A key objective of public, permissionless blockchains such as Bitcoin and those built upon Ethereum is the ability to reach agreement on transaction histories without the need for a trusted third party.
Acting autonomously, individual nodes (computers) on a network can reach consensus about the validity of new blocks of information being added to the chain, through the use of the consensus protocol encoded within the blockchain software.
Different blockchains use different consensus protocols (also known as a ‘consensus algorithm’). These are core to removing the need for individual participants to trust each other, and in their differing ways also the cause of some controversy and debate.
Types of Permissioning Method
There are three types of permissioning method used to decide who can engage in validating blocks. These are: Public (proof of work, proof of stake, delegated proof of stake), Private (limited access to a secured private blockchain), and Semi-private (consortium-based access).
Proof of Work
The most commonly used consensus method is proof of work. This is the protocol employed by Bitcoin, Ethereum and others, and it requires that mining nodes complete to calculate a hash, with a winning node appending the blockchain with a new block of transactions. Competing to solve this mathematical puzzle is hugely energy intensive and costly, as it requires millions or trillions of random guesses to find the right answer. This cost to the node discourages fraudulent behaviour and represents the proof of work of the name.
Proof of Stake
The energy use of proof of work is controversial, however, due to the negative environmental impacts of using fossil fuels to meet the huge demands of blockchains such as Bitcoin. An alternative protocol is proof of stake, and this removes the need for energy-intensive mining, instead allowing nodes to validate and update the blockchain based upon their existing stake in the token.
The basic idea behind Proof of Stake is that it is of the number of coins that the user possesses that determines their right to validate transactions. It is this existing stake-holding in the cryptocurrency in question that disincentivises malpractice; to behave fraudulently would be to devalue the stake that that user owns.
Decentralisation is Inefficient
Blockchains are networks of nodes (computers) sharing a distributed ledger. The computing, in other words, is symmetric. Work is not divided up amongst the members of the network. Instead they all duplicate the work, with just one participant eventually completing the work.
This decentralised, symmetric approach gives blockchains their ability to function without the need for trust, and to be immutable and almost unhackable. But it also means that scalability and speed are compromised.
Also, every new node joining the network must first download the entire blockchain – the entire history of transactions in other words – in order to participate. In doing so, each new node is also double-checking the state (the data) of the blockchain. But again, joining the network is made slow and inefficient.
As a result, blockchains are emerging that are private or semi-private and permissionless – where access to read and write to it must be authorised. These have less need for decentralisation and so can require fewer nodes to validate transactions.
EOS is an example. Put live in June 2018, it depends upon just 21 nodes to authenticate its blockchain. These nodes are elected by the other participants, in a consensus model known as Delegated Proof of Stake.