CSE446: Blockchain & Cryptocurrencies

Lecture – 11: Other Consensus Algorithms

Agenda
• PoW Limitations
• Other consensus algorithms
• Proof of Stake (PoS)
• Delegated Proof of Stake (DPoS)
PoW Limitations
• There are a few major limitations of PoW
• Energy consumption
• Absence of penalty
• Delay in block finality (confirmation)
PoW Limitations: energy consumption
• Each PoW algorithm needs to consume electricity to compute
the hash
• As the difficulty of the network starts to increase, so does the
energy consumption
• The amount of consumed energy is quite significant when
calculated over the whole network consisting of ASIC/GPU
mining rigs all around the world
PoW Limitations: energy consumption

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PoW Limitations: energy consumption

https://digiconomist.net/bitcoin-energy-consumption
PoW Limitations: energy consumption by country

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PoW Limitations: absence of penalty
• PoW algorithms are altruistic in nature in the sense that they
reward behaving miners
• However, they do not penalise a misbehaving miner
• One example is that a miner can collude with a group of
miners (a phenomenon known as selfish mining) to increase
its profitability in an illegitimate way
PoW Limitations: absence of penalty
• In addition, a miner can engage in Denial-of-Service attacks by
just not forwarding any transaction or block within the network
• Furthermore, such malicious miners can join forces to engage
in the spawn-camping attack
• Launching DoS attacks simultaneously over and over again to
render the blockchain network useless
• A penalty mechanism would disincentivise any miner to
engage in any type of malicious misbehaviour
PoW Limitations: delay in finality
• Finality is the assurance or guarantee that crypto-currency transactions cannot
be altered, reversed, or cancelled after they are completed
• Finality is used to measure the amount of time one has to wait for a reasonable
guarantee for a transaction to be confirmed (included in a block)
• In blockchain technology, transactions are termed immutable due to its finality
nature
• The latency level of a blockchain will ultimately affect the chain's finality rate

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PoW Limitations: delay in finality
• Finality is an essential feature for ventures accepting cryptocurrencies because
• waiting endlessly on a blockchain network can have a high adverse effect for businesses or enterprises
that accept crypto as a means of payment

• When creating a payment system, to be effective, it is crucial to have low latency

• If you were to have to wait for 10 minutes every time you wished to purchase anything, it would
quickly become very inconvenient to go shopping
• However, most PoW-based blockchain protocols only show a probabilistic transaction finality
• meaning that transactions are not automatically or instantly final but become "more and more final" over
time (as more blocks are confirmed)
• For Bitcoin, it is estimated that one has to wait 6 blocks, around 1 hour, before we can say that a
transaction is final with a reasonable guarantee

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Proof of Stake (PoS)
• In PoS, the nodes who would like to participate in the block creation
process must prove that they own a certain number of coins at first
• Besides, they must lock a certain amount of its currencies, called stake,
into an escrow account in order to participate in the block creation
process
• The stake acts as a guarantee that it will behave as per the protocol rules
• The node that escrows its stake in this manner is known as the
stakeholder, staker, validator, leader, forger, or minter in PoS terminology
• The minter can lose the stake, in case it misbehaves
Proof of Stake
• In essence, when a stakeholder escrows its stake, it implicitly becomes a
member of an exclusive group
• Only a member of this exclusive group can participate in the block creation
process
• How much block a minter can generate depends on their size of stakes
• The stakeholder who produces blocks are rewarded in one of the two
different ways
• Either it can collect the transaction fees within the block, or
• It is provided a certain amount of currencies that act as a type of interest
against their stake
Proof of Stake

