Types of Blockchains: PoW, PoS and Private
While blockchain might appear to many as a monolithic technology, there is a great deal of variation between how different blockchain networks function. One foundational differentiator is the type of consensus mechanism that each blockchain uses. A consensus mechanism is the process through which a distributed network reaches an agreement about information on the network — for example, whether transactions are valid and in what order they occur. The consensus mechanism also plays a key role in securing the blockchain network from malicious actors like hackers.
Most public blockchain networks today use processes referred to as Proof of Work (PoW) or Proof of Stake (PoS) to provide consensus, while private — or 'permissioned' — blockchains and distributed ledger technologies (DLTs) can be structured in various ways to prioritize speed, security and scalability.
Let's take a look at the most common blockchain consensus mechanisms to get a better overall understanding of the different implementations:
Proof-of-work blockchains
The PoW consensus mechanism is among the most widely utilized methods in blockchain and was popularized first by Bitcoin. The defining components of PoW systems are miners and the electricity they expend to make the calculations that verify Bitcoin (BTC) transactions.
Miners operate computer hardware to run network nodes that employ computational power to algorithmically solve mathematical puzzles called 'proofs of work'. The miner who solves the puzzle first confirms the most recent block of transactions on the blockchain. The successful miner then broadcasts the new block to all other nodes, which in turn confirms its accuracy and adds that block to their copy of the blockchain, building a verifiable record of data for the whole network.
This verification process represents consensus. Only once this data is confirmed can a new block be added to the network. Miners receive newly minted cryptocurrency, the block reward, (in the case of Bitcoin, they receive BTC) for being the first to validate a new block of data and add it to the PoW blockchain.
Proof-of-work blockchains aim to produce blocks at consistent intervals — Bitcoin, for example, generates one block about every ten minutes. PoW networks are limited in terms of their speed and scale because the process for proving work is so energy intensive. Moreover, PoW networks are coded to be more or less difficult relative to the amount of computational power on the network. You may think of computational power as simply competition — more computational power equals more competition, which equals harder proofs of work. But despite their limitations of speed and scalability, PoW blockchains have historically provided better security, while maintaining meaningful decentralization. Because PoW systems are distributed, it is extremely expensive for a malicious actor to take over the blockchain by controlling the majority of computing power on the network. The hardware, electricity and computational costs are typically too high to surmount.
However, the same features that make PoW blockchains secure also make the barriers to participating in the network as a node high. Operating a mining rig and paying for the associated hardware and electricity costs is too expensive for the average user, and mining on many major networks has been monopolized by large-scale mining operators that have amassed influence in network governance.
Another drawback of PoW networks is that they are energy intensive and thus environmentally damaging. The computational power needed to solve proofs of work requires an immense amount of electricity. For example, in 2021 the Bitcoin network had the same annual carbon footprint as the nation of New Zealand and used as much electricity as Chile. Tech development in the blockchain industry has focused significantly on remediating the environmental drawbacks of crypto mining, and a number of alternative solutions have emerged.
Proof-of-stake blockchains
Proof of Stake is the second most popular consensus mechanism and solves many of the disadvantages found on Proof-of-work blockchains like lack of speed, poor scalability, inefficient energy consumption and high barrier to entry.
Examples of current industry-leading PoS blockchains include Polkadot, Avalanche and Cardano. Ethereum, which was originally designed as a PoW blockchain, is in the process of transitioning to a PoS blockchain called Ethereum 2.0.
Instead of miners validating transactions, PoS blockchains simply have validators. Validators are network node operators that validate data, similarly to PoW systems, but there is no energy-intensive computational process to earn the right to validate. Instead of working to solve proofs of work, validators 'stake' some of the blockchain’s native tokens to become eligible for selection as a validator node. The prospective validator will essentially stake crypto tokens native to the blockchain to serve as collateral. When it comes time to validate the data held in a transaction block on a PoS blockchain, the system randomly selects a validator to confirm the data. While random to an extent, certain variables can make it more likely for a validator to be chosen, including the number of tokens a validator has staked. When the block is confirmed, that validator is rewarded with network transaction fees, and the process begins again with a new block.
