Why Proof-of-Authority Consensus Protocols Are a Powerful Tool for Fintech Development

Why Proof-of-Authority Consensus Protocols Are a Powerful Tool for Fintech Development | Docmedio
Throughout the world, online transactions and data exchanges are becoming increasingly important. The fintech sector is a dynamic one, with a need for trustworthy business networks in order to reach agreements on these exchanges.

The Future of the Blockchain Economy

What is Proof of Authority, how does it work and why will it be important? Here's why you need to pay attention to this consensus model and what it means for the future of the blockchain economy.

Consensus protocols are a powerful means to build applications that require real-time updates, such as those in the fintech sector. However, we all know that negotiations often involve some degree of conflict. This is where Proof-of-Authority (PoA) consensus comes in, offering a very different approach to reaching consensus because identities are validated by a central party.

Venture Capitalist Fred Wilson, who has backed Twitter and Tumblr, says proof-of-work “isn’t going away any time soon.” But blockchain’s consensus model can do better.

Why Proof-of-Authority Consensus Protocols Are a Powerful Tool for Fintech Development

The banking industry has been undergoing a great deal of upheaval as new fintech solutions are built in the sector. However, even though consensus protocols are used to provide real-time updates and payments, they aren't necessarily designed for conflict resolution. This is where Proof-of-Authority (PoA) consensus comes in, offering a very different approach to reaching consensus because identities are validated by a central party.

What is Proof-of-Authority?

Proof-of-authority is a consensus mechanism based on delegating trust to a set of known validators. This is a more efficient and secure method of reaching consensus than the traditional proof-of-work (PoW) method, which is based on resource-intensive computation. Proof-of-authority comes with many advantages for data governance protocols, as it automatically guarantees data integrity and prevents tampering.

Text subsequent by Richard Lazarus:

Proof-of-Authority is based on auditing all users in a distributed network where data is stored at varying distances. The actual value of each user’s balance, the “weight” of each member, is audited. Proof-of-Authority uses automated signing (by signing requests to a distributed library) to prove to each client the validity and correctness of balances and key pairs. As such, clients can sign documents attesting to the validity of individual balance and proves of authority.

The results of this mechanism are multi-party signature schemes that can be used to run meta-authentication protocols such as DSA, AES-256, and SHA-256. With SSLv3 being TLS 1.3 certified, developed, and backed by the world’s leading experts in TLS, it enables enterprises to deploy modern multi-protocol secure web services. The result is a greatly improved user experience and security for both users and service providers.

2. How does Proof-of-Authority work?

Proof-of-Authority (PoA) consensus is an alternative to Proof-of-Work (PoW) and Proof-of-Stake (PoS). In PoA, validators (“forgers”) stake their Ether to participate in the consensus protocol. Once the correct mathematical formula for PoA is discovered, those who hold a significant number of ETH can stake their money on it achieving that result. This provides an additional method of validating and pegging smart contracts to Ethereum, just like Proof-of-Work and Proof-of-Stake.

If a smart contract confirmed using PoA is validated, it creates an “ accord “ between the smart contract and all validators. It allows anyone, anywhere in the world to commit to processing an event in the future, provided they hold significant ether today.

What is Proof-of-Authority and How Can It Relate to Real Estate?

Proving your control over a piece of real estate with Proof-of-Authority enables those investing and speculating in real estate with little-to-no financial capital to access an artificially flowing marketplace, by proving their (substantial) control over the underlying property. Furthermore, proven success with Proof-of-Authority can be translated into profitability and branding for higher market capitalization.

25+ Agencies utilize PoA to support both their commercial real estate holdings, and in private investment portfolio investing and private lending.

How is Proof-of-Authority Different from Proof-of-Work & Proof-of-Stake?

These consensus algorithms have already been proven to work. A closer look at the formulas used to calculate Proof-of-Work and Proof-of-Stake can provide further details.

In Proof-of-Work, the validators (the “power users”) pay a set fee in order to be involved in validating the network’s data, including those that alter the chain of data, called miners.
Upon discovering a block, miners typically receive a “header” file in exchange for their fee. Within this file is a “difficulty” which indicates the computational power required to solve the block.

3. How does PoA compare to traditional, PoW consensus?

Proof-of-Authority (PoA) is one of the alternatives to the traditional Proof-of-Work (PoW) consensus algorithm. PoA is an alternative to PoW which does not require nodes to solve difficult math problems in order to validate transactions and create new blocks. With PoA, you can define a set of known validators, or "authorities." Authorities are nodes.

With PoA, there is no more need for miners. Instead, validators are responsible for validating transactions and confirming blocks. The more stakes a validator has, the more likely they are to be chosen to create the block. This means that validators with more at stake are incentivized to act in the best interest of the network.

The underlying aim of PoW is to detect and discount invalid data that would occur with random data inputs (known as proof-of-work attacks) — a fake mined block is called invalid, and invalid data is discounted during the PoW operation (such as the UTXO commitment transaction).

There are several different kinds of consensus that exist today, including PoW and PoS, but none are as effective or efficient as PoA.