Welcome to the final article of Consensus in the Blockchain! So far, we have touched on the importance of consensus, as well as Proof of Work (PoW) and Proof of Stake (PoS) as mechanisms for ensuring that the blockchain remains immutable. In this last article, we will focus on two mechanisms, namely Merge Mining and Delegated Proof of Stake.
Merge Mining, or Auxiliary Proof of Work (AuxPoW), refers to a blockchain that reuses PoW solutions from a parent blockchain. This method was first used by Namecoin in 2011, with Bitcoin as the parent cryptocurrency. In essence, the ‘child’ blockchain will accept Proof of Work done on the parent blockchain, but not the converse is not true (e.g. Bitcoin will not accept any Proof of Work from Namecoin). In this way, the parent chain does not need to undergo any changes, and only the child blockchain has to be coded to allow for Auxiliary Proof of Work to be accepted.
How it Works
In the Bitcoin/Namecoin Merge Mining process, miners build a block that is suitable for both chains. Both the chains have different difficulty levels, where Bitcoin’s is much higher than Namecoin’s. If a block is solved at the Bitcoin difficulty level, it is re-assembled and placed into both the blockchains, since Namecoin accepts AuxPoW. If the block is solved at the Namecoin difficulty level, it is only added to the Namecoin blockchain, because Bitcoin does not recognise AuxPoW.
In this way, a block can be produced on both chains at the same time (if it is solved at the parent chain difficulty), or only on the child chain (if it is solved at the child chain difficulty).
It is important to note that this process has a minimal effect on both chains in terms of bloating. In the case of the parent chain, there will be an additional hash added to the Merkle tree, without any side-effects. The parent chain does not even need to be aware that is being used as proof of work in another cryptocurrency.
In the case of the auxiliary chain, there is more ‘bloat’ material, as the extra hash and header of the parent chain will be added to the chain. However, this will be ignored by the protocol, and only used as proof of work. It is important to note that not the entire parent blockchain will be added, just the top-level hashes, so the bloating is minimal.
Increasing Security for the Auxiliary Blockchain
AuxPoW is a useful tool for cryptocurrencies with low hashing power. By tying themselves to a parent chain, they are able to utilize the hashing power of a much larger network to boost their security.
Prevents Dilution of Mining Power
While it seems to overly benefit only the auxiliary chain, the parent chain does reap some benefits as well. While there are many miners, the miners will logically prioritise mining the cryptocurrency that provides the most income. In a competitive market, this would dilute the number of miners in each cryptocurrency, as they are only able to focus on one at a time. With Merge Mining, they are incentivised to mine both cryptocurrencies at the same time, which means that they do not diminish the hashing power of one network at the expense of another.
For miners, they are now given a way to generate even more income for the same amount of work, which encourages them to pour their resources into merge mining coins.
Increased Risk of Centralization
Merge Mining does have additional costs, such as more bandwidth and storage needed. Bitcoin is already running the risk of centralization, as large mining pools group together to share profits while running high-end supercomputers that regular individuals cannot compete against using commercial hardware. With Merge Mining, this becomes even more of an issue, as the additional costs required means that fewer and fewer independent nodes are capable of being profitable. In the long run, these nodes will drop out, leaving the mining centralized among a few large players.
Delegated Proof of Stake
DPoS was introduced by Dan Larimer as a consensus mechanism with speed in mind, to keep up with the transactions per second that centralized systems such as VISA have managed to achieve. At the same time, it had to use less energy than Proof of Work, while retaining the security that the blockchain is known for.
In DPoS, they introduce a term ‘witness’. Witnesses serve the role of validating a block, and these witnesses are chosen by stakeholders (people who own the cryptocurrency). Each stakeholder is allowed one vote per share per witness, and the top candidates voted are selected. The total number of witnesses who are voted depends on the stakeholders; they are allowed to vote for as many witnesses as they feel is decentralized enough to be safe.
As witnesses, they are allocated a time slot. Only during that time slot are they allowed to produce a single block, for which they are compensated for. Once all the witnesses have produced a block, they are shuffled and re-ordered, and given a new time slot to produce a block. If a witness fails to produce a block, the time slot is skipped, and the next witness carries on as usual. If the witness fails to produce blocks repeatedly, he/she can be removed from the witness list and replaced with another voted candidate.
Unlike Bitcoin, these producers do not ‘race’ against each other to see who wins based on computational power. Rather, they are incentivized to be a reliable block producer to earn the payment by being a witness.
There are also Elected Delegates, who are chosen in the same fashion as witnesses; approval voting by stakeholders. These delegates become signatories on important issues about the parameters of the network, such as how much witnesses get paid for each block created, or how large a block should be. When a change is proposed, the majority of the delegates have to approve the changes, upon which the changes are submitted to the stakeholders to review. Stakeholders then vote to nullify or accept the changes.
In this manner, administrative authority of the network remains solely in the hands of stakeholders, and ensures that the growth of the network is not hindered by politics or against the best interest of the stakeholders.
When it comes to large changes, such as addition of new features, developers are able to implement changes only upon approval of majority of the stakeholders. As the number of stakeholders increase, it becomes harder and harder to change the rules. This ensures that the network remains capable of upgrading itself, but stable enough that it does not undergo a fork every few days.
We have covered 4 of the main consensus mechanisms in the market today, each with its own pros and cons. There are new methods coming up all the time, each trying to solve problems of its predecessors.
At the end of the day, the consensus mechanism chosen has to be one that is best suited to the priorities blockchain, be it speed, security, or decentralization.
Each of them have their own pros and cons, and each has room to improve. As the mainstream market increasingly tries to integrate blockchain technology into everyday life, consensus mechanisms have to upgrade to provide the speed and throughput that consumers have gotten used to, while still retaining the benefits of the distributed ledger.