It is important to understand that not all blockchains are the same nor are they designed to solve the same problem. In other words, blockchain technologies are not “one size fits all” phenomena. Understanding cryptonetworks and how they work is a complex subject, complete with subtle differences that have an enormous impact on long-term scalability and security of the network.
Blockchain architectures and the cryptonetworks built on top of them have the potential to transform the internet and create a smarter digital infrastructure. As faster and more efficient blockchain technologies begin to solve today’s challenges such as data privacy, security and transparency, decentralized cryptonetworks will rival today’s centralized systems.
There are 4 broad categories that I look at when evaluating cryptonetworks such as Bitcoin and Ethereum. Those 4 categories are:
2. Network Effect
4. Macro Environment
In this Mining Byte I will briefly address the category of Scalability.
Scaling Blockchain Networks is Really Difficult
Scaling a blockchain is very difficult as can be seen with Bitcoin and Ethereum. Those networks have inherent bottlenecks that make it difficult to scale the platform for widespread use. Scalability in the context of blockchain means that the blockchain can process fast transactions as well as provide low cost services to the end user while remaining permission-less, trustless and decentralized enough to remain secure.
What is a Consensus Protocol?
What makes cryptonetworks so powerful is that value can be exchanged within the network without users trusting a 3rd party to be honest and secure. Users within the network don’t have to worry about censorship by powerful parties (e.g. governments, corporations) and lastly network participants have more control of their personal data.
A “consensus protocol” is an algorithm that determines:
• Who should produce the next transaction block to apply to the blockchain.
• When should the next block be produced?
• What transactions should be included in the block?
• How are block producers compensated for their services?
In other words, the consensus algorithm determines how block producers are selected, and how the network agrees on a shared state of the ledger.
What is a Block Producer?
In a blockchain, transactions are verified and secured by a network of computer nodes called block producers. A block producer assumes a similar role as a “miner” in Proof-of-Work networks. The block producers play a very important role in that they provide the following services to the network:
- Ensuring Censorship-less Environment
- Tune Network Parameters (i.e. block size, fees, coin inflation, etc.)
- Security (i.e. prevent security breaches such as Double Spend Attack)
There are Different types of Consensus Protocols
Proof-of-Work or PoW
Probably one of the most widely known consensus algorithms is the Proof-of-Work or PoW which is implemented by both Bitcoin and Ethereum (although the latter plans to upgrade to PoS in a future upgrade or fork).
In PoW mining, each miner competes to solve a cryptographic puzzle in the shortest amount of time. This process determines who has the right to package individual transactions in to the next valid block, thus continuing the chain and securing the network. In return for providing this service, PoW miners are paid in the native cryptocurrency of the network. This payment can come from either inflation(newly minted coins) or from transaction fees, or a combination of both.
Proof-of-Stake or PoS
On the other hand, in a PoS network each individual can be a miner through a process known as staking . In some instances staking can be as simple as having your coins in a wallet, in others its a specific network operation which “locks” the coins or makes them illiquid for a period of time.
Delegate Proof-of-Stake or DPoS
In more complex blockchains, stakes can be delegated from one account to another. In other words, account holders can vote for who they want to be block producers in a one-token / one-vote manner.
This allows the use of the coins within the network for mining and other operations, but not a change in ownership. Delegate Proof-of-Stake or DPoS is a blockchain consensus protocol that allows network token holders to be able to cast votes to elect block producers either directly or indirectly through delegation. The votes in a DPoS are weighted by the amount of tokens a voter has staked or vested into the network. The block producers (miners) with the most votes are able to produce blocks. Unlike Proof-of-Stake (PoS) implementation where block producers are chosen entirely on wealth of their account, in a DPoS system, on-chain governance is built directly into the protocol. In a DPoS protocol, the algorithm provides an alternative path to becoming a block producer.
Transaction Rate as a Scalability Factor
The choice of which consensus protocol to use in a blockchain is important because it directly relates to how many transactions can flow through the network in a given amount of time. If it takes too long to long for a network to come to consensus then the operations of the network will be too slow for today’s use. Imagine waiting 15 minutes for confirmation that the cup of coffee you purchased at Starbucks? Or waiting 20 seconds to see your blog post published on your favorite social media site? That type of latency is probably not going to be too popular in today’s consumer environment. Humans will always choose speed and convenience, so it is important that cryptonetworks be able to scale and the blockchain’s consensus algorithm implementation is a critical component in facilitating fast and secure transactions as well as other network operations.
According to the website Blocktivity, as of today the top 5 blockchain networks with the highest transactions (7 day average) are Delegate Proof-of-Stake blockchains. Blockchain transaction rate, although not the only indication of scalability, is an important metric to monitor and track.