A simplified review of consensus models in cryptocurrency: POW, POS, DPOS and POSA.

LeoFinance
10 days ago
(edited)
7 Min Read
1318 Words

Now that Leofinance has created a decentralized finance application on Binance Smart Chain, called Cubfinance, the subject of the so called consensus models like POW, POS, DPOS and POSA, has arisen and is being discussed in the community. I think it's a good time for a simplified look at consensus models in cryptocurrency.

Examples of consensus models

A simple way to look at consensus is agreement. And in general terms, the agreement is that the transactions are accurately recorded, the ledger is correct, the software is working, and the blockchain is secure.

POW = Proof of Work = Bitcoin
POS = Proof of Stake Ethereum 2.0
DPOS = Delegated Proof of Stake= EOS, Hive
POSA = Proof of Authority = IBM Hyperledger, Ethereum Kovance and Binance Smart Chain

Bitcoin = Proof of Work

Cryptocurrency communities began with the Bitcoin Community, which establishes consensus or verifies transactions and the integrity of the blockchain ledger using a distributed networks of computers which run the software and perform verification functions. It was a core belief that a distributed network was a core component of decentralization. This is the reason that Decentralization is a rallying cry for cryptocurrency communities.

However, there are issues with transaction speed, transaction cost and limited ability to process ever increasing numbers of transaction per minute, (scaleability)in the Proof of Work model.

Proof of Stake

Proof of Stake was developed as a remedy or cure for the problems of slow transaction speed, increasing transaction cost and limited scaleability, which plague the Proof of Work model. Proof of Stake consensus models require purchases of tokens and locking them up in smart contracts to get paid for verifying transactions, maintaining ledger integrity and insuring consensus. These people are called Validators. This is less decentralized then Proof of Work, because only Validators are rewarded for participating in consensus. But the large number of Validators made it seem like it was still decentralized.

Delegated Proof of Stake

While Proof of Stake was an advance in performance over Proof of Work, it had it's own drawbacks. And in an evolutionary sense it was followed by Delegated Proof of Stake, or DPOS.

In DPOS individuals who want to be paid to run copies of the blockchain software, verify the accuracy of transactions and maintain the integrity of the blockchain ledger, have do the same thing as Validators in Proof of Stake: buy tokens and lock them up in smart contracts. But in addition they have to be voted into a limited number of positions called witnesses. Only the top 20 or top 30 get paid. The people who can vote are members of the community, who have also bought tokens and locked them up in smart contracts. In DPOS, the Validators from Proof of Stake have a new name:Witnesses.

Because the number of Witnesses in DPOS, is very small, compared to the large number of Validators in Proof of Stake, it is considered more centralized than Proof of Stake. However, because the Witnesses are voted in by a large portion of the community, the process is thought to be democratic and equivalent to decentralization. Additionally this governance or consensus model allows transactions to be free, transaction speed is faster, and scaleability if greater. (The ability to process an increasing number of transactions per minute).

As you can see, as measured by the original core concepts of decentralization with distributed networks and anyone with a computer providing work toward consensus being able to earn tokens, the subsequent forms of consensus have become less decentralized, and more centralized, when compared to the original model. And there is a spectrum of existence from the most decentralized to the most centralized.

I believe that Proof of Work, as originally designed, is the most decentralized, next is Proof of Stake, then comes Delegated Proof of Stake. I think this structural overview is very helpful, when we turn our attention to the governance model of some famous chains; IBM Hyperledger, Ethereum 2nd layer solutions Kovance, Binance Smart Chain and Binance.

Proof of Staked Authority

This model of consensus, i.e verifying the accuracy of transactions, the integrity of the blockchain ledger and agreement on same, called consensus is mediated through yet another form of governance called Proof of Staked Authority or POSA. It is a bit complex, but a simplified explanation would be that only individuals who buy very large numbers of the token, stake or lock up those tokens in smart contracts, form unions or associations with others who have done the same, so that they control very large numbers of tokens, and run copies of the blockchain software on their computers, and perform the usual tasks associated with consensus, can now be rated or assigned a numerical reputation score, and then are selected by their peers to be the what POS calls Validators, and DPOS calls witnesses, but POSA calls Authorities. Only these are paid or earn large token rewards for their work.

Another fascinating aspect of this model is delegation, where anyone who owns tokens and stakes them, can loan the representation of such stake to others, to make pool their stake and increase their chances of being selected as an Authority. In this way the Authorities are supported in some cases by hundreds of other community members. So what may appear more centralized than DPOS from the outside, may actually be just a different format for voting. And it has the added benefit of everyone who votes for the person who votes for the winning Authorities shares in the rewards they earn performing consensus duties. This actually decentralizes rewards better then POS or DPOS, and thus spreading of stake is an unstudied aspect of POA, which could lead to more decentralization of the system, as from Stake flows Power, so power is also being distributed. POSA also contains some rotation and frequent selection of Authorities, which further decentralize it.

However, getting back to the bottom line of blockchain performance. This system allows lower transaction fees, faster transaction times, and greater scaleability then Proof of Work or Proof of Stake. It also allows greater speed, and scaleability then some DPOS systems.

Decentralization and centralized decentralized systems.

I hope that at this point in your reading you understand that decentralization and centralization are not simply black and white. It's a spectrum from black to white, with many shades of gray.

As children, our knowlege of the world is limited, so we seem to gravitate towards simplistic determinations of good or evil. But as adults we learn more about the world and understand it's not that simple.

Unfortunately, many in the cryptocurrency community seek to divide the world into camps of good and evil, based on perceptions or notions of decentralization or centralization. I would suggest that the more you learn, the less certainty you possess about such things. In the cryptocurrency community, as in the world, it's hard to determine whose good and whose bad sometimes. So if their model creates an environment where you can flourish, are they truly evil?

We grow up being taught that you know the tree by the fruit it bears.

And that actions and outcomes speak louder than words.

Let us spend more time observing and learning, and less time judging. I think we will miss out on fewer opportunities for personal, mental and financial growth with that philosophy.

@shortsegments

** Penned by my hand.**

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Shortsegments is a writer focused on cryptocurrency, the blockchain, non-fungible digital tokens or NFTs, and decentralized finance, where finance meets technology.

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