an implementation of Enterprise Ethereum, offers two PoA options.

Testnets present another strong use case for proof of authority. PoA consensus is ideal for providing a control environment for testing features before launching them on the mainnet. Three of Ethereum’s testnets, namely Kovan, Goerli and Rinkeby, use Proof of Authority.  Meanwhile, one of the hottest blockchain protocols today, Polkadot, last year launched in beta as a PoA network, before switching to a PoS for its full release.

Proof of Authority is also a great option for a sidechain, a type of blockchain running parallel and connected to a parent blockchain via a two-way bridge. An example for this is the POA Network, a public sidechain on Ethereum that relies on pre-selected validators whose identities are public and verifiable.

And then there is VeChainThor, which is perhaps the most high-profile example of a public network using PoA consensus. The network aims to provide blockchain-powered enterprise solutions.

The future of Proof of Authority

Ultimately, the enterprise sector will likely be the area where PoA will gain the most traction. PoA-based algorithms are unlikely to ever be able to power public platforms with thousands or even millions of users, but they are already great for building tight and lean networks tailored to the needs of a limited number of known stakeholders. That’s where Proof of Authority shines and where it is likely to make its biggest impact.

The team at LimeChain is quite experienced in working with some of the most prominent protocols for building private blockchain solutions. If you need a capable developer to help you leverage the power of blockchain technology to boost your business, don’t hesitate to get in touch!