Cryptocurrencies use a consensus algorithm, which is a method of securing the blockchain and 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. Partly thanks to this consensus algorithm, the value of Solana has risen sharply in the past month. Can Proof-of-History be the consensus of the future? In this article, we will look at several well-known consensus algorithms to see if Proof-of-History is more than just a hype.

Table of contents

1. Proof-of-Work
2. Proof-of-Stake
3. Solana’s Proof-of-History
4. A Proof-of-History example
5. Why Proof-of-History is not (yet) the consensus of the future
6. Conclusion

Proof-of-Work

Bitcoin is the first cryptocurrency to use a revolutionary consensus protocol called Proof-of-Work (PoW). 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).

Mining and validating the solutions at the PoW consensus is an energy-consuming endeavour. Due to the precarious climate situation, many people find this consensus immoral. At the moment, there are few alternatives to make PoW less energy-consuming, which is why support for this consensus is dropping fast.

Proof-of-Stake

This is why Ethereum has recently moved from Proof-of-Work to Proof-of-Stake (PoS) consensus. With PoS, miners are replaced by validators. Validators stake a certain amount of the respective cryptocurrency on the network. With this, they validate the blockchain. They do not have to compete like miners to be the first to solve the puzzle.

Instead, users are selected at random. However, the larger the stake, the greater the chance of being selected as a validator. When the validator is selected, they must propose (or 'forge') a block. If this block is validated by other users, the validator gets a reward consisting of the fees of the transactions of that block.

PoS, unlike PoW, is slightly less secure because its security is determined by people rather than mathematical solutions. However, because validators have invested in the cryptocurrency, they are less likely to betray the system.

Nevertheless, there is a chance that with PoS a group of validators will seize control. However, these validators can be blocked or excluded from the network. Therefore, with large currencies this is almost impossible.

Furthermore, PoS is much more environmentally friendly as the energy consumption is not that high. This is due to the fact that forging a block is much more energy friendly than mining, because not as much computing power is needed.

Solana’s Proof-of-History

Solana combines Proof-of-Stake with Proof-of-History (PoH), giving it a unique hybrid consensus algorithm. PoH ensures that a blockchain is very fast but at the same time keeps its security decentralized.

All Solana events and transactions are hashed with the SHA256 hash function. Using this function, Solana 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 characteristic 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.

The core Solana innovation is Proof of History (POH), a globally-available, permissionless source of time in the network that works before consensus. POH is not a consensus protocol or anti-Sybil mechanism. Rather, POH is a solution to the clock problem.https://t.co/DsdJO9DlRq

— Solana (@solana) May 12, 2020

A Proof-of-History example

It may be difficult to imagine the exact way Proof-of-History works. Therefore, we show you how it works by illustrating this with an example.

So, for example, we have three transactions, A, B and C. Solana executes each of these transactions in order through its consensus protocol, Proof-of-History. PoH takes as input the transaction and the internal clock that objectively measures the order of the transactions, so it goes as follows:

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

Since everything is fixed in time stamps, this provides an objective measure. This includes the fact that each transaction took place, as well as the order in which each transaction took place. If transaction B were to be input at time stamp 0, the entire blockchain would be affected.

For those who don't know, he is talking about proof of history, probably nothing. #Solana https://t.co/Fn31djYLCA

— Cheems (@theCheemsToken) September 3, 2021

Due to this objective security, humans do not need to be involved during validation. This makes validation several times faster than PoW and PoS. As a result, Solana achieves transaction speeds of up to 50,000 transactions per second (TPS) where Bitcoin with Proof-of-Work achieves between 5 to 7 TPS and Ethereum with PoS achieves around 30 TPS. It is worth noting that Ethereum's Proof-of-Stake aims for much higher TPS and will probably achieve this in the future.

For a visual explanation of how Proof-of-History works, we recommend watching this video on Youtube.

Why Proof-of-History is not (yet) the consensus of the future

Proof-of-History has great potential. But as with any consensus algorithm, there are also drawbacks, and that also applies to PoH. If you want to participate as a validator at Solana, your hardware must meet strict requirements (read: specifications). If you do not meet these requirements, you are excluded from the consensus. This limits Solana's decentralization considerably. Because looking at a Proof-of-Stake validator, any standard computer equipment will do, allowing everyone to participate in the consensus, thus much more decentralized.

Whereas transaction speeds are a major advantage of Solana, they are also a hindrance in some respects. The tens of thousands of transactions generate enormous amounts of data. 1 transaction is about 250kb. 50,000 TPS of 250kb equals about 40 petabytes of data per year. That is a tremendously high amount of data and many companies, let alone private individuals, cannot store this amount of data. So a solution must be found for this in the future.

Solana #DeFi's Total Value Locked surpasses $3 BILLION 🤩🤩

By innovating a proof-of-history timing mechanism, Solana has solved a key issue that slows down regular PoW and PoS systems, and the need to verify timestamps when validating transactions! #solana #TVL #ecosystem pic.twitter.com/MtH78FniAx

— K300 Ventures (@k300ventures) September 2, 2021

Conclusion

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

Regardless, PoH is doing well in the market. Investors have confidence in PoH, which is evidenced by the fact that Solana's value has risen considerably in the last month and more and more developers are building applications on Solana's network. Whether Proof-of-History will become the basis for many other currencies remains to be seen. Though we will follow the developments with above-average interest.