The main blockchain technologies explained
At the heart of distributed ledger technology (DLT), more commonly known as blockchain, lies the notion of creating trust. Specifically between two unknown parties who want to transact with each other without the use of an intermediary.
Computers in a blockchain network, known as “nodes”, rely on “consensus protocols” to reach an agreement about all pending transactions. In the real world, this is where a bank authorises a debit card purchase, or a lawyer verifies the paperwork for the sale of a house.
Consensus protocols are often the principal point of difference between different blockchain networks and cryptocurrencies.
Bitcoin: the first cryptocurrency to use Proof of Work (PoW)
Arguably, the most significant innovation that Satoshi Nakamoto, the inventor(s) of Bitcoin – the world’s first decentralised cryptocurrency – introduced was the landmark proof of work (PoW) consensus protocol, as outlined in the 2009 paper “Bitcoin: A Peer-to-Peer Electronic Cash System”.
PoW essentially prevents Bitcoin from being spent more than once while ensuring that every transaction is valid. The process of PoW involves “miners” solving a series of complex deliberately labour-intensive puzzles that require an enormous number of random guesses.
After a Bitcoin miner has solved the puzzle, a new “block” is created (at an average time of 10 minutes) and added to the transaction “chain”. Due to the energy and highly specialised computing power needed to solve the puzzles, many say this model makes it virtually impossible to commit fraud.
Key players that use PoW
Nearly 10 years after Bitcoin debuted PoW, it remains the most widely used consensus protocol underpinning blockchain projects and cryptocurrencies.
Today, Bitcoin-based cryptocurrencies, such as Litecoin, and Bitcoin Cash as well as Ethereum, the DLT behind Ether, the second-largest cryptocurrency by market capitalisation, all use PoW.
Bitcoin Cash is a “hard fork” and derivative currency of Bitcoin. A hard fork is a change to the rules that all nodes in a network must either adopt or leave the network. In August 2017 Bitcoin split into two, after group of developers tweaked Bitcoin’s software to increase each block size from 1MB to 8MB. This enabled it to handle larger transaction volumes and increase the speed.
Litecoin, launched in 2011, is popularly known as “silver to Bitcoin’s gold”. It is seen as nearly a clone of Bitcoin, as it is based on Bitcoin’s code. The principal difference to its predecessor is that it processes transactions around four times faster – at around 2.5 minutes, and it increases the total number of “coins” miners can produce. The biggest technical difference between Bitcoin and Litecoin lies in the different cryptographic puzzles which their miners solve. Bitcoin uses the SHA-256 algorithm, and Litecoin employs Scrypt.
Ethereum, launched in 2015, and its currency Ether, is the most well-known application of DLT after Bitcoin. But unlike Bitcoin, Ethereum allows users to swap “smart contracts”, as well as trading cryptocurrency.
Ethereum’s mining process is almost the same as Bitcoin’s. However, the PoW algorithm that Ethereum uses, called “ethash”, has one main difference. It is what is known as an “ASIC-resistant algorithm”. This means highly specialised and expensive chips, now commonly used by Bitcoin miners, are not compatible with the platform. This is to address the problem of mining centralisation – where small groups of hardware companies or mining operations, essentially monopolise the mining process.
While PoW is still by far the most commonly used consensus protocol, critics argue it is both highly inefficient and energy intensive – it is estimated that 3.8 American households can be powered for a day by the energy spent generating one Bitcoin transaction.
As a result, “next generation” protocols are being deployed by new entrants to the DLT and cryptocurrency space. Meanwhile, debates about the most effective, efficient and secure consensus protocol are rife, with many believing the “perfect” method has yet to be created.
Proof of Stake (PoS)
Arguably the protocol that is in the best position to overtake proof of work is “proof of stake” (PoS). Whereas PoW rewards participants for spending computational resources, blockchains that use PoS select “validators” (equivalent to miners) based in part on the size of their respective monetary deposits – known as their stake.
The key benefit of PoS over PoW is the amount of transactions the network can process, commonly referred to as “scalability”. Instead of wasting electricity cracking computationally heavy problems, a node is selected to generate (or “mint”) a new block with a probability proportional to the amount of coins it has.
If a node has a stake greater than zero, it is called a “stakeholder”. If a node eventually becomes chosen to mint a new block, it is called a “slot leader”.
Recently, Ethereum has announced intentions to transition to a new PoS consensus called Casper, where validators who act “maliciously” are punished for their actions.
Cardano, launched in 2017, is a DLT platform that runs the blockchain for the Ada cryptocurrency. It uses a PoS protocol called “Ouroboros”, which its creators say, is the first PoS protocol that has been scientifically proven as secure. Its goal is to be a “next Generation Ethereum” in that it it will eventually host smart contracts.
Delegated Proof of Stake (DPoS)
BitShares, launched in 2013, is a decentralised exchange for cryptocurrencies rather than a cryptocurrency itself. It favours the protocol known as “Delegated proof of stake” (DPoS). Like PoS, DPoS replaces miners with validators, but instead of individual miners solving puzzles, it uses real-time voting combined with a system of reputation to achieve consensus.
Advocates say DPoS is a more democratic system than PoW, and can achieve in seconds, what PoW completes in minutes, all while using a fraction of the energy.
EOS is known as “the Ethereum Killer”. Though it would be more correctly known as the “would-be Ethereum killer”, since it is yet to officially launch as a platform. Currently, EOS tokens exist but are traded on the Ethereum network.
The actual EOS platform is set to launch in June 2018 and, its creators say, it will use a variant of DPoS. EOS token-holders will be able to elect “witnesses” to the network who are ultimately responsible for achieving consensus.