Since the first blockchain transaction was executed on the Bitcoin network, the world of digital currencies has undergone tremendous changes. In addition to the well-known Proof of Work (PoW) and Proof of Stake (PoS) algorithms, other consensus mechanisms and methods for reaching consensus within blockchain systems have also become known.

The Proof of Work algorithm used by Bitcoin is the most reliable and secure algorithm today. However, it is not truly scalable. Bitcoin and other PoW-based blockchain networks have limited performance in terms of transactions per second (TPS). This limitation is related to the fact that Bitcoin relies on a distributed network of nodes, as the nodes need to agree on the current state of the blockchain. This means that a new transaction block must be verified and approved by the majority of nodes in the network before it can be confirmed. Therefore, while the distributed nature of the Bitcoin network provides a secure and trustless economic system, it also limits its use on a larger scale.

In terms of TPS, Proof of Stake blockchains generally outperform Bitcoin. However, this difference is not significant, and PoS networks do not truly solve the scalability issue.

In this context, Proof of Authority (PoA) has emerged as a more efficient alternative, as it can execute more transactions per second.

What is Proof of Authority?

Proof of Authority (PoA) is a reputation-based consensus algorithm that introduces a practical and efficient solution for blockchain networks, especially private chains. The term was coined by Gavin Wood, co-founder and former CTO of Ethereum, in 2017.

The PoA consensus algorithm leverages the value of identity, meaning that block validators are chosen not based on staked digital currency but on their personal reputation. As a result, PoA blockchains are secured by validator nodes operated by trusted entities.

The PoA model relies on a limited number of block validators, making it a highly scalable system. Blocks and transactions are validated by pre-approved participants who act as the system's moderators.

The PoA algorithm can be applied in various scenarios and is considered a preferred choice for logistics applications. For example, in supply chains, PoA is regarded as an effective and reasonable solution.

The PoA model enables companies to leverage blockchain technology while protecting their privacy. Microsoft Azure is another example of PoA implementation. Simply put, the Azure platform provides solutions for private networks, and since mining is not required, the system does not need a native token like "gas."

Proof of Authority vs. Proof of Stake

Some believe that PoA is an improved version of PoS because it uses identity rather than currency. Due to the decentralized nature of most blockchain networks, PoS is not always suitable for certain businesses and companies. In contrast, PoA may be a better solution for private blockchains, as it offers much higher performance.

Conditions for Proof of Authority Consensus

Although conditions may vary depending on the system, the PoA consensus algorithm generally requires the following characteristics:

Valid and trustworthy identity: Validators must confirm their real identities.

Stringent requirements for becoming a validator: Candidates must be willing to invest and stake their reputation, which reduces the risk of selecting suspicious validators and encourages long-term commitment.

Uniform selection standards for validators: The method for selecting validators must be consistent.

The essence of the reputation mechanism is the verification of validator identities. This is not a simple process, nor is it one that can be easily abandoned. It must eliminate unqualified members. Ultimately, all validators must go through the same process to ensure the system's integrity and reliability.

Limitations

One perspective on PoA is that it sacrifices decentralization. Thus, it can be said that this consensus algorithm model is designed to improve the efficiency of centralized systems. While PoA is an attractive solution for large companies with logistical needs, it does have some drawbacks—especially in the context of digital currencies. PoA does offer high throughput, but irreversibility becomes an issue when actions like censorship and blacklisting can be easily implemented.

Another common criticism of PoA is that the identities of PoA validators are publicly visible. Critics argue that only seasoned professionals capable of holding such positions would want to become validators (as publicly known participants). However, knowing the validators' identities could lead to third-party manipulation. For example, if a competitor wants to disrupt a PoA-based network, they might attempt to spread rumors that validators are engaging in fraudulent behavior, thereby undermining the internal system.

Proof of Work, Proof of Stake, and Proof of Authority each have their own advantages and disadvantages. Decentralization is highly valued in digital currencies, and as a consensus mechanism, PoA removes decentralization to achieve high throughput and scalability. The inherent characteristics of PoA systems stand in stark contrast to how blockchains have operated thus far. Nevertheless, PoA presents an interesting mechanism, and as an emerging blockchain solution, it cannot be ignored. It may be particularly well-suited for private blockchain applications.