The Proof of Reputation (PoR) consensus model depends on the reputation of the participants to keep the network secure. A participant (a block signer) must have a reputation important enough to face significant financial and brand consequences if they attempt to cheat the system.
This is a relative concept, as almost all businesses would suffer significantly if caught trying to be deceitful. Still, larger companies will typically have more to lose and thus are chosen over companies with less to lose (smaller businesses).
Once a company proves its reputation and passes verification, it may be voted into the network as an authoritative node. At this point, it operates like a Proof of Authority network (PoA), where only authoritative nodes can sign and validate blocks (more on PoA below).
Reputation is Everything
Reputation is critical to a business. A business that acts unethical suffers on many levels, including financial (fines, loss of revenue), valuation decreases, branding (distrust) and public relations. Trust is the cornerstone of a successful business, and once a brand loses trust with its customers, it can take years to recover, if ever.
Let’s use corporate scandals as an example. Corporations engaged in nefarious activities, once caught pay dearly in loss of trust and financially. Their reputations are tested, and more often than not they pay dearly for it. Proof of Reputation relies on the risk of a significant loss to enable trust in the network.
PoR is Secure
PoR adds a layer of protection that may have never existed before, and that is having companies working together to keep each other honest. Imagine if Volkswagen worked with Ford, Toyota and others to validate and verify their emissions tests.
It is extremely unlikely that any company would attempt to cheat the system when its competitors are performing tests on each other’s vehicles. And even if they try to act in a nefarious way, knowing the risks, once caught, they'll quickly be voted out of the consortium and lose their rights to be a part of the network.
And finally, it would still take 51% of the companies in the network to collude simultaneously to perform the infamous 51% attack. This would mean risking the reputation of 26 companies (assuming 50 authorities).
Proof of Authority Networks
Proof of Authority (PoA) is a reputation-based consensus algorithm that introduces a practical and efficient solution for blockchain networks (especially the private ones).
The PoA consensus algorithm leverages the value of identities, which means that block validators are not staking coins but their own reputation instead. Therefore, PoA blockchains are secured by the validating nodes that are arbitrarily selected as trustworthy entities.
Proof of Authority (PoA) works great in a private network initially intended for, where you know and trust the nodes you add to the network. The advantages gained with PoA are hard to ignore, so using it for consensus in a public network is a great thing to solve for. The problem is it doesn’t work in a public setting without something at stake.
One such is a network of 12 US Notary Publics. The perception of the PoA mechanism is that it foregoes decentralization. So one could say that this model of consensus algorithm is just an effort to make centralized systems more efficient but here the more critical security.
First, there is a disparity between the network’s net worth versus the network’s market cap. This is what Proof of Stake (PoS) attempts to solve.
Assuming an average net worth of an individual in the United States is $68,828, the total net worth of the validators is:
12 ∗ $68, 828 = $825,936
Even if the number of validators increased by order of magnitude, the total net worth of the validators would still be a tiny fraction of the $6.8T in transactions processed by Visa, Inc. every year. This disparity introduces a strong incentive for bribery.
Second, validators must post their physical address publicly, which opens the potential for intimidation or physical threats. A terrorist organization or rogue state can mount an attack on a large-scale financial system by controlling half of these validators.
Finally, most individuals lack the experience and infrastructure to run a secure transaction processing system. This significantly increases the network’s exposure to malicious hacking.
Let’s take an example of a reputational rating mechanism within Ecommerce/Multi-seller platforms. In the beginning, all sellers are subjugated to rules of the platform and feedback from buyers.
A seller with a 100% positive feedback score earns buyers’ trust, which affects the trust and reputation of the platform. Sellers with low feedback ratings, however, receive warnings and fewer seller privileges. Sellers receiving consistently low positive feedback scores are de-platformed, leaving the reputable sellers with high positive feedback to continue selling on the platform.
Just as reputation is critical on such platforms, reputation for verifying is also critical in PoA.
Unfortunately, these things are not exact science and need to be evaluated by humans.
The benefits of Proof of Reputation are:
- valid and trustworthy identities: validators need to confirm their real identities.
- difficulty to become a validator: a candidate must be willing to invest money and put his reputation at stake. A tough process reduces the risks of selecting questionable validators and incentivize a long-term commitment.
- a standard for validator approval: the method for selecting validators must be equal to all candidates.
- High risk tolerance as long as 51% of the nodes are not acting maliciously.
- Far more sustainable than algorithms like Proof of Work which require computational power.
Proof of Reputation has benefits from a business point of view in addition to the technical benefits above. One of the main things is that enterprise companies may be more willing to use a network using PoR than they would be using an untrusted, anonymous network such as one using PoW or PoS.
In PoR, everyone knows who is operating the network and where the nodes in the network are running (which country). A company can then decide whether they trust the companies running the nodes and, therefore, whether they trust the network.
If they do trust it, they are much more likely to run a business process on it. We feel this could open the door to new ways that businesses work together using a public blockchain.