UNIT III

DISTRIBUTED CONSENSUS

Nakamoto consensus, Proof of Work, Proof of Stake, Proof of Burn, Difficulty Level,
Sybil Attack, Energy utilization and alternate

3.1 Nakamoto consensus

Consensus in blockchain
Consensus is a distributed computing concept that has been used in blockchain in order to
provide a means ofagreeing to a single version of the truth by all peers on the blockchain
network. This concept was previouslydiscussed in the distributed systems section of this
chapter. In this section, we will address consensus in thecontext of blockchain technology.
Some concepts presented here are still relevant to distributed systems theory,but they are
explained from a blockchain perspective.

Roughly, the following describes the two main categories of consensus mechanisms:

Proof-based, leader-election lottery based, or the Nakamoto consensus whereby a leader is

elected atrandom (using an algorithm) and proposes a final value. This category is also
referred to as the fullydecentralized or permissionlesstype of consensus mechanism. This type
is well used in the Bitcoin andEthereum blockchain in the form of a PoW mechanism.
BFT-based is a more traditional approach based on rounds of votes. This class of consensus is
also knownas the consortium or permissioned type of consensus mechanism.
The Nakamoto Consensus, as its name implies, was created by Satoshi Nakamoto, Bitcoin’s
pseudonymous founder, in the Bitcoin white paper.
BFT-based consensus mechanisms perform well when there are a limited number of nodes,
but they do not scalewell. On the other hand, leader-election lottery based (PoW) type
consensus mechanisms scale very well butperform very slowly. As there is significant
research being conducted in this area, new types of consensusmechanism are also emerging,
such as the semi-decentralized type, which is used in the Ripple network.
Alternative Blockchains. There are also various other proposalsout there, which are trying to
find the right balance between scalability and performance. Some notable projects
include PBFT, Hybrid BFT, BlockDAG, Tezos, Stellar, and GHOST.
The consensus algorithms available today, or that are being researched in the context of
blockchain, arepresented here. The following is not an exhaustive list, but it includes all
notable algorithms.

Proof of Work (PoW): This type of consensus mechanism relies on proof that adequate
computationalresources have been spent before proposing a value for acceptance by the
network. This scheme is used inBitcoin, Litecoin, and other cryptocurrencyblockchains.
Currently, it is the only algorithm that has provento be astonishingly successful against any
collusion attacks on a blockchain network, such as the Sybilattack.

Proof of Stake (PoS): This algorithm works on the idea that a node or user has an adequate
stake in thesystem; that is, the user has invested enough in the system so that any malicious
attempt by that user wouldoutweigh the benefits of performing such an attack on the network.
This idea was first introduced byPeercoin, and it is going to be used in the Ethereum

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blockchain version called Serenity. Another importantconcept in PoS is coin age, which is a
criterion derived from the amount of time and number of coins thathave not been spent. In
this model, the chances of proposing and signing the next block increase with thecoin age.

Delegated Proof of Stake (DPoS): This is an innovation over standard PoS, whereby each
node that has astake in the system can delegate the validation of a transaction to other nodes
by voting. It is used in theBitSharesblockchain.

Proof of Elapsed Time (PoET): Introduced by Intel in 2016, PoET uses a Trusted
ExecutionEnvironment (TEE) to provide randomness and safety in the leader election
process via a guaranteed waittime. It requires the Intel Software Guard Extensions (SGX)
processor to provide the security guaranteefor it to be secure. This concept is discussed in
more detail in Chapter 15, Hyperledger, in the context of theIntel's Sawtooth Lake blockchain
project.

Proof of Deposit (PoD): In this case, nodes that wish to participate in the network have to
make a securitydeposit before they can mine and propose blocks. This mechanism is used in
the Tendermintblockchain.

Proof of Importance (PoI): This idea is significant and different from PoS.PoI not only
relies on howlarge a stake a user has in the system, but it also monitors the usage and
movement of tokens by the user inorder to establish a level of trust and importance. It is used
in the NEM coin blockchain. More informationabout this coin is available at NEM's website
https://nem.io.

Federated consensus or federated Byzantine consensus: This mechanism is used in the

stellar consensusprotocol. Nodes in this protocol retain a group of publicly-trusted peers and
propagate only thosetransactions that have been validated by the majority of trusted nodes.

Reputation-based mechanisms: As the name suggests, a leader is elected by the reputation

it has builtover time on the network. It is based on the votes of other members.

PBFT: This mechanism achieves state machine replication, which provides tolerance against
Byzantinenodes. Various other protocols including PBFT, PAXOS, RAFT, and Federated

Byzantine Agreement
(FBA) are also being used or have been proposed for use in many different implementations
of distributedsystems and blockchains.

Proof of Activity (PoA): This scheme is a combination of PoS and PoW, which ensures that
a stakeholderis selected in a pseudorandom but uniform fashion. This is a comparatively
more energy-efficientmechanism as compared to PoW. It utilizes a new concept called
Follow the Satoshi. In this scheme, PoWand PoS are combined together to achieve consensus
and good level of security. This scheme is moreenergy efficient as PoW is used only in the
first stage of the mechanism, after the first stage it switches toPoS which consumes negligible
energy. Bitcoin Network andPayments where protocols are reviewed in the context of
advanced Bitcoin protocols.

Proof of Capacity (PoC): This scheme uses hard disk space as a resource to mine the blocks.
This isdifferent from PoW, where CPU resources are used. In in PoC, hard disk space is

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utilized for mining and assuch is also known as hard drive mining. This concept was first
introduced in the Burstcoincryptocurrency.

