Cryptocurrencies use a consensus algorithm, which is a method of securing a cryptocurrency's blockchain and ledger. The thousands of cryptocurrencies out there today use a wide variety of consensus algorithms, each with its own advantages and disadvantages. Anatoly Yakovenko, founder of Solana, designed a unique consensus algorithm for the Solana network called Proof of History. Thanks to this consensus algorithm, Solana has skyrocketed in prominence and popularity. By comparing Proof of History with other consensus algorithms, we are going to see how "superior" the Proof of History consensus concept is.
- What are consensus algorithms?
- What is Proof of History (PoH)
- How does Proof of History work?
- An example of Proof of History
- Disadvantages of Proof of History
What are consensus algorithms?
Before we dive deeper into the Proof of History consensus algorithm, it is good to dig into the most common consensus algorithms. Most cryptocurrencies today use the Proof of Work or Proof of Stake consensus algorithm.
Proof of Work (PoW)
Proof of Work (PoW) is the first consensus protocol ever used, namely with Bitcoin, the very first cryptocurrency. In a PoW consensus protocol, miners compete on the network to solve complicated mathematical puzzles. Although the puzzles are difficult to solve, it is easy to verify the correct solution. When a miner has found the solution, he sends a block with the solution to the network. All other miners must verify that the solution is correct. This process is repeated, causing the blocks on the network to form a chain (hence the name blockchain).
Mining and validating the solutions in the PoW consensus protocol is an energy-consuming undertaking, as thousands of computers around the world are busy trying to find the solution as quickly as possible. This consumes as much power for the Bitcoin network alone as a country like Sweden consumes in a year. Because of the dire situation surrounding the climate, many people therefore consider this consensus protocol immoral. Currently, there are few alternatives to make PoW less energy-consuming, which is why the popularity of this protocol is dropping very fast.
Proof of Stake (PoS)
Due to the energy-consuming nature of Proof of Work, Ethereum switched from the Proof of Work to the Proof of Stake (PoS) consensus protocol. In Proof of Stake, miners have been replaced by validators. Validators stake (store) a certain number of tokens of a cryptocurrency from a blockchain network. They vote on block validation. If a majority of validators agree on the validity of a block, it is added to the blockchain. Block validation in a Proof of Stake network is thus done through voting.
In Proof of Stake, the rule normally applies: the more tokens you stake, the more chance you have as a validator to be selected. When the validator is selected, they may propose a block. If this block is validated by other users, the validator gets a reward consisting of fees from that block's transactions and usually new tokens. A block of coins is much less energy consuming because it involves much less computing power of computers. This makes Proof of Stake much more environment friendly than its counterpart.
Proof of Stake, unlike Proof of Work, is less secure, because with Proof of Stake, security is partly determined by people rather than just computers (which solve mathematical problems). But then, isn't Proof of Stake secure? Yep, the Proof of Stake consensus can really be seen as a secure consensus protocol. This is because people who are validators have in fact invested a considerable amount of money in this cryptocurrency, making them hardly prone to sabotaging the system.
Although the chances are minimal, in Proof of Stake networks there is a chance that a group of validators will still grab power so that they can sabotage the system. This is the case when more than (usually) 51% of validators to agree on the plan to sabotage. Indeed, with 51% of the vote, validators can influence the vote, and this is also known as a "51% attack". These attacks are extremely rare and are never realized in practice because for well-known and "more trustworthy" cryptocurrencies, it is rare for malicious parties to hold more than 51% of the tokens.
The strongest security of a Proof of stake network, however, is the slash and the consequences of bad acting. The slash is a penalty you face if you produce incorrect or corrupt blocks. You may then lose some, or all, of the coins you have at stake. You can also lose your role as a validator, making you more likely to lose than win.
Another very safe aspect of Proof of Stake is that people who have a lot of coins at stake and are trying to scam things will find that in the event of such an attack becoming public, the cryptocurrency suddenly becomes worth much less.
So, you risk all your coins that may also become less worth to get a small number of coins. The economic principle of Proof of Stake is cleverly put together, and an attack is therefore very rare.
What is Proof of History (PoH)
Solana (SOL) combines Proof of Stake with Proof of History (PoH), creating a unique hybrid consensus algorithm. Important character trait of the Proof of History algorithm is that the blockchain is tremendously fast, but at the same time guarantees its security in a decentralized manner.
Proof of History is a blockchain technique that ensures that historical data are correct and have not been tampered with. This is achieved by using a hash function to create a unique "fingerprint" of a packet of data. These in turn are verified by the nodes that keep track of the blockchain. Any changes in this fingerprint are immediately noticed by the nodes, which then see that it is a fraudulent block.
