For every cryptocurrency there is a consensus mechanism, a way in which the network agrees upon which transactions are added to its distributed ledger. In Bitcoin, that mechanism is Proof of Work, but other cryptocurrencies have offered some compelling alternatives. Peercoin was the first introduced the Proof of Stake mechanism, albeit in a hybrid Proof of Work system. Proof of Stake has since been widely adopted in modified forms by cryptocurrencies such as Lisk and EOS (delegated Proof of Stake) while NXT uses a randomized version of Proof of Stake.
In any case, both Proof of Work and Proof of Stake have proven to be very popular consensus mechanisms with strong advocates for each. Now an experimental new currency called TAU is proposing an entirely new type of consensus mechanism. TAU call this unique solution Proof of Transaction (PoT). Is it possible that this upstart cryptocurrency has created something truly mold-breaking and can this novel mechanism offer an improvement on both Proof of Work and Proof of Stake? Let’s take a look.
Proof of Work
First, let’s get back to basics. Proof of Work (PoW) is the most ubiquitous and widely adopted consensus mechanism, thanks in large part to it being chosen by Satoshi Nakamoto for the cryptocurrency Bitcoin. In a Proof of Work network transactions on the blockchain are verified by miners who compete to resolve a difficult computational puzzle. Whoever solves the computational puzzle is said to have mined the block and is rewarded in the cryptocurrency of that blockchain.
The Proof of Work consensus mechanism is the most battle-tested of consensus mechanisms but it is not without its flaws. In smaller networks it is prone to the dreaded 51% attack where an individual or organization control a majority of the network mining power allowing them to double-spend. Furthermore, since Proof of Work is very demanding on computational power, developers have sought to find consensus mechanisms which are less power hungry and energy-inefficient.
Proof of Stake
Proof of Stake is an alternative consensus mechanism designed to be more efficient than Proof of Work. Proof of Stake actually has several different variations, but it commonly involves holding a set number of coins over a set period of time to become eligible to approve blocks. In delegated Proof of Stake mechanisms stakeholders vote for ‘delegates’ to approve blocks. Although this type of consensus mechanism is far less energy intensive it encourages network users to hoard and to hodl in order to collect benefits from approving blocks.
Proof of Transaction
TAU is an experimental cryptocurrency which aims to overcome the inherent problems of both Proof of Work and Proof of Stake with a new type of consensus. TAU propose that in a Proof of Transaction blockchain the on-chain transaction fee should be used as proof to approve blocks. In this new consensus method, block generation is simply called mining just like in Bitcoin and other PoW blockchains, but the block reward comes in the form of a transaction fee. In short, miners work to collect the transaction fees.
The positive long-term economic benefits of the PoT mechanism is that it doesn’t encourage coin hoarding as in PoS, concentrating power and rewards in the hands of the few. It also doesn’t incur the massive computational costs of Proof of Work meaning it is less energy hungry and better for the environment. Every transaction on the TAU blockchain is promoted as part fee and as part investment — encouraging a greater level of financial activity within the network. Greater activity holds greater reward, not simply greater funds.
For this reason the wealth and benefits of mining are distributed more evenly amongst the network instead of the rich simply getting richer. Proof of Transaction is designed to benefit the ordinary person far better than PoW or PoS.
Tau members can also choose to work cooperatively by delegating their mining power to a mining leader as part of a mining club. Mining clubs create a way for even the smallest coin holders to benefit from reaching consensus on the blockchain.