Proof of Storage (PoS): This scheme allows for the outsourcing of storage capacity. This
scheme is basedon the concept that a particular piece of data is probably stored by a node
which serves as a means toparticipate in the consensus mechanism. Several variations of this
scheme have been proposed, such asProof of Replication, Proof of Data Possession, Proof of
Space, and Proof of Space-Time.
It can be considered the solution to the Byzantine Generals Problem, a thought experiment
that deals with a key question in computer science: is it possible to form a consensus in a
computer network of independent, distributed nodes? — The Nakamoto Consensus says that
yes, indeed it is.

The Nakamoto Consensus is a set of rules that verifies the authenticity of a blockchain
network, using a combination of the proof-of-work consensus algorithm on a Byzantine
Fault Tolerance (BFT) peer-to-peer network.
Prior to Satoshi’s creation of the Nakamoto Consensus, Byzantine Fault Tolerance was used
in peer-to-peer networks to maintain their authenticity for a variety of cryptography-related
projects, and even some early forms of digital currency.

However, there were problems — in just a Byzantine Fault Tolerant system, the voting
system for consensus requires a rotating election of leaders. If a leader acted maliciously, as
leaders are known to do, then they could be removed from the network by a vote from the
other nodes. In the case of Bitcoin (and for the idea of a digital currency in general) this
individual removal of leaders through a voting process would pose a huge problem when it
came to scaling.

In the Nakamoto Consensus, there is no block selection “voting” process like in BFT-only
networks; instead, the miners compete to solve a cryptographic puzzle, and the winner (and
their new block) is then accepted as valid across the entire network of miners. The mining
computation process is a little bit like a lottery: it’s not possible to tell who will find the
solution, meaning that miners have to be willing to honestly invest time and money in their
participation to validate the next block.

Another aspect of the Nakamoto Consensus comes from Satoshi putting a hard cap on the
amount of Bitcoin — there will only ever be a total of 21 million of the cryptocurrency in
circulation. This creates artificial scarcity, which again adds to the incentives for miners to
participate in the network.

3.1.1.The Nakamoto Consensus Beyond Bitcoin

Looking beyond Bitcoin, the Nakamoto Consensus created the foundation for the large
blockchain and cryptocurrency community that exists today. By solving the Byzantine
Generals Problem, Satoshi created a consensus model that can be used for almost an infinite
number of use cases besides Bitcoin — blockchain’s potential has reached industries ranging
from banking, to real estate, to voting, and even to health care.

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3.1.2 Consensus in blockchain

Consensus is a distributed computing concept that has been used in blockchain in order to
provide a means of agreeing to a single version of the truth by all peers on the blockchain
network. This concept was previously discussed in the distributed systems section of this
chapter. In this section, we will address consensus in the context of blockchain technology.
Some concepts presented here are still relevant to distributed systems theory, but they are
explained from a blockchain perspective.
Roughly, the following describes the two main categories of consensus mechanisms:
Proof-based, leader-election lottery based, or the Nakamoto consensus whereby a leader is
elected at random (using an algorithm) and proposes a final value. This category is also
referred to as the fully decentralized or permissionlesstype of consensus mechanism. This
type is well used in the Bitcoin and Ethereum blockchain in the form of a PoW mechanism.
BFT-based is a more traditional approach based on rounds of votes. This class of consensus is
also known as the consortium or permissioned type of consensus mechanism.

BFT-based consensus mechanisms perform well when there are a limited number of nodes,
but they do not scale well. On the other hand, leader-election lottery based (PoW) type
consensus mechanisms scale very well but perform very slowly. As there is significant
research being conducted in this area, new types of consensus mechanism are also emerging,
such as the semi-decentralized type, which is used in the Ripple network. There are also
various other proposals out there, which are trying to find the right balance between
scalability and performance. Some notable projects include PBFT, Hybrid BFT, BlockDAG,
Tezos, Stellar, and GHOST.
The consensus algorithms available today, or that are being researched in the context of
blockchain, are presented here. The following is not an exhaustive list, but it includes all
notable algorithms.

3.2.Proof of Work (PoW):

In 1998, B-money was proposed by Wei Dai, a computer engineer who used to work for
Microsoft, whichintroduced the idea of using Proof of Work (PoW) to create money. The
term Proof of Work emerged and got popular later with Bitcoin, but in Wei Dai's B-money a
scheme of creating money was introduced by providing asolution to a previously unsolved
computational problem. It was referred in the paper as solution to a previouslyunsolved
computational problem. This concept is similar to PoW, where money is created by
broadcasting asolution to a previously unsolved computational problem.
This type of consensus mechanism relies on proof that adequate computational resources
have been spent before proposing a value for acceptance by the network. This scheme is used
in Bitcoin, Litecoin, and other cryptocurrencyblockchains. Currently, it is the only algorithm
that has proven to be astonishingly successful against any collusion attacks on a blockchain
network, such as the Sybil attack.

A major weakness in the system was that an adversary with higher computational power
could generateunsolicited money without allowing the network to adjust to an appropriate
difficulty level. The system lacked details on the consensus mechanism between nodes and
some security issues such as Sybil attacks were also notaddressed. At the same time, Nick
Szabo, a computer scientist introduced the concept of BitGold, which wasalso based on the
PoW mechanism but had the same problems as B-money with the exception that the network

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difficulty level was adjustable. Tomas Sander and Amnon Ta-Shma from the International
Computer ScienceInstitute (ICSI), Berkley introduced an e-cash scheme under a research
paper named Auditable, AnonymousElectronic Cash in 1999. This scheme, for the first time,
used Merkle trees to represent coins and Zero-Knowledge Proofs (ZKPs) to prove the
possession of coins.

