"Proof of work", "proof of stake", "proof of attendance". These are terms scattered across blockchain-based applications and platforms that we do not take much time to question, but what exactly are we proving, and why does it matter?
At its core, blockchain offers a way for people to transact securely, without relying on a third party to see that exchanges of information or value happen fairly. When information is added to a blockchain, this is proof of its authenticity and creates real-world utility in multiple contexts as proof of fact.
But how does a blockchain network know that what it is adding to its ledger is correct? For that, every network relies on its own internal verification system, normally known as its consensus mechanism, or its "proof of". Yet proof systems also go beyond internal consensus and increasingly shape how blockchain interacts with the real world.
In this article, we take a deep dive into the two main categories of "proof of" - both internal and external - explaining the utility of each one, so this omnipresent concept is a bit less mystifying the next time you see it.
Consensus Protocols - Proof of Validation
Blockchain technology is a way of recording and storing information on a distributed ledger. The record is spread across a network of computers, called nodes, so instead of having one person or party in charge of the record, everyone in the network is involved in keeping track.
The consensus protocol refers to the system where all nodes reach a common agreement about the data recorded on the distributed ledger. There is consensus between all parties that allows trust that the information is up to date and accurate.
But without any central authority to verify blockchain data, how is the process of verification incentivized and made watertight? What compels people to keep an accurate account of a blockchain?
There are a few different ways that consensus protocols work in practice - and each offers different tradeoffs and rewards.
Proof-of-Work
One of the OG consensus mechanisms, Proof-of-Work (PoW), is what Bitcoin uses. It goes hand-in-hand with cryptocurrency and blockchain mining. The main idea behind this system is that a node works to solve an extremely complicated algorithmic puzzle and come up with the solution. Each solution works to add a new block to the blockchain and the process validates information and transactions.
How does proof of work guarantee veracity?
Due to the nature of the distributed ledger, if a person tries to tamper with the network, the altered version of the blockchain would be quickly rejected by others. It would take more than half of the nodes involved in the system, or at least 51%, to conspire a false verification. This is both physically unrealistic and so expensive in terms of energy and hardware that one person simply would not be able to do it.
The financial incentive involved in correct verifications, coupled with the prohibitive cost of verifying an invalid transaction, means that gaming the system is all but impossible and has poor outcomes for anyone who tries.
Proof-of-Stake
As an alternative to the energy-intense Proof of Work, the Proof of Stake (PoS) consensus takes a lot less energy. In this method of validating blocks, miners do not use equipment to solve a puzzle. Rather, validators invest in the protocol by locking up some of their cryptocurrency as a stake to help the network keep turning.
How do we know the information is valid?
In a proof-of-stake system, validators tokens act as proof of good will. They put their own resources on the table to show that they will not lie or act maliciously because doing so would directly impact their own holdings. This means the PoS model encourages agreement by incentive.
Similar to Proof-of-Work, it will take at least 51% of the network to validate a false transaction, something incredibly expensive and practically impossible for one person to effect.
Proof-of-Authority
While blockchains are known typically as public distributed ledgers, there are two different kinds: permissionless networks, like Bitcoin and Ethereum, where anyone can become a node, and permissioned networks where nodes are pre-selected.
For permissioned blockchains, Proof-of-Authority is a common consensus that uses the same concept of Proof of Stake, but instead of staking coins, nodes are staking their reputation. This acts as a deterrent from attempts to verify false transactions.
While the blockchain has room to be private, the data is still distributed across the network and all parties can see what other nodes have validated. While the system provides effective incentives to ensure valid transactions, its limitation is that it allows power to culminate with a central few actors who build the strongest reputation.
The most common application for Proof of Authority is in supply chains and ledgers that require precise and updated information across a network of people. While it is not a decentralized protocol at the core, it still takes advantage of blockchains technology to increase efficiency and accuracy.
Those are the key internal consensus mechanisms that keep most blockchains running, and the dynamics by which they ensure all actors in the network are pulling in the same accurate direction.
Now we have looked at the internal proof systems keeping blockchains running, let us check out some of the external applications of the technology as proof systems within real life.
Proof-ofs for Real Life: NFTs and Attestations
An NFT is a unique piece of data recorded on a blockchain, represented in the form of a single ownable token. Every NFT, even when it looks identical to another, holds a value and significance exclusively for its owner, and the ownership itself is enshrined by the blockchain.
NFTs started out as art and gaming assets, but when you think about it, their basic elements and capacity to prove particular things make them a good vehicle for recording personal information and proving it to others.
Proof-of-Ownership
The ownership of an NFT cannot be challenged, forged, or undone by a third party, and the public key from the creator acts as a certificate of authenticity of its contents. No other tokens will share the same data, meaning an NFT cannot be replicated or swapped with another one.
This makes NFTs an ideal vehicle for personal contracts that confer ownership, from insurance policies to property transfers or even a college diploma. Since NFTs are governed by smart contracts, they can also be programmed with a specific duration, or to expire or transfer after a specific period of time passes, making them a strong venue for finite personal contracts.
All of this can be implemented and maintained without using a third party, meaning proof of ownership of real-world assets could be transferred seamlessly on a peer-to-peer basis.
Proof-of-Authenticity and Provenance
The online world is plagued with issues of security and trust: fake news, identity theft, and fraud. Blockchain technology and smart contracts can put a massive security blanket on online activity without the need for a central operator.
Blockchain is an ideal candidate for record keeping, information storage, and identity authenticity because of its transparency, traceability, and the immutability of records. Once something has been established as valid, it is accepted by the network.
A student graduates from university and is given a diploma in person. They also want to get a version of their diploma to live on the blockchain. This version is unmodifiable, tamper-proof, and verifiably listed to the student. With blockchain-based authenticity, the document can be sent to prospective employers with easy verification and the source institution can also be proven.
Education is not the only place where we are seeing NFTs employed as authentication. Driver licenses, medical information and records, and social security numbers are all areas of activity. The technology adds security so that we can trust verified information and see whether the person behind the information is able to validate it.
Proof-of-Attendance
The Proof of Attendance Protocol, also seen as POAP, gives event-goers a way to collect badges signifying their attendance. It is like keeping the tickets for events, but the badges live on the blockchain as NFTs. Each badge is unique and the only way to claim one is to attend the event.
Not all events can hand out NFTs and call them POAP, however. They need to meet certain criteria. They need to be minted through the official POAP smart contract, show metadata related to a specific time, and have an image behind them.
While they might only seem like a fun collectible documenting a persons crypto experiences, the function goes a little deeper. If an event can issue a POAP, there is not a lot stopping universities from issuing POAP badges when students graduate or from professionals using badges as a digital resume of training or experience.
Proof-ofs for the Future
So what does all of this mean? While it is not necessarily important to know about all the ins-and-outs and hyper-granular details of the technology behind the protocols, it is important to know about the different ways blockchain can be applied and what it means for our future.
Because blockchain offers a trustless system, we do not need to rely on any central party to manage and control our assets and information. Decentralization empowers peer-to-peer transactions without someone watching over you and gives you complete control and greater freedom over your own data without interference from other parties.
Blockchain protocols mean that trust concerns no longer have a place at the table in your interactions, whether financial or otherwise, which could make for quicker, simpler, and cheaper transactions in the not so distant future.
Knowledge is Power
Understanding proof systems matters because they are the mechanism by which blockchains both defend their internal integrity and export trust into the real world. The more familiar you are with them, the easier it becomes to understand where this technology is heading and how it may reshape identity, ownership, and verification online.