What Blockchain Consensus Mechanism Will Rule Enterprise Applications?

Nodes 2
Nodes 2

In the developing world of blockchain technology and cryptocurrency, there is considerable debate around the benefits and drawbacks of different consensus mechanisms. Protocols like proof of work (PoW), proof of stake (PoS) and newly emerging options like proof of transaction (PoT) each boast their own unique propositions and have their own proponents.

PoW and PoS are backbone technologies that allow mainstream businesses to harness the power of blockchain technology for their respective purposes. And new protocols are emerging all the time. But, as distributed ledger applications continue to accrue mainstream acceptance, how should new enterprise players determine which consensus protocol they will leverage?

The Pros and Cons of PoW

PoW is the original consensus mechanism, which allows Bitcoin to function as it does. PoW relies on miners to verify each block, resulting in completed transactions after a specified number of blocks have been verified. PoW technology is often argued to be the most "proven" consensus mechanism, and community coin holders are not needed to run the network. Beyond Bitcoin, another example of a PoW-powered project is Monero.

However, many argue that PoW can lead to centralization, risk of 51 percent attacks and questions of scalability . In addition, PoW can often require significant electrical cost and strain, leading to the argument that PoW may not be the most efficient option. Mining PoW coins also often requires a significant investment in a quality mining setup for a miner to be effective and profitable.

According to a World Economic Forum white paper , "estimates liken the [Bitcoin] network's energy consumption to the power used by nearly 700 average American homes at the low end of the spectrum and to the energy consumed by the island of Cyprus at the high end. That's more than 4.409 billion kilowatt-hours, a Godzilla-sized carbon footprint, and it's by design. It's what secures the network and keeps nodes honest."

The Pros and Cons of PoS

PoS is a somewhat newer technology (first applied by Peercoin in 2013 ) compared with PoW. With PoS, mining equipment is not necessarily needed, as PoS coins are "staked" based on the amount of coins held by the owner (in a compatible staking wallet). Payouts for staking are based on the amount of coins held in said wallet. DASH and NEO are notable PoS projects, with DASH having the capability to run masternodes. DASH masternodes help ensure a defined amount of computing power on the network, by users who hold a specified amount of coins, for activities such as "InstantSend," "PrivateSend" and "Decentralized Governance."

PoS technology is argued to be a better option than PoW because coins can often be staked on a normal computer, using less electricity, as well as allowing the coin holder to make returns regardless of the amount of coins held. There is often no minimum investment required, as seems to be the case with mining setups in PoW applications.

Another potential benefit to PoS is that coins/projects may have the potential to be more decentralized, due to the ability to stake any amount of coins. This decentralization is also said to make PoS more resistant to 51 percent attacks and possibly enable greater scalability. However, PoS may not actually be more decentralized , with a "concentration of voting power in the hands of the wealthy," per at least one argument against it.

An Emerging Protocol

As of recently, a new option for consensus is being developed - proof of transaction (PoT), as seen in TAU coin . PoT's consensus mechanism is based on users that collectively maintain network security through everyday transactions, with no advantage given to those with expensive mining setups or large coin holdings.

Transactions are incentivized by the sharing of future block rewards, with importance on the number of transactions, instead of the size of transactions.

As far as mainstream adoption goes, PoT appears to be an interesting concept. PoT looks to be a possible solution for businesses that have hundreds of small transactions per day (like McDonald's, for example).

"The way TAU is structured, it really incentivizes transactions and, across the board, it makes transactions more cost friendly; both for vendors that have a high amount of transactions (because they are more likely to win the block reward) and for vendors who do large price sales," Dean Pappas, architect for TAU, explained in an email interview. "They won't be charged a percentage of the sale, they will just be charged whatever the transaction fee is. The system doesn't really look at quantity as a metric. It looks at transactions and the quantity of transaction as the metric."

With regard to business utilization of blockchain technology, perhaps the ultimate solution lies in utilizing multiple technologies for differing purposes. Some in the blockchain space argue for one option over the other, but maybe the solution is to cater to businesses' specific needs, using whichever consensus mechanism would best cater to those needs.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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