In this scheme, a central bank was required that kept a record of all used serial numbers. This
scheme allowedusers to be fully anonymous. This was a theoretical design which was not
practical to implement due toinefficient proof mechanisms.

Reusable Proof of Work (RPoW) was introduced in 2004 by Hal Finney, a computer
scientist, developer andfirst person to receive Bitcoin from Satoshi Nakamoto. It used the
hashcash scheme by Adam Back as a proof ofcomputational resources spent to create the
money. This was also a central system that kept a central database tokeep track of all used
PoW tokens. This was an online system that used remote attestation made possible by a
trusted computing platform (TPM hardware).
All the previously mentioned schemes are intelligently designed but were weak from one
aspect or another.Specifically, all these schemes rely on a central server that is required to be
trusted by the users.

3.3 Proof of Stake (PoS)

This proof is also called virtual mining. This is another type of mining puzzle that has been
proposed as analternative to traditional PoW schemes. It was first proposed in Peercoin in
August 2012. In this scheme, theidea is that users are required to demonstrate possession of a
certain amount of currency (coins) thus provingthat they have a stake in the coin. The
simplest form of the stake is where mining is made comparatively easierfor those users who
demonstrably own larger amounts of digital currency. The benefits of this scheme
aretwofold; first acquiring large amounts of digital currency is relatively difficult as
compared to buying high-endASIC devices and second it results in saving computational
resources.

Another commonly used consensus algorithm is PoS (Proof of Stake). This is the most
common alternative to PoW. In this consensus algorithm, instead of investing in expensive
hardware to solve a complex mathematical puzzle, the validator uses the following
approach:
 They invest in the coins by locking up some of their coins as a stake.
 All the validators will start validating the blocks.
 Validators will validate blocks by placing a bet on them if they find a block that they
think can be added to the chain.
 Based on the actual blocks added in the Blockchain, all the validators get a reward
proportionate to their bets, and their stake increase accordingly.
 In the end, a validator is chosen based on their economic stake in the network to
generate a new block.
Thus, PoSencourages validators through an incentive mechanism to reach an agreement. It
doesn’t use hash functions, it uses digital signatures as the proof of ownership of the coins.
Block forgers or minters are used for the validation of new blocks. The forger who puts
more coins at stake has a greater chance to be selected as the block validator. There are no
block rewards in the PoS system.
Advantages of PoB Over PoS: In Posblockchain, market scarcity is not permanent. The
scarcity is only for a certain amount of time i.e. until the forger stakes their coin which is
usually done by locking them up. But the coins come back into circulation if the forger who

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is leaving takes those coin and sell them in the market. While in the case of PoB the coins
are destroyed thus the scarcity is permanent.

Advantages of PoB:
 It required very little power compared to PoW.
 It reduces energy consumption by wasting insignificant resources when coins are
burned.
 It encourages long-term involvement in a project as a consumer is displaying a big
commitment to the currency by foregoing a narrow profit in exchange for a long-term
profit.
 The coin distribution is more fair compared to all other consensuses.

Disadvantages OfPoB:
 It is risky because one doesn’t know that will they gain the wealth they have burnt in
the future or not.
 As coins are burnt, so technically if we see then resources are wasted.
 It may suffer from rich getting richer phenomena. In which those who are wealthy are
getting wealthier by having more coins.

Proof of Burn (PoB): Another approach to allocating initial funds to a new altcoin is PoB,
also called a one-way peg or price ceiling. In this method users permanently destroy a certain
quantity of bitcoins in proportion to the quantity of altcoins to be claimed. For example, if ten
bitcoins were destroyed then altcoins can have a value no greater than some bitcoins
destroyed. This means that bitcoins are being converted into altcoins by burning them.

As an alternate expenditure to computing power, PoB, in fact, destroys a certain number of

bitcoins to getequivalent altcoins. This is commonly used when starting up a new coin
projects as a means to provide a fairinitial distribution. This can be considered an alternative
mining scheme where the value of the new coins comesfrom the fact that previously a certain
number of coins have been destroyed.

Delegated Proof of Stake (DPoS): This is an innovation over standard PoS, whereby each
node that has a stake in the system can delegate the validation of a transaction to other nodes
by voting. It is used in the BitSharesblockchain.

Proof of Stake (PoS): This algorithm works on the idea that a node or user has an adequate
stake in the system; that is, the user has invested enough in the system so that any malicious
attempt by that user would outweigh the benefits of performing such an attack on the
network. This idea was first introduced by Peercoin, and it is going to be used in the
Ethereum blockchain version called Serenity. Another important concept in PoS is coin age,
which is a criterion derived from the amount of time and number of coins that have not been
spent. In this model, the chances of proposing and signing the next block increase with the
coin age

Proof of Elapsed Time (PoET): Introduced by Intel in 2016, PoET uses a Trusted
Execution
Environment (TEE) to provide randomness and safety in the leader election process via a
guaranteed wait time. It requires the Intel Software Guard Extensions (SGX) processor to
provide the security guarantee for it to be secure. Hyperledger, in the context of the Intel's
Sawtooth Lake blockchain project.

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Proof of Deposit (PoD): In this case, nodes that wish to participate in the network have to
make a security deposit before they can mine and propose blocks. This mechanism is used in
the Tendermintblockchain.

Proof of Importance (PoI): This idea is significant and different from PoS.PoI not only
relies on how large a stake a user has in the system, but it also monitors the usage and
movement of tokens by the user in order to establish a level of trust and importance. It is used
in the NEM coin blockchain. More information about this coin is available at NEM's website
https://nem.io.