Proof-of-stake blockchains keep the network secure and validators honest by requiring validators to stake their tokens. If validators act maliciously or incompetently, they lose their stake and access to the network through a process called 'slashing'. This incentive structure ensures that validators have more to gain through lawful operation than by breaking the rules.
Since validators on PoS blockchains do not have to invest in expensive hardware and high electricity costs, the barrier to entry to PoS blockchains for validators is arguably lower. However, if you wish to become a validator, you still must have a sufficient amount of crypto to stake. This amount varies between blockchains, but can reach into the thousands of dollars worth of tokens. PoS blockchains have also been criticized as plutocratic, because the amount of influence validators have over the network is often proportional to the size of their stake.
In terms of sustainability, PoS blockchains are arguably better for the environment than PoW networks because they consume significantly less electricity. Proponents therefore argue that there should be a focus on employing PoS consensus mechanisms in future blockchain projects.
Delegated Proof of Stake (or DPoS) is a popular evolution of the proof-of-stake concept, whereby users of the network elect delegates to validate the next block. Delegates can also be called witnesses or block producers. Using DPoS, you vote for delegates by pooling your tokens into a staking pool and linking those to a particular delegate. Proponents say DPoS is a more decentralized and egalitarian process for achieving consensus than Proof of Stake alone.
Private and consortium blockchains
Blockchain types that use PoW and PoS consensus mechanisms are typically public and decentralized. However, two other categories of blockchain exist — consortium blockchains and private blockchains. A private blockchain is a blockchain controlled by a centralized entity that determines who can interact with the blockchain, verify transactions and who can view the information recorded on the blockchain. A consortium blockchain is a distributed ledger controlled by several entities, each of which operates a network node, participates in consensus and has permissions to view certain types of data.
Private and consortium blockchains are typically used by enterprises that aim to employ blockchain architecture, but want to ensure specific information remains private, for either regulatory or competitive reasons.
Public blockchains like Bitcoin and Ethereum are censorship-resistant and offer broad ecosystems for the development of apps and platforms. Consortium blockchains, however, may offer faster transaction processing times and are easier to modify, but are walled gardens with limited usage outside of the private consortium.
ConsenSys’ Quorum (which was formerly owned by JPMorgan Chase) is a private, permissioned version of the Ethereum network designed to facilitate interbank information sharing. Consortium blockchains are currently under development in a variety of industries including the insurance industry, the food distribution industry, the financial services industry, and are even being used to prototype central bank digital currencies (CBDCs) around the globe.
Not all blockchains are made equal, and the various consensus mechanisms have different implications for accessibility, security, and sustainability. Likewise, not all blockchain types are equally well suited for every use case. Though public blockchains are secure and censorship-resistant, for example, they are not well-suited for enterprises due to their transparency. While PoW has been the standard consensus mechanism since the launch of Bitcoin in 2009, PoS, DPoS, and DLT are rapidly gaining traction in the world of blockchain.
A private blockchain network, similar to a public blockchain network, is a decentralized peer-to-peer network. However, one organization governs the network, controlling who is allowed to participate, execute a consensus protocol and maintain the shared ledger. Depending on the use case, this can significantly boost trust and confidence between participants. A private blockchain can be run behind a corporate firewall and even be hosted on-site.
Businesses who set up a private blockchain will generally set up a permissioned blockchain network. It is important to note that public blockchain networks can also be permissioned. This places restrictions on who is allowed to participate in the network and in what transactions. Participants need to obtain an invitation or permission to join.
Multiple organizations can share the responsibilities of maintaining a blockchain. These pre-selected organizations determine who may submit transactions or access the data. A consortium blockchain is ideal for business when all participants need to be permissioned and have a shared responsibility for the blockchain.
Risk management systems for blockchain networks
When building an enterprise blockchain application, it’s important to have a comprehensive security strategy that uses cybersecurity frameworks, assurance services and best practices to reduce risks against attacks and fraud.