To put it more simply, Proof of History works with a verifiable delay function that uses the hash of the previous output as the new input. Much easier!
Right! Proof of History uses the timestamp, which represents the time the block was created, to create the next block with this timestamp to start with. They do this to eliminate time fraud, which is essential for this technique.
This makes PoH highly accurate, fast and fraud-proof.
How does Proof of History work?
It works by creating a timestamp of each block, after which their Verifiable Delay Function (VDF) kicks in to prove that this timestamp was made at a specific time. That timestamp is a hash of the previous PoH block. A sequence of timestamps is called a time series or time string and proves that these blocks were added to the blockchain at specific times.
Time stamps are forwarded to all nodes. The VDF takes a lot of computation, but this is done by the validators, who have special hardware and software for this purpose. Verification is pretty much instantaneous because verifying a hash is much faster than verifying a block. As a result, huge speeds of more than 50,000 transactions per second can be achieved, and that is indeed Solana's biggest achievement.
Proof of History thus involves creating timestamps that prove that a block was created at a specific time. Think of it through this analogy: when you attend an athletics competition at the Olympics and take a photo of it, you create proof that the photo was taken during that particular competition. Not before or after, because the competition took place at a specific time. With Proof of History, you basically create a historical record that proves that an event took place at a specific time.
All events and transactions on the Solana blockchain are hashed using the SHA-256 hash function. This function takes an input and produces a unique output that is extremely difficult to predict. Solana takes the output of a transaction and uses it as input for the next hash. The sequence of transactions is now built into the hashed output.
This hashing process creates a long, unbroken chain of hashed transactions. This feature creates a clear, verifiable sequence of transactions that a validator adds to a block, without the need for a conventional timestamp. Hashing also takes a certain amount of time to complete, meaning validators can easily check how much time has elapsed.
So those who want speed should turn to Solana. This has not gone unnoticed, given their high ranking.
An example of Proof of History
Using an example, we will show you how Proof of History works. For example, we have three transactions, namely A, B and C. Solana runs each of these transactions in sequence through its consensus protocol, Proof of History. This takes as input the transaction and the internal clock that objectively measures the order of the transactions, so it works as follows:
PoH (A, timestamp 0) -> hash: encrypted version of A at timestamp 0
PoH (B, timestamp 1) -> hash: encrypted version of B at timestamp 1
PoH (C, timestamp 2) -> hash: encrypted version of C on timestamp 2
Because everything is recorded in timestamps, this provides an objective measure. Both the fact that each transaction took place and the fact in which order each transaction took place is recorded. If transaction B were entered at timestamp 0, the entire blockchain would be affected.
Because of this objective security, people do not need to be involved in validation. This makes validation many times faster than Proof of Work and Proof of Stake. Solana can theoretically achieve transaction speeds of over 50,000 per second (TPS), where Bitcoin with Proof of Work achieves between 5 to 7 TPS and Ethereum around 30 TPS.
Disadvantages of Proof of History
The potential of Proof of History is very great, but as with any consensus algorithm, there are drawbacks. If you want to join Solana as a validator, your hardware must meet strict requirements. If you do not meet these requirements, you will be excluded as a validator. This significantly limits the decentralization of Solana, as not everyone has the opportunity to participate as a validator. Many forms of Proof of Stake are a lot more decentralized.
While transaction speeds are a big advantage at Solana, it is at the same time a hindrance in some ways. This is because the tens of thousands of transactions create huge amounts of data. 1 transaction is about 250 kilobytes (kB). At 50,000 250-kB transactions per second, this is equivalent to about 40 petabytes (or 40 million gigabytes) of data per year.
That is an incredibly high capacity and many companies, let alone individuals, cannot store this amount of data. In theory, the 50,000 transactions per second sounds very interesting, but to make it work in practice, solutions for the high storage capacity must first be invented here. With hard drives getting bigger and bigger, this problem may solve itself.
The Proof of History consensus mechanism has enormous potential. Consensus works faster and more energy-friendly than many other algorithms, such as Proof of Work. Thanks to timestamps, validating a block is enormously secure since time is a given. There are also drawbacks to Proof of History. For example, it requires a lot of computing power and data capacity from validators' hardware to run Proof of History successfully. Whether PoH is history proof, the future will tell!
Nevertheless, Proof of History is catching on well in the market. Investors have confidence in Proof of History as evidenced by the fact that Solana has been in the top ten cryptocurrencies by market capitalization and more and more developers are building applications on Solana's network. Whether Proof of History will form the basis for many other cryptocurrencies in the future remains to be seen, but there is no doubt that we will follow it with above-average interest in the coming years.