Federated consensus or federated Byzantine consensus: This mechanism is used in the

stellar consensus protocol. Nodes in this protocol retain a group of publicly-trusted peers and
propagate only those transactions that have been validated by the majority of trusted nodes.

Reputation-based mechanisms: As the name suggests, a leader is elected by the reputation

it has built over time on the network. It is based on the votes of other members.

PBFT: This mechanism achieves state machine replication, which provides tolerance against
Byzantine nodes. Various other protocols including PBFT, PAXOS, RAFT, and Federated

Byzantine Agreement
(FBA) are also being used or have been proposed for use in many different implementations
of distributed systems and blockchains.

Proof of Activity (PoA): This scheme is a combination of PoS and PoW, which ensures that
a stakeholder is selected in a pseudorandom but uniform fashion. This is a comparatively
more energy-efficient mechanism as compared to PoW. It utilizes a new concept called
Follow the Satoshi. In this scheme, PoW and PoS are combined together to achieve
consensus and good level of security. This scheme is more energy efficient as PoW is used
only in the first stage of the mechanism, after the first stage it switches to PoS which
consumes negligible energy.

Proof of Capacity (PoC): This scheme uses hard disk space as a resource to mine the blocks.
This is different from PoW, where CPU resources are used. In in PoC, hard disk space is
utilized for mining and as such is also known as hard drive mining. This concept was first
introduced in the Burstcoincryptocurrency.

Proof of Storage (PoS): This scheme allows for the outsourcing of storage capacity. This
scheme is based on the concept that a particular piece of data is probably stored by a node
which serves as a means to participate in the consensus mechanism. Several variations of this
scheme have been proposed, such as Proof of Replication, Proof of Data Possession, Proof of
Space, and Proof of Space-Time.

Mining and proof‐of‐work.It turns out that all of these problems are related, and all of them
have the same solution, which is called proof‐of‐work . The key idea behind proof‐of‐work
is that we approximate the selection of a random node by instead selecting nodes in
proportion to a resource that we hope that nobody can monopolize. If, for example, that
resource is computing power, then it’s a proof‐of‐work system. Alternately, it could be in
proportion to ownership of the currency, and that’s called proof‐of‐stake . Although it’s not

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used in Bitcoin, proof‐of‐stake is a legitimate alternate model and it’s used in other
cryptocurrencies.

But back to proof‐of‐work. Let’s try to get a better idea of what it means to select nodes in
proportion to their computing power. Another way of understanding this is that we’re
allowing nodes to compete with each other by using their computing power, and that will
result in nodes automatically being picked in that proportion. Yet another view of
proof‐of‐work is that we’re making it moderately hard to create new identities. It’s sort of a
tax on identity creation and therefore on the Sybil attack. This might all appear a bit vague, so
let’s go ahead and look at the details of the proof‐of‐work system that’s used in Bitcoin,
which should make things a lot clearer.
Bitcoin achieves proof‐of‐work using hash puzzles . In order to create a block, the node that
proposes that block is required to find a number, or nonce , such that when you concatenate
the nonce, the previous hash, and the list of transactions that comprise that block and take the
hash of this whole string, then that hash output should be a number that falls into a target
space that is quite small in relation to the much larger output space of that hash function. We
can define such a target space as any value falling below a certain target value. In this case,
the nonce will have to satisfy the following inequality:

(nonce|| prev_hash|| tx|| tx H || ... || tx) <target

As we saw earlier, normally a block contains a series of transactions that a node is proposing.
In
addition, a block also contains a hash pointer to the previous block1. In addition, we’re now
requiring that a block also contain a nonce. The idea is that we want to make it moderately
difficult to find a nonce that satisfies this required property, which is that hashing the whole
block together, including that nonce, is going to result in a particular type of output. If the
hash function satisfies the puzzle‐friendliness property from Chapter 1, then the only way to
succeed in solving this hash puzzle is to just try enough nonces one by one until you get
lucky. So specifically, if this target space were just one percent of the overall output space,
you would have to try about 100 nonces before you got lucky. In reality, the size of this target
space is not nearly as high as one percent of the output space.
It’s much, much smaller than that as we will see shortly. This notion of hash puzzles and
proof of work completely does away with the requirement to magically pick a random node.
Instead, nodes are simply independently competing to solve these hash puzzles all the time.
Once in a while, one of them will get lucky and will find a random nonce that satisfies this
property. That lucky node then gets to propose the next block. That’s how the system is
completely decentralized. There is nobody deciding which node it is that gets to propose the
next block.

Difficult to compute.There are three important properties of hash puzzles. The first is that
they need to be quite difficult to compute. We said moderately difficult, but you’ll see why
this actually varies with time. As of the end of 2014, the difficulty level is about 10 20 hashes
per block. In other words the size of the target space is only 1/10 20 of the size of the output
space of the hash function. This is a lot of computation — it’s out of the realm of possibility
for a commodity laptop, for example. Because of this, only some nodes even bother to
compete in this block creation process. This process of repeatedly trying and solving these
hash puzzles is known as Bitcoin mining , and we call the participating nodes miners . Even
though technically anybody can be a miner, there’s been a lot of concentration of power in
the mining ecosystem due to the high cost of mining.

