Blockchain Technology: A Consensus Model Debate of Proof of Work v. Proof of Stake

The blogpost is Part-1 of the Cryptocurrency Series taken up by the Centre. The present post is authored by Mr. Aashish Gupta, a Second Year Law Student at National Law University, Jodhpur.

Abstract

Blockchain is one the most interesting technical invention of this era. It has recently come into limelight with the introduction of cryptocurrencies into the financial world. Cryptocurrency is the biggest and most important product of the blockchain technology. A blockchain is nothing more than a decentralized digital ledger of transactions that is duplicated and distributed throughout the blockchain’s entire network of computer systems.[i] It has revolutionized the way in which a business operates.  Many countries have started recognizing cryptocurrencies and imbibing them in their regular financial system but at the same time there are some countries which still have their doubts over the integrity and security of cryptocurrency and hence, haven’t endorsed its use in their economies. This article aims at clearing the clouds over the meaning, history, working and consensus models of the blockchain technology.

What is blockchain technology?

Blockchain is a public distributed ledger which uses blocks to record the transactions. It is a distributed database of transaction records that is verified and maintained by a global network of computers. Unlike the conventional mode of transactions, blockchain technology is not limited to any particular host or central authority. It is a system of network unmanageable and unhackable by any single individual or group due to its decentralized working model.[ii] It makes the use of consensus model to perform its functions. Blockchain technology operates on a ‘peer to peer’ network, which helps in protecting the system against manipulations. Due to this distributed structural nature of blockchain, information once stored by an entity cannot be tampered by any central authority. When someone makes a transaction, it is sent to the network, where computer algorithms verify the transaction’s validity. Once the transaction has been confirmed, it is connected to the preceding one, establishing a chain of transactions. The blockchain is the name given to this chain.

History of blockchain technology:

Although the popularity of blockchain technology has increased drastically recently, its origin lies back in 1976 when a paper was released on the topic ‘New Directions in Cryptography’, which dealt with the concept of distributed ledgers. This was the first step towards the blockchain technology. Several papers were subsequently published on related topics from 1976 to 2000. Another key notion, known as “Electronic currency” or “Digital Currency,” which arose from a model provided by David Chaum, also contributed to the creation of the Blockchain concept. A major breakthrough was achieved in 2008 by Satoshi Nakamoto in the field of blockchain technology when he authored “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008.[iii] The abstract of the article discussed the direct online payment between two sources without the use of a third-party source and the article further described a cryptographic-based electronic payment system. Nakamoto’s article proposed a way to avoid double spending by creating a digital money that cannot be replicated and cannot be spent more than once. He introduced the notion of a public ledger, which allows for the tracking and confirmation of an electronic coin’s transaction history in order to determine whether the coin has been spent before and to avoid duplicate spending. A few months later, an open – source software to implement the Bitcoin system was released, and the first Bitcoin network was launched in early 2009.

Although there is no consensus regarding the creator of Bitcoins, Bitcoins continued to be generated and marketed, and a sizable community remained to support and fix different flaws with the code. There are hundreds of alternative cryptocurrencies such as Litecoin, Dogecoin, etc., which are based on the blockchain technology. In 2015, the Ethereum platform was released, enabling blockchain to be used for loan and contact management. It was built on a smart contract mechanism that ensured the execution of an activity between the two parties. Ethereum gained widespread popularity as a result of its capacity to provide a quicker, safer, and more efficient ecosystem.

How does blockchain technology work?

As the name suggests blockchain technology works on the concept of blocks. Information is stored in the form of blocks, which are further chained to each other in order to form a chain of blocks. Each new transaction is sent to a global network of peer-to-peer computers, spread across the world.[iv] The computer network then solves equations to verify the transaction’s legitimacy. A block is created after the transaction is finished. These blocks are then linked together to provide a comprehensive record of all permanent transactions. Once the transactions have been verified to be genuine, they are aggregated into blocks. These blocks are connected in a sequential fashion to arrange them in a chronological order.

Blockchain technology works on a certain type of database.  A database is a digitally stored collection of data on a computer system, which is decentralized and transparent. Generally, information, or data, is organized in a tabular style in databases to simplify searching and filtering for particular bits of information.

Blockchain technology uses three things to work:

  1. Cryptographic keys
  2. A peer-to-peer network containing a shared ledger
  3. A means of computing, to store the transactions and records of the network[v]

Private and public cryptographic keys are used to give effect to the completion of the settlement between the two parties. Each person possesses this, which they use to generate a secure digital identification reference. One of the critical features of Blockchain technology is this protected identification. In the world of cryptocurrencies, this identity is referred to as a digital signature’, and it is used to approve and monitor transactions.[vi]

The peer-to-peer network includes the digital signature and these are used by multiple people acting in their capacity as authority to achieve agreement on transactions and other matters. When they approve a transaction, it is mathematically validated, leading in a safe exchange of information between two network-connected parties. Blockchain users utilize cryptographic keys to conduct a variety of online transactions across a network. In a blockchain, transactions are instantaneous and permanent. The data is duplicated and stored across the system on each node. All the required transaction data, including price, ownership, and asset, are recorded in a blockchain, and this occurs in a matter of seconds. Any modification to one ledger is automatically reflected in all other ledger copies. The procedure is so straightforward that it eliminates the need for third-party verification, as each transaction is transparently documented.

