8 Distributed Ledger Technology
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algorithms is large, only several of them are widely known. Selected consensus
algorithms are discussed below.
8.3.4.1 Proof-of-Work (PoW)
Proof-of-Work, or PoW [10], is the most well-known consensus algorithm which
was used by Bitcoin. The purpose of this algorithm is to validate transactions and
add validated new blocks to the blockchain. Due to its public and distributed nature,
a blockchain needs a mechanism to prevent malicious transactions and attacks. This
is the responsibility of participating nodes called miners through a process called
mining. Essentially, PoW presents a complex mathematical puzzle for the nodes
to solve. Very strong computing power is needed to solve this puzzle in a timely
manner. However, proving the correctness of a solution for the puzzle is easy. In
the meantime, miners receive rewards for solving the complex puzzle. In summary,
in a PoW-based blockchain, miners strive to validate transactions, solve the puzzle,
propose candidate blocks, and receive rewards. The amount of work done by a miner
determines its chance of successfully mining a single block and receiving a reward.
PoW not only provides a solution for the Byzantine Generals’ Problem, but
also provides defense against denial-of-service (DoS) attacks because it takes a
tremendous amount of computational power for an attack to be successful. In
a PoW-based blockchain, the available fund/credit in the attacker’s wallet does
not increase its ability to publish new blocks. What really matters is a node’s
computational power to solve a puzzle and generate new blocks. PoW strongly
discourages DoS attacks on a blockchain because it is highly unlikely that an
attacker has the ability to acquire enough hardware and energy resources to
overpower the rest of the nodes on a blockchain as a whole.
However, PoW has weaknesses and users should be aware of them. First, a
PoW-based blockchain is vulnerable to the so-called 51% attack, in which case
the attacker has the majority of the mining power for whatever reason. With 51%
or more of the mining power, the attacker is able to control the operations of the
blockchain and prevent other mining nodes from creating new blocks. By doing
this, only the attacker will get the rewards. With 51% of the computing power, the
attacker can even reverse transactions.
The second weakness of PoW is huge power consumption due to the need
for solving complex puzzles. It has been observed that the Bitcoin blockchain is
currently using more power than the whole country of Ireland and will use more
power than the whole country of Denmark by 2020.
8.3.4.2 Proof-of-Stake (PoS)
Proof-of-Stake, or PoS [11], was designed to overcome the weaknesses of PoW. The
basic rationale of PoS is that a node who owns more stakes in the blockchain will
more likely want it to succeed. To be able to be admitted to the blockchain, a node
409
algorithms is large, only several of them are widely known. Selected consensus
algorithms are discussed below.
8.3.4.1 Proof-of-Work (PoW)
Proof-of-Work, or PoW [10], is the most well-known consensus algorithm which
was used by Bitcoin. The purpose of this algorithm is to validate transactions and
add validated new blocks to the blockchain. Due to its public and distributed nature,
a blockchain needs a mechanism to prevent malicious transactions and attacks. This
is the responsibility of participating nodes called miners through a process called
mining. Essentially, PoW presents a complex mathematical puzzle for the nodes
to solve. Very strong computing power is needed to solve this puzzle in a timely
manner. However, proving the correctness of a solution for the puzzle is easy. In
the meantime, miners receive rewards for solving the complex puzzle. In summary,
in a PoW-based blockchain, miners strive to validate transactions, solve the puzzle,
propose candidate blocks, and receive rewards. The amount of work done by a miner
determines its chance of successfully mining a single block and receiving a reward.
PoW not only provides a solution for the Byzantine Generals’ Problem, but
also provides defense against denial-of-service (DoS) attacks because it takes a
tremendous amount of computational power for an attack to be successful. In
a PoW-based blockchain, the available fund/credit in the attacker’s wallet does
not increase its ability to publish new blocks. What really matters is a node’s
computational power to solve a puzzle and generate new blocks. PoW strongly
discourages DoS attacks on a blockchain because it is highly unlikely that an
attacker has the ability to acquire enough hardware and energy resources to
overpower the rest of the nodes on a blockchain as a whole.
However, PoW has weaknesses and users should be aware of them. First, a
PoW-based blockchain is vulnerable to the so-called 51% attack, in which case
the attacker has the majority of the mining power for whatever reason. With 51%
or more of the mining power, the attacker is able to control the operations of the
blockchain and prevent other mining nodes from creating new blocks. By doing
this, only the attacker will get the rewards. With 51% of the computing power, the
attacker can even reverse transactions.
The second weakness of PoW is huge power consumption due to the need
for solving complex puzzles. It has been observed that the Bitcoin blockchain is
currently using more power than the whole country of Ireland and will use more
power than the whole country of Denmark by 2020.
8.3.4.2 Proof-of-Stake (PoS)
Proof-of-Stake, or PoS [11], was designed to overcome the weaknesses of PoW. The
basic rationale of PoS is that a node who owns more stakes in the blockchain will
more likely want it to succeed. To be able to be admitted to the blockchain, a node