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Parameterizable cost. The second property is that we want the cost to be parameterizable, not
afixed cost for all time. The way that’s accomplished is that all the nodes in the Bitcoin
peer‐to‐peer network will automatically recalculate the target, that is the size of the target
space as a fraction of the output space, every 2016 blocks. They recalculate the target in such
a way that the average time between successive blocks produced in the Bitcoin network is
about 10 minutes. With a 10‐minute average time between blocks, 2016 blocks works out to
two weeks. In other words, the recalculation of the target happens roughly every two weeks.
Let’s think about what this means. If you’re a miner, and you’ve invested a certain fixed
amount of hardware into Bitcoin mining, but the overall mining ecosystem is growing, more
miners are coming in, or they’re deploying faster and faster hardware, that means that over a
two week period, slightly more blocks are going to be found than expected. So nodes will
automatically readjust the target, and the amount of work that you have to do to be able to
find a block is going to increase. So if you put in a fixed amount of hardware investment, the
rate at which you find blocks is actually dependent upon what other miners are doing. There’s
a very nice formula to capture this, which is that the probability that any given miner, Alice,
is going to win the next block is equivalent to the fraction of global hash power that she
controls. This means that if Alice has mining hardware that’s about 0.1 percent of total hash
power, she will find roughly one in every 1,000 blocks. What is the purpose of this
readjustment? Why do we want to maintain this 10‐minute invariant? The reason is quite
simple. If blocks were to come very close together, then there would be a lot of inefficiency,
and we would lose the optimization benefits of being able to put a lot of transactions in a
single block. There is nothing magical about the number 10, and if you went down from 10
minutes to 5 minutes, it would probably be just fine. There’s been a lot of discussion about
the ideal block latency that altcoins, or alternative cryptocurrencies, should have. But despite
some disagreements about the ideal latency, everybody agrees that it should be a fixed
amount. It cannot be allowed to go down without limit. That’s why we have the automatic
target recalculation feature.
The way that this cost function and proof of work is set up allows us to reformulate our
security assumption. Here’s where we finally depart from the last leap of faith that we asked
you to take earlier. Instead of saying that somehow the majority of nodes are honest in a
context where nodes don’t even have identities and not being clear about what that means, we
can now state crisply, that a lot of attacks on Bitcoin are infeasible if the majority of miners,
weighted by hash power, are following the protocol — or, are honest. This is true because if a
majority of miners, weighted by hash power, are honest, the competition for proposing the
next block will automatically ensure that there is at least a 50 percent chance that the next
block to be proposed at any point is coming from an honest node.

Proof of burn.A proof-of-burn is a script that can never be redeemed. Sending coins to a
proof-of-burn script establishes that they have been destroyed since there’s no possible way
for them
to be spent. One use of proof-of-burn is to bootstrap an alternative to Bitcoin by forcing
people to destroy Bitcoin in order to gain coins in the new system.
Proof-of-burn is quite simple to implement: the OP_RETURN opcode throws an error if it’s
ever reached. No matter what values you put before OP_RETURN, that instruction will get
executed eventually, in which case this script will return false.
Because the error is thrown, the data in the script that comes after OP_RETURN will not be
processed. So this is an opportunity for people to put arbitrary data in a script, and hence into
the block chain. If, for some reason, you want to write your name, or if you want to
timestamp and prove that you knew some data at a specific time, you can create a very low

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value Bitcoin transaction. You can destroy a very small amount of currency, but you get to
write whatever you want into the block chain, which should be kept around forever.

Proof of Burn Consensus Algorithm in Blockchain

Blockchain is the backbone technology of digital cryptocurrencyBitcoin that allows digital
information to be decentralized and distributed. It provides immutability, privacy, security,
and transparency. In Blockchain no central authority is present to validate and verify the
transactions, yet every transaction in the Blockchain is completely secured and verified.
The transactions are considered to be secured and verified because of the consensus
protocol which is a core part of any Blockchain network.
Consensus Algorithm: A consensus algorithm is an algorithm or we can say a procedure
through which all the peers of the Blockchain network reach a common agreement about
the present state of the distributed ledger. In this way, consensus algorithms help to achieve
reliability in the Blockchain network and establish trust between unknown peers in a
distributed computing environment. It makes sure that every new block that is added to the
Blockchain is the one and only version of the truth that is agreed upon by all the nodes in
the Blockchain.

3.4.Proof of Work (PoW): Bitcoin uses a PoW consensus algorithm. This algorithm is
used to select a miner for the next block generation. The idea behind this algorithm is to
solve a complex mathematical puzzle that requires a lot of computational power and easily
gives out a solution. Thus, the node that solves the mathematical puzzle as soon as possible
gets to mine the next block.
Proof of Burn (PoB): With PoB, instead of investing in expensive hardware equipment,
the validators follow the following approach:

 They burn coins by sending them to an address from where they are irretrievable.
 By committing the coins to an unreachable address, validators earn a privilege to mine
on the system based on a random selection process.
 Thus, burning coins means that validators have a long-term commitment in exchange
for their short-term loss.
 Depending on how the PoB is implemented, miners may burn the native currency of the
Blockchain application or the currency of an alternative chain, such as bitcoin.
 The more coins validators burn, the better are their chances of being selected to mine
the next block.
While PoB is an interesting alternative to PoW, the protocol still wastes resources
needlessly. It is also questioned that mining power simply goes to those who are willing to
burn more money.
Why Proof of Burn Required?
There were some drawbacks in the PoW consensus algorithm which made researchers work
towards a new consensus algorithm i.ePoB.
 The first drawback is that the power consumption of PoW is very high. Miners are
awarded by upgrading the ledger under a POW model. Computational power is
employed to solve a math problem in exchange for remuneration. Greater the money a
miner spends to solve the problem, the greater the chances that they will be allowed to
mine blocks.
 PoW requires very high capital investments.

How PoB Works?

