Different blockchains Suit Different Needs, So Making Informed Decisions Matters

When thinking about different blockchain offerings, it is easy to gravitate towards familiar names such as Bitcoin, Ethereum, Polygon, Polkadot, Avalanche, Algorand or Solana while overlooking the actual technology that underpins them and the direction in which each is evolving. What is clear is that amid the rapid development and usage of blockchain technology, it is a fractured market crowded with innovative competitors, where developers are all vying to come out on top.

This article looks at some of the key processes to consider when viewing different blockchains for practical usage. These include such factors as energy consumption, speed, scalability and decentralization, along with interoperability and governance. All play a critical role in maximizing the value and benefit derived from the technology, and will determine which blockchain ultimately emerges as the industry leader.

There are five key processes: consensus mechanism; the “blockchain trilemma”; single-chain vs multi-chain; governance; smart contract language.

Multiple blockchain mechanisms

A consensus mechanism is used in a blockchain to reach an agreement on a single state of the network among distributed nodes. The protocols make sure that all the nodes are synchronized with each other and agree on transactions to ensure they are legitimate and can be added to the blockchain. Their function is essentially to ensure the validity and authenticity of the transactions.

Every blockchain network must have a consensus mechanism. It is necessary for organizations and blockchain developers to decide what blockchain consensus mechanism works best for their needs. As with many types of decision making, a good approach is to work back from the desired outcome to the most suitable consensus mechanism – rather like working out the answer and then finding a question to suit it.

The most common consensus mechanisms are proof-of-work and proof-of-stake. Others include delegated proof-of-stake, proof-of-capacity, proof-of-elapsed time, proof-of-activity, proof of identity, and proof-of-authority. There are more.

• Proof of Work is also called mining and the miners are known as nodes. They use complex mathematical puzzles requiring large amounts of computational power, along with numerous different mining methods – the puzzle solving is basically a trial-and-error process with the miners rewarded with a block, a ledger record and “payment”, for finding solutions. Miners require an increasing amount of computational power to find the solutions quickly.

This mechanism consumes a vast amount of energy, making it very expensive. This expense also forms the economic barrier-to-entry for a fraudster’s looking to dominate and undermine the network. A single Bitcoin transaction uses the same amount of electricity as an average US household over 70 days. Ethereum currently uses Proof of Work, but is migrating to Proof of Stake.

• Proof of Stake has been the most successful consensus mechanism thus far at enabling high throughput low transaction cost networks. It uses a randomised process to determine who can produce the next block. Users can lock up (stake) their tokens for a period of time to become a validator. Validators can also be selected according to the design of the blockchain. Validators are normally rewarded for their work with all or part of the transaction fees of all the transactions carried out in the block they created. The Proof of Stake method incentivises validators to maintain the blockchain network. It is also far more energy efficient than other consensus mechanisms such as Proof of Work.
• The consensus is important because it prevents fraud. A consensus mechanism where the validating node dictating the next block cannot be predicted is less prone to manipulation. Similarly, a relatively small (centralised) network may be prone to collusion by a majority of the validating nodes, undermining the security of the blockchain.

As more and more (valuable) assets are stored on chain, so the risks of using a less secure network are more significant. The recent growth in decentralised finance (DeFi) in particular has seen vast swathes of liquidity follow low prices and fast commits, without sufficient due diligence regarding security risks due to centralised control or less secure consensus.

Blockchain trilemma

Blockchain offers great potential as the most efficient value transacting technology available today. Three core concepts lie at the heart of its ability to securely transact assets: decentralization, scalability and security. Blockchains often have to make trade-offs that prevent them from achieving all three:

