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Types of Blockchains: PoW, PoS, and Private



Not all blockchains are the same. Their different consensus mechanisms have unique implications for accessibility, security and sustainability.



SUMMARY


Blockchain systems vary significantly in their design, especially regarding the consensus mechanisms used to verify network data. The most common consensus mechanisms are Proof of Work (PoW), Proof of Stake (PoS) and methods used by private and consortium blockchains. Each design has different implications for the security, accessibility and sustainability of the underlying blockchain.



CONTENT

  • Blockchain types

  • Proof-of-work blockchains

  • Proof-of-stake blockchains

  • Private blockchains


BLOCKCHAIN TYPES


Although the blockchain appears to many as a monolithic technology, there are major differences in the way different blockchain networks operate. One fundamental differentiator is the type of consensus mechanism each blockchain uses. A consensus mechanism is a process by which a distributed network reaches an agreement on information in the network - for example, whether transactions are valid and in what order they occur. The consensus mechanism also plays an important role in protecting the blockchain network from malicious actors such as hackers.


Most public blockchain networks today use procedures called Proof of Work (PoW) or Proof of Stake (PoS) to ensure consensus, while private - or "permissioned" - blockchains and distributed ledger technologies (DLTs) can be structured in different ways to prioritise speed, security and scalability. Below, we take a look at the most common blockchain consensus mechanisms to get a better overall understanding of the different implementations:



PROOF-OF-WORK BLOCKCHAINS


The PoW consensus mechanism is one of the most widely used blockchain methods and was first popularised by Bitcoin (BTC). The critical components of PoW systems are the miners and the power they use to perform the calculations that verify BTC transactions. Miners operate computer hardware to power network nodes that use computing power to algorithmically solve mathematical puzzles called proofs of work. The miner who solves the puzzle first confirms the last block of transactions on the blockchain. The successful miner then sends the new block to all other nodes, which in turn confirm its accuracy and add the block to their copy of the blockchain, creating a verifiable record for the entire network. This verification process constitutes the consensus. Only when this data is confirmed can a new block be added to the network. Miners receive newly minted cryptocurrency, the block reward (in the case of Bitcoin, they receive BTC) when they are the first to validate and add a new block of data to the PoW blockchain.


Proof-of-work blockchains aim to generate blocks at regular intervals - Bitcoin, for example, generates a block every ten minutes or so. PoW networks are limited in speed and size because the process of proof-of-work is so energy intensive. Moreover, PoW networks are coded to be more or less difficult relative to the network's computing power. One might think that computing power simply means competition - more computing power means more competition, which in turn means harder proofs of work. But despite their limitations in speed and scalability, PoW blockchains have historically provided better security while ensuring meaningful decentralisation. Because PoW systems are decentralised, it is extremely expensive for a malicious actor to take over the blockchain by controlling the majority of the network's computing power. The cost of hardware, electricity and computing power is usually too high to overcome.


However, the same features that make PoW blockchains secure also mean that the barriers to participating in the network as a node are high. Running a mining rig and the associated hardware and electricity costs are too expensive for the average user, and mining on many large networks has been monopolised by large mining operators who have exerted influence over network management.


Another disadvantage of PoW networks is that they are energy-intensive and thus harmful to the environment. The computing power needed to solve proofs of work requires an immense amount of electricity. For example, the Bitcoin network itself has the same annual carbon footprint as New Zealand and uses as much electricity as Chile. Solving these problems has been a major focus of technical development in the blockchain industry, and other solutions have since emerged.



PROOF-OF-STAKE BLOCKCHAINS


PoS is the second most popular consensus mechanism and solves many of the drawbacks of PoW blockchains such as lack of speed, poor scalability, inefficient energy consumption and high barriers to entry. Examples of current industry-leading PoS blockchains include Polkadot, EOSIO and Cardano. Ethereum, which was originally developed as a PoW blockchain, is currently being transformed into a PoS blockchain called Ethereum 2.0.


Instead of miners validating transactions, PoS blockchains simply have validators. Validators are operators of network nodes that validate data, similar to PoW systems, but there is no energy-intensive computational process to acquire the right to validate. Instead of working to solve proofs of work, validators use some of the tokens on the blockchain to be selected as validation nodes. The prospective validator essentially deploys crypto tokens from the blockchain to act as collateral. When it is time to validate the data in a transaction block on a PoS blockchain, the system randomly selects a validator to validate the data. While the selection is random to some degree, certain variables can increase the likelihood that a validator will be selected, such as the number of tokens a validator has deployed. If the block is confirmed, the validator is usually rewarded with network transaction fees and the process starts with a new block.


Proof-of-stake blockchains ensure the security of the network and the honesty of validators by requiring that validators stake their tokens. If validators act maliciously or incompetently, they lose their stake and access to the network through a process called slashing. This incentive structure ensures that validators stand to gain more by acting lawfully than by breaking the rules. There are many different variations on how this general process works.


Since validators on PoS blockchains do not have to invest in expensive hardware and high electricity costs, the barrier to entry for validators on PoS blockchains is probably lower. However, if you want to become a validator, you still need to stake a sufficient amount of cryptocurrency. This amount varies from blockchain to blockchain but can go into thousands of dollars. PoS blockchains have also been criticised as plutocratic because the influence that validators have on the network is often proportional to the amount they stake.


In terms of sustainability, PoS blockchains are arguably better for the environment than PoW networks because they consume significantly less electricity. Proponents, therefore, argue that future blockchain projects should focus on PoS consensus mechanisms.


Delegated Proof of Stake (or DPoS) is a popular evolution of the Proof of Stake concept, where users of the network elect delegates to validate the next block. Delegates can also be called witnesses or block producers. In DPoS, you choose delegates by pooling your tokens in a stake pool and linking them to a specific delegate. Proponents say DPoS is a more decentralised and egalitarian consensus-building process than Proof of Stake alone.



PRIVATE BLOCKCHAINS


Blockchain types that use PoW and PoS consensus mechanisms tend to be public and decentralised. However, there are two other categories of blockchains - consortium blockchains and private blockchains. A private blockchain is a blockchain that is controlled by a central authority that determines who can interact with the blockchain, verify transactions and view the information stored on the blockchain. A consortium blockchain is a distributed ledger controlled by multiple organisations, each of which operates a network node, participates in consensus and has permission to view certain types of data. Because of the lack of decentralisation in these networks, this type of blockchain technology is often referred to as distributed ledger technology.


Private blockchains and consortium blockchains are usually used by companies that want to use the blockchain architecture but want to ensure that certain information remains secret either for legal or competitive reasons.


Public blockchains like Bitcoin and Ethereum are censorship-resistant and offer broad ecosystems for app and platform development. Consortium blockchains, on the other hand, offer faster transaction processing times and are easier to modify, but are "walled gardens" with limited use outside the private consortium.


JPMorgan Chase's Quorum is a private, permissioned version of the Ethereum network designed to facilitate information sharing between banks. Consortium blockchains are currently being developed in a variety of industries, including insurance, food, financial services and even prototyping central bank digital currencies (CBDCs) around the globe.


Not all blockchain is the same, and different consensus mechanisms have different implications for accessibility, security and sustainability. Similarly, not all blockchain types are equally suitable for every use case. Although public blockchains are secure and resistant to censorship, they are not well suited for businesses due to their transparency. While PoW has been the standard consensus mechanism since the launch of Bitcoin in 2009, PoS, DPoS and DLT are gaining traction in the blockchain world.


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