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1. As the name itself suggests, there is something which should be burned. Here as we are
talking in the context of virtual currency so it’s obvious that in PoB virtual currency is
burned. The more the currencies are burned by miners the more they have the power to
create blocks.
2. By burning we don’t exactly mean burning. It means not using that coin. This may be
done if it is sent to somewhere where it can’t be spent. So miners send these coins to
such addresses from where they can’t be used. It is sent to a public verifiable address
where it cannot be accessed and thus can not be used.
3. When the coin is burnt its availability decreases leading to a potential increase in the
value of the coin.
4. Now the question is why do we need to burn the coin? The basic explanation for this is
that by destroying the currency, the consumer is displaying a big commitment to the
currency by foregoing a narrow profit in exchange for a long-term profit.
5. To avoid any undue advantages for early adopters, the PoB has devised a method that
allows for the periodic burning of crypto coins in order to maintain mining capacity.
Any time a fresh block is mined, the energy of burned coins decreases slightly.
6. It is a deflationary idea in which the quantity of currencies reduces over time, increasing
deficiency and, as a result, the currency holders’ value. Coins that grow their quantity
over time, on the other hand, tend to lose value.

3.5.Block difficulty

Block difficulty is increased if the time between two blocks decreases, whereas it increases if
the block timebetween two blocks decreases. This is required to maintain a roughly consistent
block generation time. Thedifficulty adjustment algorithm in Ethereum's Homestead release
is shown as follows:

block_diff = parent_diff + parent_diff // 2048 *

max(1 - (block_timestamp - parent_timestamp) // 10, -99) +
int(2**((block.number // 100000) - 2))

The preceding algorithm means that, if the time difference between the generation of the
parent block and thecurrent block is less than 10 seconds, the difficulty goes up. If the time
difference is between 10 to 19 seconds,the difficulty level remains the same. Finally, if the
time difference is 20 seconds or more, the difficulty leveldecreases. This decrease is
proportional to the time difference.
In addition to timestamp-difference-based difficulty adjustment, there is also another part
(shown in the last lineof the preceding algorithm) that increases the difficulty exponentially
after every 100,000 blocks. This is the socalledDifficulty Time Bomb or Ice Age introduced
in the Ethereum network, which will make it very hard tomine on the Ethereum blockchain at
some point in the future. This will encourage users to switch to Proof ofStake (PoS) as
mining on the POW chain will eventually become prohibitively difficult.
According to the original estimates based on the algorithm, the block generation time would
have becomesignificantly higher during the second half of the year 2017, and in 2021, it
would become so high that it will bevirtually impossible to mine on the POW chain, even for
dedicated mining centers. This way, miners will haveno choice but to switch to the PoS
scheme proposed by Ethereum called Casper.
This Ice Age proposal has been postponed with the release of Byzantium. Instead, the mining
reward has beenreduced from 5 Ethers to 3 Ethers. This is in preparation for PoS
implementation in Serenity.

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 In the Byzantium release, the difficulty adjustment formula has been changed to take uncles
into account fordifficulty calculation. This new formula is shown here:

adj_factor = max((2 if len(parent.uncles) else 1) - ((timestamp - parent.timestamp) // 9), -

99)

3.6. Sybil Attack

What is a Sybil Attack?

A Sybil Attack is a form of online security violation where an entity has numerous fake
identities on a blockchain for malicious reasons.

The origin of the term “Sybil” can be traced back to the 1973 novel by Flora Schreiber. It has
a character named Sybil who has an identity-related medical issue. She would always try to
operate with multiple identities.

The term crept into tech after John R. Douceur published a short research paper some
decades back. Apart from explaining the nature of Sybil Attacks, John also classified them
into two categories.

The first is the direct Attack, and the second is the indirect attack.

1. Direct Sybil Attack

A Direct Sybil Attack occurs when a malicious node directly interacts with honest nodes in
the protocol. This type of attack is particularly effective because the genuine nodes are unable
to detect that the fake nodes are not legitimate.

Consequently, the attacker can manipulate the genuine nodes into taking actions that align
with the attacker’s self-interests.

2. Indirect Sybil Attack

A typical indirect Sybil Attack happens when fake nodes come in contact with one or more
nodes connected to the authentic nodes.

In contrast to a Direct Sybil Attack, hackers use intermediary/proxy nodes to launch an

indirect attack. The intermediary nodes, which are positioned between the Sybil node and the
honest ones, represent a single or a few points of failure. By exploiting these intermediary
nodes, hackers can launch an attack on the honest nodes that is not as easily detected as a
direct Sybil Attack.

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The logic is that once a Sybil node has influenced the middle nodes, it would compromise the
authentic nodes.

What triggers the Sybil Attack?

A Sybil Attack is a high-severity security threat that has assailed some blockchains. The
question is, “What are the factors that trigger a Sybil Attack?”

First, a weakness in the node creation process can be a trigger. Once it is easy to create and
run a node, an adversary can easily set up multiple Sybil nodes and attack anytime. Hence,
the reason some blockchain protocols often resort to a financially flamboyant node creation
process.

Second, how effective is the node validation system? Sybil Attacks can easily be detected and
expunged when the validation system points them out on time. So if the validation system can
easily be manipulated, this can trigger a hacker to give it a try.

Most importantly, huge revenues in a blockchain magnetize hackers. Throughout history,

hackers have always assaulted high-volume blockchain protocols with Sybil Attacks.
Examples include Monero, Verge, and Ethereum Classic.

Examples of the Sybil Attack

The Tor attack in 2014 was one of the earliest Sybil Attacks against a P2P network. Tor is a
peer-to-peer network that facilitates private conversations.

The attackers assailed it that year to discover the locations and identities of some Tor users.
In the unofficial post-mortem report, the Tor team found some facts that the attack was a
Sybil Attack.

