Proof-ofs: Blockchain’s Biggest Contribution

“Proof of work”, “proof of stake”, “proof of attendance”. They’re terms scattered across blockchain-based applications and platforms that we don’t 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 – this has real world utility in multiple contexts, as proof of X, Y or Z fact.

But how does a blockchain network know that what it’s 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”. But “proof ofs” also go beyond consensus mechanisms in the crypto dialectic, and here, we’ll take you by the hand to show you what they mean.

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 will be a bit less mystifying the next time you see it. Let’s jump in!

Consensus Protocols – Proof of Validation

So we know that blockchain technology is a way of recording and storing information. We call it a “distributed ledger” because the record is spread across a network of computers (called nodes). Because of this, instead of having one person or party in charge of the record, everyone in the network (all of the nodes) are 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 (a) up to date and (b) accurate.

But without any central authority to verify blockchain data, how is the process of verification incentivised and made watertight? What compels people to keep an accurate account of a blockchain?

There are a few different ways that we see consensus protocol in action – and what rewards they offer.

Proof-of-Work

One of the OG consensus mechanisms, Proof-of-Work (also seen as 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.

Proof-of-Work and the process of solving the puzzles takes a massive amount of power, which makes mining an expensive task. The first person to solve the puzzle earns a reward of some of the cryptocurrency for the validation of transactions on the network. 

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. (Yay, trust by consensus!) 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 the energy to make it happen would be at such a massive cost that one person just wouldn’t be able to do it. The financial incentive involved in correct verifications, coupled with the prohibitive cost of verifying an invalid transaction, mean 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. Solana, Elrond and Cosmos are just a few of the rising blockchains currently using proof of stake as a consensus mechanism, and Ethereum plans to transition to this type of system soon, something that’s hotly awaited within the industry. In all cases, the selling points of using proof of stake include vastly reduced energy consumption since the system doesn’t require all participants to compete for just one spot, lower transaction costs and a more decentralized framework.

With this method of validating blocks, miners don’t use equipment to solve a puzzle. Rather, the validators (nodes ensuring the protocol runs without a hitch) 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, ie. they put X amount of their own resources on the table to show that they won’t lie or act maliciously – if they did, it would impact their own holdings. This means the PoS 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 (like Bitcoin and Ethereum) where anyone can become a node, and permissioned where all nodes are pre-selected. 

For permissioned blockchains, the Proof-of-Authority is a common consensus that uses the same concept of Proof of Stake, but instead of staking coins, in Proof of Authority, 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’s not a decentralized protocol at the core, it takes advantage of blockchain’s technology to increase efficiency and accuracy.

Those are the key internal consensus mechanisms that keep most of our blockchains running, and the dynamics by which they ensure all actors in the network are pulling in the same accurate direction.

Now we’ve looked at the internal “proof ofs” keeping blockchain running, let’s check out some of the external applications of the technology – as “proof ofs” within real life.

Proof-ofs for Real Life: NFTs and Attestations

Let’s get back to basics. 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 pretty good vehicle for recording your personal information, and proving it to others.

Proof-of-Ownership

The ownership of an NFT can’t be challenged, forged or undone by a third party (thanks blockchain), 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: think insurance policies, property transfers or a college diploma.

Further to this, since NFTs are governed by smart contracts, they can be programmed with a specific duration, or to expire or transfer after a specific period of time passes – this makes them a great venue for finite personal contracts, such as a rental agreement on a property, or a provisional driver’s license.

All of this could 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, fraud. Blockchain technology and smart contracts work to put a massive security blanket on your online activity without the need to have someone manage it. 

Blockchain is the ideal candidate for record keeping, information storage, and identity authenticity. This is because of (a) the transparency and the tracebility, (b) and how immutable the records are. We know that if someone tries to change something on the network, the network will see it and be able to accept or reject the change.

This means that once something has been established as valid, it’s accepted by the network. Let’s look at how this can work in real-life (and beyond finance):

A student graduates from university and is given their 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 is verifiably-listed to the student. With blockchain-based authenticity, the documents are certifiably listed to the student alone and no-one (including the student) can change the information. The blockchain-diploma is online proof of the student’s achievements and can be sent to prospective employers with easy verification. 

The NFT would also verify the provenance of the student’s degree; with each university having its own smart contract powering their certifications, the NFT will not only authenticate the student’s achievement, but also the source institution.

Education isn’t the only place where we’re seeing NFTs be employed as authentication: driver’s licenses, medical information and records, social security numbers are all areas of activity. The technology adds in security so that we can trust verified information and we can see whether the person behind the information is able to validate it. This happens because we can create and authenticate NFTs through smart contracts – meaning that the record or item (whether it’s a diploma or a property listing) becomes a validated, blockchain-based online asset.

Proof-of-Attendance

Have you got a fridge covered in magnets from foreign countries? A wall full or old ticket stubs – or even an Instagram account? No matter what era you grew up in, human beings are linked by a desire to save and curate their memories into a unique story. Our story is part of our identity and, thanks to social media, it’s now a form of social signalling. 

With this in mind, blockchain has just made the story of your life easier to curate, more unique and more permanent than ever.

The Proof of Attendance Protocol (also seen as POAP) provides event-goers with a way to collect badges signifying their attending events. It’s 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. Depending on their crypto enthusiasm, collectors can wrack up an accumulation of unique tokens pretty quickly.

Not all events can hand out NFTs and call them POAP, however. They need to meet certain criteria. Firstly, they need to be minted through the official POAP smart contract. Secondly, they need to show metadata that is related to a specific time (significant of an event). Thirdly, they need an image behind them. 

While they might only seem like a fun collectible documenting a person’s crypto experiences, the function goes a little deeper – and unlike those ticket stubs, you can show off that collection 24/7.

If an event can issue a POAP, there’s 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’s not necessarily important to know about all the ins-and-outs and hyper-granular details of the technology behind the protocols, it’s 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 don’t 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 managing or sometimes prohibiting your activity – 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, be they financial or otherwise, which could make for quicker, simpler and cheaper transactions in the not so distant future.

Knowledge is Power.

Trust yourself and keep on learning. Blockchain is pretty damn interesting, right?! We couldn’t agree more. But to see it’s utility, sometimes you need to get back to basics. So check out this School of Block episode to wrap your head around the technology that’s changing the future.