Escrow Account

Set of Users Set of Validators

Proof of Stake

Staked amount

Escrow Account

Set of Users Set of Validators

Proof of Stake

Escrow Account

Set of Users Set of Validators

Proof of Stake
0 1
0 1

Staker 2 Staker 5
0 1
Staker Selection Algorithm
0 1

Staker 1
0 1 0 1
Staker 6

Staker 3 Staker 4
Proof of Stake
0 1
0 1

Staker 2 Staker 5
0 1
Staker Selection Algorithm
0 1

Staker 1
0 1 0 1
Staker 6

Staker 3 Staker 4
Proof of Stake
0 1 2 0 1

Staker 2 Staker 5
0 1
Staker Selection Algorithm
0 1

Staker 1
0 1 0 1
Staker 6

Staker 3 Staker 4
Proof of Stake
0 1 2 0 1

2
Staker 2 Staker 5 Verify 2

0 1
2 Staker Selection Algorithm
0 1

Staker 1 Verify 2 2

0 1
0 1 Verify 2
Staker 6
2
2
Verify 2
Staker 3 Staker 4 Verify 2
Proof of Stake
0 1 2 0 1 2

Staker 2 Staker 5
0 1 2
Staker Selection Algorithm
0 1 2

Staker 1
0 1 2 0 1 2
Staker 6

Staker 3 Staker 4
PoS: Bootstrapping issue
• One of the major barriers in a PoS algorithm is how to generate the initial
coins
• A fair distribution of coins among the stakeholders are essential to
ensure a secure PoS algorithm
• This is known as the bootstrapping problem
• There are two ways to solve the bootstrap issue:
• Pre-mining
• PoW to PoS transition
PoS: Bootstrapping issue
• Pre-mining:
• A set of coins are pre-mined, which are then sold before the launch of the
system in an IPO (Initial Public Offering) or ICO (Initial Coin Offering)
• PoW-PoS transition
• The system starts with a PoW system to fairly distribute the coins among the
stakeholders
• Then, it slowly transitions towards the PoS system
• Ethereum took this approach
DPoS
• Delegated Proof of Stake (or DPoS in short) is a form of consensus
algorithm in which reputation scores or other mechanisms are used to
select the set of (delegated) validators
• Even though it has the name Proof of Stake associated with it, it is quite
different from other PoS algorithms
• In DPoS, users of the network vote to select a group of delegates (or
witnesses) who are responsible for creating blocks
• Delegates are the only entities who can propose new blocks
DPoS
• For each round, a leader is selected from the set of delegates who can
propose a block
• How such a leader is chosen depends on the respective blockchain
system
• The leader gets rewards for creating a new block, and is penalised and
de-listed from the set of validators if it misbehaves
DPoS
• The delegates themselves compete with each other to get included in
the validator list
• In such, each validator might offer different levels of incentives for the
voters who vote for it
• For example, if a delegate is selected to propose a block, it might
distribute a certain fraction of its reward among the users who have
voted for the delegate
• Since the number of validators is small, the consensus finality
(confirmation) can be fast
DPoS

Wishing to be Validators
Set of Validators

Set of Users
DPoS

Wishing to be Validators
Set of Validators

Set of Users
DPoS: EOS
• EOS is the first DPoS crypto-currency and smart-contract platform
• The DPoS consensus algorithm of EOS utilises 21 validators, also known
as Block Producers (BPs)
• These 21 validators are selected with votes from EOS token (currency)
holders
• The number of times a particular BP (block producer) is selected to
produce a block is proportional to the total votes received from the
token holders
DPoS: EOS
• Blocks in EOS are produced in rounds where each round consists of 21 blocks
• At the beginning of each round, 21 BPs are selected
• Next, each of them gets a chance to create a block in pseudo-random fashion
within that particular round
• Once a BP produces a block, other BPs must validate the block and reach into a
consensus
• A block is confirmed only when the (+2/3) majority of the BPs reach the
consensus regarding the validity of the block
• Once this happens, the block and the associated transactions are regarded as
confirmed or final, so no fork can happen
Finality: Bitcoin vs EOS

Blockchain Consensus Avg. time per block Avg. time to finality

60 minutes
Bitcoin PoW 10 minutes
(6 confirmations)

2-3 seconds (2-3

EOS DPoS 0.5 - 1 second
commitments)

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