The attacker-controlled about 115 relays from a single IP address. This means that only one
person was in charge of the numerous relays. The attacker was able to get some unduly large
influence over the network and access some pieces of information.

A similar and probably deadlier Sybil Attack happened in 2020 on the same Tor network.
The hackers behind the 2020 attack focused more on the Bitcoin holders that use Tor.

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 The attacker who controls a lot of fake Tor relays would intercept the cyber-movements of
Bitcoin holders and strip them of their funds.

What threats can Sybil Attacks cause?

Sybil Attacks can be disastrous to the integrity of a blockchain. These two major threats they
can cause:

1. Breach of Privacy
Blockchain technology places a premium on security and privacy. But Sybil Attack assaults
the core of this tenet. A threat actor can run a malicious node to collect sensitive details that
the honest nodes are passing.

Depending on the information that the attacker seeks to get, a Sybil Attack places the
blockchain at risk. One of the details can be illegally obtaining the IP addresses of those
behind the honest nodes.

2. Hijacking a Blockchain
In the context of blockchain, one of the vulnerabilities that a Sybil Attack can cause is the
51% attack. A 51% attack happens when a single person or group gains total dominance over
a blockchain.

Such that the inauthentic or malicious nodes outnumber the honest nodes. This power gives
the attacker the upper hand in the protocol’s decision-making processes.

As a result, the former can outvote the latter and hijack such a blockchain. It is a fatal security
assault that is bound to happen with a Sybil Attack. This was the exact thing that happened
during the Litecoin Cash Attack in 2019.

3. Block Withholding Attack

A Block Withholding Attack can also occur as a result of a Sybil Attack. In this type of
attack, a significant number of validators who are acting against the blockchain’s interests
refuse to add new blocks to the chain.

This can result in the blockchain becoming stagnant an

This can result in the blockchain becoming stagnant and unusable over time, requiring
intervention to restore its functionality for users.

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 How do blockchains prevent Sybil Attacks?

Sybil Attacks can lead to complications on a blockchain and compromise its operation. After
careful analysis, blockchains have also come up with some preventive measures.

We shall consider a few of them subsequently:

Identity Validation

John Douceur himself recommended this Sybil attack prevention in his research paper.
According to him, there are two basic ways to authenticate identities. The first is direct, and
the second is indirect.

Direct authentication works so that the central authority checks and verifies every new
validator that applies to join the network as a peer. They can require details such as IP
address, name in real life, etc.

But in an indirect authentication, some already verified validators attest to the genuineness of
the new to-be validator. All the personal information does not matter; only the vouching does.

Each of these validating techniques has its good and bad sides. The direct authentication
model is susceptible to the applicant supplying incorrect information.

Similarly, indirect authentication can be centralized because the existing validators will only
approve the people they know. This is against the decentralized nature of blockchain.

2. Setup a Hierarchical System

New nodes or identities on the blockchain are likely to be Sybil nodes. As a result, they
should be placed under suspicion for some time till their overall genuineness is confirmed.

Create a structure where the integrity of nodes is in cadets. This is why a hierarchical system
is a sure prevention of Sybil Attacks.

Those who have been in the network for a long time should have higher powers than the
newbies. Such that the new Sybil nodes cannot carry out a major attack even if they want to.

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3. Utilize Social Trust Graphs
A social graph is the visual representation of every validator within a network. So trust
graphs then classify validators based on their honesty so far.

If the algorithm notices some foul nodes, it will indicate that their trust level is low. This way,
the main operators of a blockchain network can quickly detect Sybil nodes.

There are currently several social trust graph techniques, such as SybilRank, SybilGuard, the
Advogato Trust Metric, and so on. But note that social trust graphs do not have 100% speed
and accuracy.

Thus, it is recommended that they are used with other preventive measures for battle-tested
security.

4. Create Custom Defense Systems

Generic security measures can still be susceptible to attacks. The more specific the defense,
the better. This is why some blockchains are incorporating custom defense mechanisms to be
more Sybil-resistant.

A similar example is how Invisible Internet Project (I2P), a private p2p protocol, utilizes
Kademlia to prevent Sybil Attacks. Kademlia is a form of a distributed hash table on which
Sybil Attacks are difficult to happen.

These days, there are also developments of some Sybil-resistant algorithms. They include
DSybil, SumUp, and Whānau.

5. Costly Consensus Mechanisms

The main intention of attackers during Sybil Attacks is to take over the blockchain to siphon
funds. But running a costly consensus mechanism is an effective measure that checkmates
such purposes.

On the Ethereum blockchain, for instance, anyone needs to stake 32 ETH to run an Ethereum
node. 32 ETH is around $48,000. So to run multiple nodes for a Sybil Attack is not worth it
economically.

This is why blockchains that utilize PoW and PoS consensus mechanisms rarely experience
Sybil Attacks

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3.7. Energy utilization and alternate

Blockchain technology shows promise for sectors ranging from banking to logistics. In
the world of sustainability, it's being considered for applications from energy trading
schemes to supply chain transparency to food safety. However, as people envision hope-filled
plans for how it could change the world, they often overlook blockchain's non-sustainable
energy consumption.

Discussions of that downside typically center on the electricity consumption used for
cryptocurrency mining — which uses almost as much energy per year as Ireland. It also
doesn't help that cryptocurrency miners invest in more powerful and resource-dependent
computer equipment to succeed compared to their peers.

However, analysts suggest several ways to solve the blockchain energy problem. Here are
four:

1. Move away from the proof-of-work validation method

Proof of work is a validation method that prizes computing power and resource usage. As
cryptocurrency miners' computer power goes up, so does their mining power. When people
solve the mathematical challenges that allow them to validate blockchain transactions
through proof of work, they get rewarded with more cryptocurrency.

