What Is Proof-of-Activity And Why It Matters To Understand Blockchain Business Models

Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Aspect	Explanation
Definition	Proof-of-Activity (PoA) is a hybrid consensus algorithm used in blockchain networks to secure and validate transactions. It combines elements of Proof-of-Work (PoW) and Proof-of-Stake (PoS) mechanisms. In a PoA system, participants are required to perform a PoW challenge to create new blocks, and once a block is mined, validators with stakes verify and sign the block. This dual mechanism aims to strike a balance between energy-efficient block creation and maintaining a decentralized network. PoA is designed to mitigate the environmental concerns associated with PoW while providing security through PoS-like validation.
Key Concepts	– Proof-of-Work (PoW): PoW involves solving complex mathematical puzzles to validate transactions and create new blocks. It consumes significant computational power and energy. – Proof-of-Stake (PoS): PoS relies on validators who hold cryptocurrency stakes to validate transactions and create blocks. It is more energy-efficient than PoW. – Hybrid Consensus: PoA combines PoW and PoS elements to achieve both security and energy efficiency. – Block Creation: PoA requires miners to perform PoW for block creation, followed by validation by stakeholders in the PoS phase.
Characteristics	– Energy Efficiency: PoA is more energy-efficient compared to traditional PoW algorithms because it only requires energy-intensive mining during block creation. – Decentralization: The presence of PoS validators helps maintain network decentralization. – Block Finality: Transactions in PoA networks achieve finality more quickly than in PoW-only networks due to the PoS validation phase. – Security: PoA aims to provide security through PoS-like validation, reducing the risk of 51% attacks.
Implications	– Reduced Energy Consumption: PoA reduces the energy consumption associated with PoW consensus mechanisms, making it more environmentally friendly. – Faster Transaction Confirmation: PoA networks offer faster transaction confirmation times compared to PoW-only networks. – Enhanced Security: The combination of PoW and PoS enhances network security by reducing the risk of centralization and 51% attacks. – Balanced Consensus: PoA strikes a balance between the energy efficiency of PoS and the security of PoW.
Advantages	– Energy Efficiency: PoA is more energy-efficient and environmentally friendly than traditional PoW. – Quick Confirmation: Transactions are confirmed faster due to the PoS validation phase. – Security: PoA maintains security through the PoS element, reducing centralization risks. – Decentralization: The presence of PoS validators helps maintain network decentralization.
Drawbacks	– Complexity: Implementing a PoA consensus algorithm can be more complex than using PoW or PoS alone. – Validator Selection: The selection of validators in the PoS phase needs to be carefully designed to avoid centralization. – Hybrid Nature: The hybrid nature of PoA may make it less straightforward for participants to understand and implement.
Applications	Proof-of-Activity is mainly applied in blockchain networks where there is a desire to reduce energy consumption while maintaining security and decentralization. It is used in various blockchain projects that seek to combine the advantages of PoW and PoS.
Use Cases	– Decred (DCR): Decred is a cryptocurrency that uses a hybrid PoW/PoS consensus system, which includes a PoA element for added security. – NavCoin (NAV): NavCoin employs a PoA consensus algorithm known as Proof of Stake Plus Work (PoS+W). – Emercoin (EMC): Emercoin utilizes a PoA-based hybrid consensus algorithm to secure its blockchain network. – Peercoin (PPC): Peercoin combines PoW and PoS mechanisms, including PoA, to validate and secure its transactions. – Myriad (XMY): Myriad employs a PoW/PoS hybrid algorithm with a PoA component to enhance network security.

Table of Contents

Understanding Proof-of-Activity

Proof-of-Activity is a combination of Proof-of-Work (PoW) and Proof-of-Stake (PoS).

Proof-of-Work is the most common consensus algorithm and is utilized by Bitcoin among other cryptocurrencies. While PoW maintains blockchain integrity and security, it does consume vast amounts of computing power and electricity. There are also issues with scalability and centralization, with most of the hashing power held by a select few individuals or groups.

Proof-of-Stake remedies the resource intensiveness of PoW but also suffers from a form of centralization. In this case, centralization is caused by early adopters who earn a larger share of block creation fees and discourage late adopters from participating.

Proof-of-Activity was first proposed in a research paper in 2014. In the abstract of the paper, the authors “propose a new protocol for a cryptocurrency, that builds upon the Bitcoin protocol by combining its Proof-of-Work component with a Proof-of-Stake type of system. Our Proof-of-Activity (PoA) protocol offers good security against possibly practical attacks on Bitcoin, and has a relatively low penalty in terms of network communication and storage space.“

How blocks are generated in a PoA network

The following steps dictate the block creation process in a PoA network:

To start, each miner uses hash power to try and generate an empty block header. This is header data consisting of the hash of the previous block, the miner’s address, the height relative to the genesis block, and a nonce. It’s important to note that the header does not include past transactions.
A miner succeeds in generating a block header when the hash of their block header data is less than the current difficulty target. Once successful, the block header is broadcasted to the network.
The hash of the block header is linked with the hash of the previous block. Each combination is then hashed and follow-the-satoshi is invoked with each hash acting as input. Follow-the-satoshi is a PoA subroutine, which transforms a pseudorandom value into a small unit of cryptocurrency called a satoshi. Each satoshi is picked randomly from the satoshis that have been already mined.
Active miners then check whether the block header from step two is valid. Does it contain the hash of the previous block and does it meet the current difficulty? After validation, each miner determines whether they are one of the stakeholders of the block. Successful miners sign the hash block header with a private key that determines their satoshi and broadcasts their signature to the network. This process is repeated until every chosen validator signs the block.
The last miner to sign the block then broadcasts the wrapped block to the network. The block is considered a legitimate extension of the blockchain once other nodes see validity in the above four steps. Similar to the Bitcoin blockchain, the nodes try to extend the longest branch they are aware of by assessing PoW difficulty. The fees collected by the last miner are shared between themselves and the remainder of the “winners”.

Protection against malicious attacks

Both PoS and PoW were designed to prevent 51% attacks, where one individual or party attempts to gain majority control over mining power.

However, PoA adds another layer of protection against such attacks. In theory, a malicious actor would need to have 51% or more of the total mining power in addition to 51% or more of the coins staked in the network.

Key takeaways:

Proof-of-Activity (PoA) is a hybrid of the PoS and PoW consensus mechanisms. It facilitates genuine transactions and consensus among miners.
PoA attempts to address centralization issues in both PoS and PoW. It also seeks to do so in a manner that is not resource-intensive.
The probability of a 51% attack on a PoA system is reduced significantly. This is because a malicious actor would need majority control of both the mining hash rate and the number of coins in a system.