June 6, 2018

Understanding Blockchain – Present Challenges

Blockchain: a digital, distributed, and decentralized ledger in which transactions are made in cryptocurrency and recorded in chronological order using advanced cryptography. Immutable in its record keeping yet transparent, blockchain is self-sufficient because of de-centralized consensus mechanisms developed. Futhermore, its verified transactionscan be easily found or recalled. In theory, this is a recipe for a near-perfect record keeping solution. And it is, mostly.

The main challenges arise from the consensus mechanisms in place. The two most prevalent consensus mechanisms in place are Proof of Work (PoW) and Proof of Stake (PoS). Proof of Work relies on miners and a series of connected nodes (copies of the blockchain) to validate transactions across the network. Leveraging computing or hashing power, miners compete to solve a puzzle to verify any transactions sent on the network. The miner who verifies and solves the puzzle gets the prize (transaction fees). This mechanism, however, has introduced a new set of issues:

  1. Massively controlled, centralized mining pools
  2. Slowed transaction times
  3. Large electrical demands
  4. High transaction fees
  5. Backups in the mempool (memory pools are where all transactions are placed for miners to pick up and place them into blocks. All transactions must first go to the mempool)
  6. 51% attacks (If any one group of miners controlled 51% or more of the hashing power on any network they could approve fraudulent transactions)
  7. Centralization because of the above

Proof of Stake relies on “stake ownership,” or bidding. Relevant stakeholders or validators compete to be selected to create a new block through a semi-random election process. The winner is then awarded the prize for processing. If a node is chosen to forge the next block, they will check to validate all transactions in said block. However, the single greatest challenge to Proof of Stake concerns the selection process; to become a validator users must bid. The amount bid determines your chances of being awarded the prize for the forging the new block. Obviously, the more you bid the greater your chances.

With that said, how can we trust validators to only approve valid transactions? In short, they would be penalized if they approve fraudulent transactions, but only if the other nodes on the network don’t agree. They would lose a part of the amount that which they bid if a fraudulent transaction was approved. But again, only if all nodes don’t agree.

Like Proof of Work, Proof of Stake is also susceptible to a group of validators pooling their bids, thereby taking control of 51% of the validation. Any one group that can control 51% of the network can approve fraudulent transactions. If a group of validators control has majority consensus, it’s hard to imagine they would penalize themselves for approving fraud.

Challenges abound, but Blockchain is and will continue to be used in real-world scenarios. As innovators, we must be diligent in our execution, forward thinking in our approach, and reach our own consensus as to the best way forward.

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