In the last few years, the so-called blockchain technology, or “Distributed Ledger Technology” (DLT), has developed rapidly. In particular, the increase in value of Bitcoin and other cryptocurrencies, as well as the global success of some large Initial Coin Offerings (ICOs), has sparked public interest in developments in the digital world.
One of the particularly interesting aspects of blockchain technology consists in the decentralized consensus building, achieved by the application of various consensus mechanisms. Most blockchain projects use one of the three currently most common consensus algorithms: Proof of Work (PoW), Proof of Stake (PoS) or Delegated Proof of Stake (DPoS). All these mechanisms aim at ensuring that all participants dispose of identical copies of the distributed database files.
2. Proof of Work (PoW)
In contrast to other consensus mechanisms, the proof-of-work mechanism requires a lot of energy and computer power to reach a consensus and is thereby a very expensive option. The underlying idea is that so-called “miners” in a network must prove that they have made a certain effort. Miners provide the computing power needed to maintain the blockchain and to verify transactions. At the same time, miners ensure the network’s immunity against hackers. They compete against each other in order to chain together a group of transactions, so-called “blocks” (“blockchain”). The blockchain contains all verified transactions which are accessible to all network participants. Miners use so-called hash functions, i.e. mathematical functions. In simple terms, hashing means taking an input string of any length and giving out an output of a fixed length. The actual challenge lies in the fact that by solving mathematical puzzles a result with certain characteristics must be obtained, which are derived from the hash function. By solving the mathematical puzzles, it can be proven that the transactions (i.e. the calculation path) have been executed without errors. If the block is then mined correctly, it gets attached to the blockchain and the first miner to solve the mathematical puzzle gets rewarded. The best known crypto currency using the proof-of-work mechanism is Bitcoin.
3. Proof-of-Stake (PoS)
The idea of Proof of Stake (PoS) is to divide the voting power of a miner from its computing power, i.e. PoS gives mining power based on the percentage of tokens held by a miner. The larger his or her share of the total amount of tokens, the more likely this miner is to be selected to mine the next block. Nevertheless, the proof-of-stake-mechanism uses a random algorithm for consensus building. Though the amount of tokens held (“stake”) is relevant (as the proportion of tokens held affects the probability that a miner will be allowed or selected to mine the next block), several other factors play a part in selecting the next miner. The main objective of the PoS is to ensure that the miners support the blockchain project in the long term. Projects that use the PoS-mechanism include Dash and Neo.
4. Delegated Proof-of-Stake (DPoS)
The DPoS-mechanism can be considered a more democratic development of the PoS-mechanism. In DPoS, not those with the highest amount of tokens are authorized to confirm or validate transactions.. All token owners select a group of delegates to perform this task. The mechanism remains decentralized as all users in the network are authorized to select the group of miners that confirm transactions. On the other hand, the advantage of the centralized aspect of DPoS over the PoS-mechanism consists in the higher speed of verification and transactions, which results in high scalability. The EOS project as well as Lisk use the DPoS-mechanism.
5. Consensus as a Service (CaaS)
The daura platform is based on the Hyperledger Fabric Blockchain protocol, a private blockchain infrastructure. One of the differences to so-called “public blockchain protocols”, such as Bitcoin or Ethereum, is that the operation of a private blockchain requires much less energy and can only be used by “whitelisted”, i.e. known or registered, users. For further information on private and public legers, please read our article here.
daura relies on the Swiss “Consensus as a Service”-mechanism, which was established by Swisscom. The two trusted partners PostFinance and Swisscom maintain the nodes of the blockchain daura is built on. They are authorized to validate transactions that are initiated on the daura platform. Such validation consists in an automated, algorithmic and technical check of all information entered on the platform. Among others, this includes verifying whether sufficient tokens for the respective transaction are registered on the Blockchain- address of the transferrer. Moreover, it is checked whether the information to be transferred is valid or has already expired (i.e. has been used before). The contents, however, are not reviewed.
Essentially, the mechanism works like a digital account book: all transactions are equally visible and verifiable for all operators of the nodes. Trust is achieved through the mutual verification of the node operators and the unalterable storage of all the data generated. The data is stored on highly secure, trustworthy so-called R4 computing centres in Switzerland. The CaaS aims to connect to an “open” ecosystem. Therefore, in addition to daura, any number of other blockchain- based applications may purchase the CaaS service. In addition to the existing node operators, additional operators may join and operate another node independently. All operators must meet all relevant requirements and security features. New operators of nodes are selected by the existing ones.
The daura platform enables Swiss companies limited by shares to keep their share register automatically and digitally, as well as to issue new digital shares and participation certificates by means of capital increases. The processing of capital increases hence gets digitized, and non-listed companies get access to a wide range of investors via the daura platform. In addition, the keeping of the share register is simplified through digitally supported share transfers, i.e. by using assignment declarations that are automatically generated via the platform. However, no trading and settlement of blockchain-based share tokens is conducted via the platform.
First Published at Consensus Mechanisms in Blockchain Technology – Lexology