However, some people in the cryptocurrency sector want to instead use proof of stake or
authority to validate entries on the blockchain. Bitcoin researcher Alex de Vries is a
supporter of the proof-of-stake method.

It involves giving a person validation or mining privileges that relate to how many
cryptocurrency coins they have. People taking part in the proof-of-stake validation method
have to surrender cryptocurrency to do so, similarly to holding them in an escrow account. If
people fraudulently validate a transaction on the blockchain, they lose their staked coins — as
well as the ability to approve future blockchain entries.

Then, proof of authority only allows a selected number of people — usually 25 or less — to
validate blockchain transactions. These individuals are people viewed as trustworthy,
according to the consensus of everyone able to access the blockchain. This consensus method
is most common on private blockchains, such as the sort that would be built to handle
specific energy trading schemes or verification of sustainable business measures being taken
across a supply chain.

Here, people put their reputations on the line. Those who maliciously validate a transaction
lose their status within that group and forfeit the chance to perform any further validations.

The proof-of-stake and proof-of-authority methods are significantly less energy-intensive

than proof-of-work validation. If those building blockchain applications move toward less
energy-intensive methods of verification, there should be a resultant decrease in blockchain
energy consumption.

The Energy Web Foundation (EWF), for example, is designing a proof-of-

authority consensus method of confirming blockchain content. It wants to use the blockchain
to support distributed and renewable energy sources.

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Using blockchain in the energy sector handles both the regulatory and technical needs in that
industry. EWF wants to have at least 1,000 energy authorities participating in this blockchain.
It's devising a governing plan to eliminate bad actors, too.

2. Use blockchain to spur energy-efficient transportation methods

The possibilities above relate to how a blockchain operates. However, some efforts to reduce
blockchain energy consumption take a different approach. They aim to use blockchain to
promote energy-efficient ways of getting around, such as electric vehicles. Then, the
blockchain spurs people to adopt eco-friendly, environmentally conscious behaviors that help
offset the energy used.

However, the lack of infrastructure is one of the main barriers that makes people hesitate to
invest in electric cars. They may live in cities that don't have many or any electric charging
stations. If people take frequent road trips, they may worry about running out of power in an
isolated and unfamiliar place.

Blockchain-based, peer-to-peer platforms exist to help people find private charging

stations for their electric cars. One example is Share & Charge. It leverages the Ethereum
blockchain to connect drivers with charging points.

Some researchers are building blockchains that work differently from the ones that use so
much energy.

The individuals who own those power hubs can get some cash on the side during the times
they don't need to connect their electric vehicles. All such transactions get entered onto the
blockchain and are seamlessly handled by the relevant parties inside a dedicated app. Projects
like that could increase convenience for individuals who own electric cars and reduce range
anxiety.

There's also a blockchain project called DRIFE that brings on-demand transportation to the
blockchain. It's a decentralized system that lets people rate their drivers and see payment
details for their trips entered into the blockchain as ledger transactions.

Uber and Lyft helped people get comfortable with the idea of using on-demand drivers to
take them to their destinations. The blockchain solution proposed by DRIFE hopes to
eliminate some problems associated with using the gig economy for transportation and
emphasize transparency. If it becomes a readily available option, more people may decide
they don't need to own cars.

3. Build more energy-efficient blockchains

Some researchers are building blockchains that work differently from the ones that use so
much energy. Going that route is akin to the first possibility described on this list because it
changes a fundamental characteristic to cut blockchain energy use.

One example is the Red Belly Blockchain. It's a speedy solution capable of performing tens
of thousands of transactions per second. Most blockchains currently handle 20 or fewer
transactions in that time.

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Even better for the blockchain energy problem, researchers developed this blockchain with a
unique algorithm that allows performance scalability without ramping up energy
consumption levels. The Red Belly Blockchain also does not use the proof-of-work method
for transaction validation.

If projects like this one have long-term success, more people will realize it's possible to use
blockchain as a secure method of verifying transactions or behaviors while keeping
sustainability in mind.

It'll likely be a while before these new blockchains become the norm — if they ever do.
Nevertheless, it's fantastic that researchers recognize how crucial it is to conquer blockchain's
energy problem. The fact that they have developed something that works so well in lab tests
also helps other teams investigate ways to make progress.

4. Focus on sustainable ways to mine bitcoin

As mentioned earlier, the computing setups used by cryptocurrency miners are primarily
responsible for the exceptionally high energy demands of the blockchain. Fortunately, efforts
are underway, such as an initiative by Cryptosolartech in Spain, to mine bitcoin with solar or
wind energy.

These solutions strive to reduce the associated carbon footprint and prove that methods exist
to allow bitcoin mining to continue sustainably — even when validating with energy-
intensive, proof-of-work methods.

People in the corporate world who are considering systems that rely on blockchain or
cryptocurrency should ask plenty of questions about how transactions are resolved or the
currency is mined.

The next step is to prioritize the companies or miners that use sustainable methods. One
example of what's possible is a company called Northern Bitcoin. The organization is among
the enterprises leading the way in sustainable mining. It uses 100 percent renewable energy.

Blockchain can support energy sustainability

Blockchain has understandably earned a poor reputation due to concerns about its energy
requirements. The options mentioned above mean the blockchain could develop a better
reputation among people who appreciate its technological potential but have problems with
the energy aspect.

People at the corporate level must not get dazzled by outstanding blockchain projects. The
most responsible approach to take is to thoroughly research blockchain solutions — and their
energy implications — before pursuing them. After gathering information, they should take
care to align themselves with the ones that show the most potential for genuine operational
sustainability.

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