Consensus model debate – Proof of work v. Proof of stake

Determining which user releases the next block is a critical element of blockchain technology. This is accomplished by implementing one of the many potential consensus models. In general, permissionless blockchain networks include a large number of publishing nodes vying concurrently to publish the next block. They often engage in this behaviour in order to get Bitcoin and/or transaction fees. They are usually distrustful of one another and may only know one another by their public addresses. Each publishing node is very certainly driven by financial gain, not by concern for the well-being of other publishing nodes or even the network as a whole.

Why would a user propagate a block that another user is trying to publish in such a situation? Additionally, who handles disputes when several nodes publish the same block at the same time? To solve this, blockchain technologies use consensus models to allow the collaboration of a group of mutually distrusting users. We have plethora of consensus models but two, which are most famous are:

1. Proof of work consensus model:

As the name suggests, this model is based on ‘work’. The more you work the more you get. It is a ‘puzzle solving’ method where a user in order to get a block published has to solve a technical puzzle. The one who solves the puzzle first will get the block added to the chain of blocks. The answer to this puzzle is the “proof” that they have worked. All the puzzles are independent and it is not affected by any subsequent or previous solutions. 

2. Proof of stake consensus model:

In this model, the probability of a blockchain network user releasing a new block is proportional to their stake in relation to the total quantity of staked amount on the blockchain network. Publication of new blocks is completely dependent on the amount of cryptocurrency that the user is already holding i.e., the amount he has already invested in the system. His stake in the system will decide whether he would get another published or not. This does not involve any puzzle solving and hence it uses less resources due to which several users have surrendered their block producing reward.

Which one is better?

Proof of work model was considered to be as the best model for blockchain technology right from the beginning. It was the most common and widely used method to mine Bitcoins. But today, many people have started believing that proof of stake model has the ability to take the driving seat and lead the blockchain technology.

Author endorse this argument and believes that in consonance with the needs of the present world and giving priority to the security of the blockchain network, proof of stake model is best suited to be pursued. Proof of work model poses some serious threats, which can be detrimental to the network’s security and environmental. On the other hand, proof of stake model provides no such threat, which is the reason why the author is preferring this model over the former one.

One of the two biggest problem with proof of work model is its massive energy consumption.[vii] The majority of this computing power is squandered, since each block is awarded to just one miner, despite the fact that thousands fight for it. Furthermore, such massive energy use poses a grave danger to the environment. Quest for energy is insatiable as it will only increase in future as when the network increases in size, the algorithms get more complicated. This results in an increased need for hash power. As a result, we may see an upward cycle in which the power demand is always increasing.

Another problem associated with the proof of work model is the probable safety threats it poses.[viii] It works on the model of puzzle solving and whosoever solves that puzzle can the block validated. Author believes that proof of work model can lead to mining pool which can hijack the entire network if they join hands. Any such types of activity are not assumable in Proof of stake model as it works on the basis of ‘stake’ and to hijack a network in this model, one needs to have a holding of 51% which is very difficult.[ix] Logically thinking, why would anyone hijack a network when he himself have 51% share in that network. This would only lead to his loss and would be detrimental to him only.

The author believes that the time has come to move from Proof of Work model to Proof of stake model in order to enjoy the greater benefits of the technology and to ensure the safety of your transactions. Ethereum has already moved towards proof of stake model and now it’s time for other cryptocurrencies working on the blockchain technology to do the same.


[i]Blockchain Explained, Euromoney learning (August 1 2021), available at: https://www.euromoney.com/learning/blockchain-explained/what-is blockchain#:~:text=A%20blockchain%20is%20essentially%20a,computer%20systems%20on%20the%20blockchain.&text=The%20decentralised%20database%20managed%20by,Distributed%20Ledger%20Technology%20(DLT).

[ii] Simanta Shekhar Sarmah, Understanding blockchain technology, 8(2) Computer Science and Engineering, 23-29 (2018).

[iii] Id.

[iv] Andy Oram, Peer–to–peer, O.Reilly, available at: https://www.oreilly.com/library/view/peer-to-peer/059600110X/ch01.html.

[v] Dylan Yaga, Peter Mell, Nik Roby & Karen Scarfone, Blockchain Technology overview, 82 nistir, 2018.

[vi] Supra note 2, at 1.

[vii] Supra note 5, at 4.

[viii] Akash Takyar, The proof of work vs proof of stake: An in-depth discussion, Leeway Hertz (August 01 2021), available at: https://www.leewayhertz.com/proof-of-work-vs-proof-of-stake/.  

[ix] Id.

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