Blockchains use consensus algorithms for the purpose of choosing who gets to verify transactions on a given network. Consensus algorithms are processes where a validator (also known as a node or miner) of a blockchain network agrees on the current state of the network. This process mainly entails agreeing on whether transactions submitted by validators are authentic. Any fraudulent or inaccurate transactions are rejected, assuming all validators on the network are acting fairly without malicious intentions. Validators are rewarded with cryptocurrency for submitting authentic and accurate transactions, whilst malicious actors will end up penalized depending on the rules of the consensus protocol.
For example, in PoW (proof-of-work) networks like Bitcoin (BTC), validators have to spend energy using expensive hardware to validate transactions. If successful, the validator gains new tokens, but if they act maliciously, they gain nothing – the loss comes from wasted energy used in submitting the fraudulent or inaccurate transaction.
With PoS (proof-of-stake), users will stake tokens and receive additional tokens when they submit an authentic transaction. They will lose a portion of the staked tokens for submitting any wrong transactions.
A third example, the PoT (proof-of-time) protocol, goes by the same principle, with validators receiving additional tokens for submitting an authentic transaction and losing tokens for submitting an inaccurate or malicious transaction.
So, PoS and PoT share some similarities, but they are actually two very different protocols.
This type of consensus algorithm works with users staking their tokens as collateral by locking them into smart contracts. The system operates by selecting a validator to process a block of transactions. The validator has to validate transactions inside the block, ensuring that no inaccurate information is contained within it. After that, the validator submits the block to the blockchain. As stated above, if the block has been validated correctly, they will receive additional tokens as a reward. But if a validator behaves in a malicious or lazy manner (usually by submitting incorrect or fraudulent transactions), they will lose a portion of the tokens they have staked.
Validators staking higher amounts of tokens are more likely to be selected for verifying transactions. Staking a higher amount of tokens will also earn validators additional rewards. Typically, you earn a fixed percentage based on different blockchain networks’ systems. For example, on Ethereum 2.0, their validators currently earn around 4.2% on staked tokens. Validators will have a higher possibility of selection if they have staked tokens over a longer timeframe.
Becoming a validator within the PoS system is open to everybody, but the barrier to entry is high because of the popularity of the protocol.
The more nodes a network has, the more tokens users will need to stake to become a validator. Thus, staking pools, which are run by validators, are typically used by average crypto users for the purpose of staking tokens. In this system, users deposit their tokens into a pool, then the tokens are staked by validators on their behalf. In return, users usually pay a “pool fee”, typically a percentage of the tokens they earn from staking.
On the other hand, PoT is a consensus algorithm that uses a voting system when choosing network validators. It focuses on how long network validators have been active within the network and also their reputation.
The protocol was developed by Analog. It is based on dPoS (delegated proof-of-stake) – a modified version of the PoS protocol.
Proof-of-time refers to its ledger as a Timechain. It works by using a ranking score VDF (verifiable delay function) and staked tokens to determine who gets to add new transactions to the ledger. Scores given in the ranking system are based on the network validator’s age and past performance.
Validators get higher scores for being trustworthy and active within the network for a longer period of time. As with PoS, staking a larger amount of tokens also makes it more likely for validators to be selected.
PoT is similar to dPoS in that users on the network vote to decide which delegate can validate the next block. There are some notable differences in the voting process, however, and proof-of-time also having multiple voting stages stands out as one of them. In the first voting stage, validators (or time electors) submit a block that contains data for adding transactions to the Timechain. If the block is accepted, the block will then be validated, and all transactions within the block are processed accordingly.
Time electors are chosen in a selection process that takes into account the electors’ ranking score as well as the number of tokens staked. This information, as well as VDF, will be used to randomly select a time elector, with only one chosen at a time.
Time electors also run a VDF to check whether they have been chosen to add a new block to the Timechain or not. If they have, they validate the block, generate a VDF proof, and then submit both sets of data to the rest of the nodes in the Timechain.
In the second stage, the block and VDF proof is sent to 1,000 other time electors. They will double-check it before it gets added to the Timechain. If most time electors agree to accept the transaction, it is then added to the Timechain.
How Do These Two Consensus Protocols Compare?
PoS and PoT share a few similarities; for example, they both require validators to stake their tokens as collateral when verifying transactions, with a higher stake giving a better chance of being selected. But there are also big differences, such as the ranking and voting system used by PoT and the additional verification by 1,000 validators before transactions are submitted to the ledger.
PoS is a more popular and familiar option. It is used by Solana, Polkadot, Cardano, and Ethereum 2.0. One of the advantages the types of consensus protocols outlined have over proof-of-work is the fact that both systems require users to stake tokens instead of expending energy. Also, PoT adds to the security layer by requiring each transaction to be double-checked by 1000 validators, with two-thirds of them having to agree on whether transactions should be added to the ledger.
Each particular blockchain network has its own set of requirements tailored to the needs of the network. Many networks stick to PoW and PoS for their needs, with algorithms like PoT, dPoS, and PoH (proof-of-history, used by Polkadot together with PoS) catering to the needs of various other blockchain networks.