• Decentralized: a blockchain system that does not rely on a central point of control. This is a core component of blockchain. Unlike in traditional finance, which are centralized with financial institutions, blockchains offer a decentralized and transparent alternative, serving as the issuance and storage of value, without the need for a centralized entity. Decisions are made by consensus, which means transactions are approved by a (large) group of validating nodes as opposed to an individual party. The security of a blockchain is threatened by the propensity of the validating nodes to collude to corrupt the ledger of assets and transactions. A larger more “decentralised” group of validating nodes is considered more secure, since their interests are less likely to be aligned around colluding to undermine or defraud the ledger. Once these transactions are verified, they can’t be altered after the fact, unless the validating nodes collude to corrupt the ledger. Therefore, risk isn’t placed in one central entity, and trust doesn’t rely on another individual. The drawback, however, is speed. If a transaction requires multiple confirmations before reaching consensus, it will take longer than one confirmed by a single entity. Ethereum is very decentralized, but relatively slow.
• Scalable: to handle a growing number of transactions. This is important for mass adoption, so it’s important to ensure the blockchain system can continue to operate smoothly as demand increases. One technique for increasing scalability in a blockchain to make it more centralised. This is because one way to achieve high speed and throughput is by requiring less validating nodes to participate in consensus. Many fast Proof-of-Stake chains achieve speed and throughput by having a small number of validating nodes. This reduces security and increases the risk of interference and fraud. In particular, it’s necessary to pay close attention when blockchains have different types of nodes, where the “full” nodes providing maximum security should be assessed.
• Secure: to operate as expected, and defend itself from attacks, bugs, and other unforeseen issues. The security of a blockchain system is paramount. Due to the transparent nature of the source code and rich rewards of conducting a successful attack, blockchains have become prime targets for hackers. Yet the basic mechanics of the blockchain are standing the test of time, with most successful attacks occurring outside the blockchain (e.g. in centralised exchanges), or in complex smart contract code written on top of the blockchain.

As liquidity and assets have migrated away from Ethereum due to high transaction fees and low throughput, alternatives should be assessed before entrusting with high value and high-volume assets. These alternatives range from relatively centralised, yet fast and low-cost, layer 1 Proof-of-Stake blockchains, such as Solana, to initially centralised layer 2 solutions, such as Polygon and Starkware. Each one of these solves and compromises the trilemma in a different way. Solana is less decentralised than Ethereum, since the node hosting requirements are substantial. Polygon provides an Ethereum-compatible fast and low-cost processing environment through an initially centralised,and now growing network.

Starkware and other zero-knowledge rollup solutions process transactions in a fast, low-cost and efficient manner in a (currently) centralised environment, where a provable “rolled up” view of the transactions is periodically shared with the main Ethereum network. Again, the risk lies in the gaps between confirmations on the Ethereum main network, but the scalability gains are large, and transactions fees extremely low.

Algorand offers a solution that appears to solve the blockchain trilemma through a combination of decentralised consensus – based on cryptographic randomness and wallets, as well as validating nodes.

Blockchain governance

Governance is essentially a system or structure that everyone agrees to follow. It improves efficiency, sustainability and transparency. The need for governance grows as the system or organisation grows. Blockchain has seen exponential growth in recent years and its governance has struggled to keep up. It is a continual work-in-progress.

At present, it uses two main forms of governance: direct governance and representative governance.

In most companies and governing bodies, which are more centralized in structure, a leadership team usually governs them. Blockchain governance is the mechanism by which a blockchain can adapt and stay relevant amid the changing times and requirements of the blockchain and its users. Adaptability and upgradability become two crucial characteristics when it comes to blockchain governance, and is a key differentiator to stay competitive.

Blockchain governance usually involves four central communities, though to what degree each is involved varies from blockchain to blockchain. These communities are: core developers; node operators; token holders; and the blockchain team. The latter can be a firm or non-profit that takes on the roles. As examples, Bitcoin and Ethereum have foundations, while Ripple is managed by a company.

Many blockchain projects pride themselves on their community-led on-chain governance, where users, stakeholders and validators all have a say regarding the future direction of the projects, making the blockchains more democratic and nimbler in reacting to the market. Different projects use different voting mechanisms, and some have central teams with more control than others.

Four key elements to blockchain governance are consensus, incentives, information and governing structure. These can be applied to off-chain and on-chain governance. Off-chain is relatively centralised and promotes a balance between a blockchain community – developers, miners, users etc. On-chain is explicitly created for blockchain and far more democratic in nature.

Clearly there is no one best way to provide governance. It varies according to the blockchain. Ultimately, however, some form of hybrid is likely to prevail.