Proof of Authority was proposed in 2017 by Gavin Wood, co-founder of the world's second-largest blockchain, Ethereum. And has since become a prominent consensus mechanism. There were two main drivers behind this proposal. And the growing need to move away from energy-intensive proof-of-work and to address certain problems found in proof-of-stake.

The cryptocurrency space has changed a lot since the first blockchain transactions on the Bitcoin network. In addition to the well-known proof-of-work and proof-of-stake algorithms. Other consensus mechanisms have been proposed, including alternative methods of reaching consensus within blockchain systems.

What is proof of authority?

Proof of Authority (PoA) is a reputation-based consensus algorithm that introduces a practical and efficient solution for blockchain networks.

The PoA consensus algorithm leverages the value of identity, which means that block validators are not staking coins but their own reputation. Therefore, PoA blockchains are secured by legitimate nodes that are arbitrarily chosen as trusted entities.

The Proof of Authority model relies on a limited number of block validators. And this makes it a highly scalable system. Blocks and transactions are verified by pre-approved participants, who act as moderators of the system.

The PoA consensus algorithm can be applied in a variety of scenarios. And is considered a high-value alternative for logistics applications. When it comes to supply chains, for example, PoA is considered an effective and reasonable solution.

The Proof of Authority model enables companies to maintain their privacy when using blockchain technology. Microsoft Azure is another example where PoA is being implemented. In short, the Azure platform provides solutions for private networks, with a system that does not require native currencies such as Ether 'gas', since there is no need for mining.

How does PoA work?

A permissioned blockchain transaction powered by PoA does not require "mining". The purpose of mining is to provide an incentive for nodes to validate transactions. And participate in maintaining an honest record of a decentralized public and permissionless blockchain.

But in a private blockchain where all participating nodes are already identified. And pre-authorized, there is no need to provide incentives. Therefore, there is no need for mining.

Adding a block to the chain does not require nodes to solve complex mathematical problems. Instead, blocks are added to a permissioned chain when a majority of pre-authorized nodes sign off on them.

To be authorized, nodes must prove their authority by meeting certain conditions thus proving their long-term commitment to maintaining the blockchain.

This can be anything from being located in a specific country, being associated with the organization, having good ethical standing and reputation, and having formal on-chain identification.

Proof of Authority vs Proof of Stake

Some consider PoA to be a modified PoS, using identities instead of coins. Due to the decentralized nature of most blockchain networks, PoS is not always suitable for certain businesses and corporations. In contrast, PoA systems may represent a better solution for private blockchains because their efficiency is considerably higher.

Use in case of proof of authority

As blockchain grows, more and more businesses are realizing the benefits of its technology. As a result, permissioned blockchains are growing in popularity, especially in industries where security, privacy, identity, and role definition are essential or where high transaction processing speed at low cost is most desired.

For example, supply chain management may use a PoA system with designated validators from logistics partners, financing banks, and other involved vendors. Each individual entity can have its own permissions and a level of transparency that will streamline operations from tracking inventory to account monitoring and invoicing.

The system may also be useful for sidechains or testnets such as Ethereum's Kovan, Goerli, and Rinkeby. They each use PoA consensus to provide a controlled environment for testing features before launching them on the mainnet.

Limitations

The perception of the PoA process is that it ignores decentralization. So one can say that this model of consensus algorithm is just an attempt to make centralized systems more efficient. While this makes PoA an attractive solution for large corporations with logistical needs, it comes with some dilemmas – especially in the cryptocurrency space. PoA systems have a high throughput, but aspects of immutability come into question when things like censorship and blacklisting are easily achieved.

Another common criticism is that the identity of PoA verifiers is visible to anyone. The argument against this is that only established players who want to be legitimate can be in this position. Nevertheless, knowing the identity of verifiers can lead to manipulation by third parties. For example, if an adversary wants to disrupt a PoA-based network, he can try to influence publicly known verifiers to act dishonestly to compromise the system.

PoW, PoS, or PoA all have their own unique advantages and disadvantages. It is well known that decentralization is highly valued in the cryptocurrency community and PoA, as a consensus process, sacrifices decentralization to achieve high throughput and scalability. The underlying features of PoA systems are completely different from how blockchains have been working so far. Nevertheless, PoA represents an interesting approach and cannot be ignored as an emerging blockchain solution, which may be suitable for private blockchain applications.

Summing up PoA

However, the Proof of Authority consensus mechanism may sacrifice some of Blockchain's beloved features. What it loses in decentralization it gains in lower energy consumption and environmental impact, higher throughput, and scalability.