What is Proof of History?

Cryptocurrencies use a consensus algorithm, which is a method of securing the blockchain and the ledger of a cryptocurrency. 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, has designed a unique consensus algorithm for the Solana network, called Proof of History. Thanks to this consensus algorithm, Solana has grown enormously in fame and popularity. By comparing Proof of History with other consensus algorithms, we will examine how "superior" the Proof of History consensus is.

Table of Contents

1. What are consensus algorithms?
2. Proof of History (PoH)
3. An example of Proof of History
4. Disadvantages of Proof of History
5. Conclusion

What are consensus algorithms?

Before we dive deeper into the Proof of History consensus, it is good to get an idea of the most common consensus algorithms. Most cryptocurrencies today use the Proof of Work and Proof of Stake consensus algorithm.

Proof of Work (PoW)

Proof of Work (PoW) is the first consensus protocol ever used, namely for Bitcoin, the very first cryptocurrency. In a PoW consensus, miners compete with each other 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 whether the solution is correct. This process is repeated over and over again so that the blocks on the network form a chain (hence the name blockchain).

The mining and validation of the solutions in the PoW consensus is an energy-consuming endeavour, as thousands of computers around the world are busy finding the solution as quickly as possible. Because of the precarious climate situation, many people consider this consensus immoral. At the moment, there are few alternatives to make PoW less energy-consuming, which is why the popularity of the consensus is dropping so fast.

Proof of Stake (PoS)

Due to the energy-consuming nature of Proof of Work, Ethereum is currently in transition from the Proof of Work to the Proof of Stake (PoS) consensus. In Proof of Stake, miners are replaced by validators. Validators put (store) a certain amount of tokens of the relevant cryptocurrency on the network. People who stake a certain amount of tokens vote on the block validation. If a majority of the validators agree on the validity of the block, it is added to the blockchain. So the block validation in a Proof of Stake consensus is done by voting, unlike with the Proof of Work, where the block validation is done by solving puzzles.

In Proof of Stake, the rule is normally: the more tokens you stake, the more chance you have of being selected as a validator. When the validator is selected, they must propose (or 'forge') a block. If this block is declared valid by other users, the validator gets a reward consisting of the fees of the transactions of that block. Forging a block is much less energy-consuming because it requires much less computing power from computers. This makes Proof of Stake much more environmentally friendly than its counterpart.

Proof of Stake, unlike Proof of Work, is less secure because with Proof of Stake the security is determined by people rather than computers (which solve mathematical problems). So is Proof of Stake not secure? Actually, the Proof of Stake consensus can be seen as a secure consensus protocol. This is because people who are validators have invested a considerable amount of money in the cryptocurrency in question, so they are hardly likely to sabotage the system.

Although the chance is minimal, there is a chance that at the Proof of Stake, a group of validators will take power so that they can sabotage the system. To do this, more than 51% of the validators must agree to the plan to sabotage. With 51% of the votes, validators can influence the voting and is also called a "51% attack". These attacks are extremely rare and are actually never realised in practice, because in the case of well-known and "more reliable" cryptocurrencies, more than 51% of the tokens are rarely in the hands of malicious parties.

Proof of History (PoH)

Solana (SOL) combines Proof-of-Stake with Proof-of-History (PoH), creating a unique hybrid consensus algorithm. An important characteristic of Proof of History is that the blockchain is extremely fast, but at the same time can guarantee its security in a decentralised manner.

How does Proof of History work?

In Proof of History, time stamps are created that prove that a block was created at a certain time. Think of it this way: if you visit an athletics competition at the Olympic Games and take a photo of it, you create a proof that the photo was taken during that competition. Not before, not after, because the competition took place at a specific time. With Proof of History, you basically create a historical record that proves an event took place at a specific time.

All events and transactions on the Solana blockchain are hashed with the SHA256 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 property 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 time to complete, meaning that validators can easily check how much time has passed.

An example of Proof of History

Using an example, we will show you how Proof of History works. For instance, we have three transactions, A, B and C. Solana runs each of these transactions in order through his consensus protocol, Proof of History. Proof of History takes as input the transaction and the internal clock that objectively measures the order of the transactions, so it goes like this:

PoH(A, time stamp 0) -> hash: encrypted version of A on time stamp 0

PoH(B, time stamp 1) -> hash: encrypted version of B on time stamp 1

PoH(C, time stamp 2) -> hash: encrypted version of C on time stamp 2

The fact that everything is fixed in time stamps provides an objective measurement. Both the fact that each transaction took place and the fact in which order each transaction took place. If transaction B were to be entered at time stamp 0, the entire blockchain would be affected.

Because of this objective security, people do not need to be involved during validation. This makes validation many times faster than Proof of Work and Proof of Stake. Solana can theoretically achieve transaction speeds of 50,000 per second (TPS), where Bitcoin with Proof-of-Work achieves between 5 and 7 TPS and Ethereum reaches around 30 TPS. Ethereum is currently transitioning from Proof of Work to Proof of Stake, which will improve their TPS in the future.

Watch the YouTube video below for a visual explanation of Proof of History

Disadvantages of Proof of History

The potential of Proof-of-History is enormous, but as with any consensus algorithm, there are also drawbacks. If you want to participate as a validator in Solana, your hardware must meet strict requirements (read: specifications). If you do not meet these requirements, you are excluded from the consensus. This limits the decentralisation of Solana considerably, as not everyone has the possibility to participate as a validator. Looking at a Proof-of-Stake validator, any standard computer equipment will suffice, allowing everyone to theoretically participate in the consensus, thus much more decentralised.

While transaction speeds are a big advantage with Solana, it is also a hindrance in some ways. The tens of thousands of transactions create enormous amounts of data. 1 transaction is about 250 kilobytes (kb). 50,000 transactions per second of 250kb equals about 40 petabytes (or 40 million gigabytes) of data per year. That is an incredibly high consumption rate and many companies, let alone private individuals, cannot store this amount of data. In theory, the 50,000 transactions per second sound very interesting, but to make it work in practice, solutions must first be found for the high data capacity.

Conclusion

Nevertheless, the Proof-of-History consensus shows enormous potential. The consensus is faster and more energy efficient than many other algorithms, such as Proof of Work. Thanks to the time stamps, validating a block is very secure, since time is a given. Of course, Proof-of-History also has its drawbacks with consensus. For example, a lot of computing power of the validators' hardware and data capacity is required to run Proof-of-History successfully. 

Nevertheless, Proof of History is doing well in the market. Investors have confidence in Proof of History, as evidenced by the fact that Solana has penetrated into the top 10 cryptocurrencies based on market capitalisation, and more and more developers are building applications on Solana's network. Whether Proof of History will become the basis for many other cryptocurrencies remains to be seen, but it is certain that we will follow it with above-average interest in the coming years.