Over the past year alone, blockchain technology has surged in popularity. By 2025, the global blockchain market is anticipated to be worth approximately $12.48 billion.
However, in order to make this a reality, we will first need to figure out a way to expand blockchain’s reach.
The concept of consensus is built into blockchain and plays a large role in promoting cryptocurrency transparency. Requiring users to validate transactions and achieve consensus before recording the details on a public ledger represents an easy way to ensure that every node has the same information and that opportunities for fraud or tampering are significantly decreased. Moreover, it provides a straightforward way for cryptocurrencies to manage the creation and flow of new coins by tying them to verification via the mining process.
Bitcoin was revolutionary when it introduced the concept of Proof of Work—whereby new blocks were added when a node verified the transactions within them and received a set number of bitcoin for completing the underlying work. On the surface, this method is inherently democratic: anyone can verify transactions and mine cryptocurrencies.
While promising in theory, reality dictates that proof of work accomplishes the exact opposite of bitcoin’s original vision. Due to the immense and expanding resource needs for mining to be profitable, proof of work has become a highly exclusionary model available only to those who can afford the immense costs.
Shedding the Exclusionary Label
The issue of consensus mechanisms is one that could have serious repercussions for the future of cryptocurrencies and blockchain in general.
Proof of Work, the original consensus mechanism, has become highly inefficient and impractical for individual users. PoW’s massive economies of scale mean that individual actors do not have the same opportunities to profit when compared to the outsized resources allocated by highly capitalized mining operations.
Proof of Stake is another protocol, originally created to solve inherent issues in the PoW protocol, it awards mining power proportionally to the amount of coins held by the miner. New problems have arisen for Proof of Stake, which dispenses with the heavy resource costs but adds a layer of elitism by tying users’ ability to validate transactions to the amount of coins they hold. While in theory, it means verification and consensus will be easier and cheaper for everyone, it also means crypto whales have a disproportionate opportunity to earn more coins—a feature built in deliberately to increase security and incentivize validation.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake (DPoS) is another consensus mechanism used by blockchains such as EOS. The system is essentially a technological democracy created by a community of block producers are users that have agreed to a set of rules. It works slightly different to PoS.
In the PoS protocol, users with more coins in their wallet available to stake will eventually receive a greater reward. With DPoS, however, coin holders use their balances to elect delegates - known as witnesses. Every wallet that contains coins will be able to vote, but users with more coins will have more voting power. The elected witnesses will then be able to stake blocks of new transactions and add them to the blockchain.
This means that there will ultimately be a better distribution of rewards between both the ‘rich’ and the casual users, also increasing security by allowing voters to oust malicious witnesses. However, this protocol has its drawbacks as well, as witnesses could potentially organize themselves into cartels, hence making the system unfair. In addition, the power is concentrated in the hands of a few, making the system potentially more centralized, making it easier to organize an attack on the network, as there are fewer people in charge.
These major consensus methods restrict blockchain’s growth by giving access only to those individuals or parties already heavily invested in the technology, or those with the resources to profit from mining.
Growing awareness within the industry suggests that, while useful for cryptocurrencies, these mining and consensus methods do more harm than good when it comes to broadening blockchain and crypto adoption and have ultimately catalyzed continued consensus mechanism innovation. Thanks to emerging tools, blockchain may finally be able to drop its niche appeal and enter the mainstream
Several projects have instead opted to find methods for reaching consensus and verifying transactions that remove many of the limitations that current mechanisms such as PoW, PoS, and DPoS impose. To this end, finding mechanisms that reduce the need for competition while concurrently affording the financial incentive inherent in mining are vital concerns. One sector where this quest to find smarter consensus mechanisms is paramount is the Internet of Things (IoT).
Blockchain’s distributed networks make it ideal for IoT infrastructure, which requires handling thousands of data points simultaneously and accurately conveying information across every node. A big issue facing current popular mechanisms is their enormous resource requirements, a factor which contrasts sharply with the idea that most IoT devices are built to minimize power consumption and processing power.
One IoT-based company, IOTW, offers an intriguing new solution to reduce consensus resources and improve efficiency, with their Proof of Assignment protocol. With this mechanism, IoT devices must still handle part of the verification process, but on a much smaller scale, greatly reducing memory and energy demands. The company’s goal is to re-democratize mining using a secure, random based election process and choosing limited amounts of IoT devices to compute a block hash.
Another interesting application of consensus is Practical Byzantine Fault Tolerance (or PBFT). This model was originally conceived to detect and verify faults in distributed systems with a goal of ensuring security and proper operation. In PBFT, every node must verify the same message as it is being passed from peer-to-peer and confirms that they have the same content. Because they’re organized sequentially, each node can determine where the message came from, adding to the reliability of the chain. This way, a majority of honest nodes can always verify a transaction or message while avoiding dishonest ones. One of the biggest applications of PBFT currently in use comes courtesy of Hyperledger, the suite of open source blockchains and tools.
Different Paradigms for Different Needs
To break free of the stigmas and limitations that still hold back blockchain, companies and developers must continue exploring ways to promote fairer access. PoW and PoS, while initially democratic, become harder to scale as they become more entrenched. On the other hand, new solutions like PoA and DPoS offer a more democratic and efficient approach to reach consensus.
By working to remove incentives that centralize and limit access, these consensus mechanisms are getting closer to the original goal of cryptocurrency.
With the community in mind, newer methodologies present a clearer path for blockchain to reach mainstream audiences and broaden participation.
Jim Hoffer is founder and managing director at Hoffer Financial Consulting. Follow him on Twitter.
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