You've likely heard of cryptocurrency consensus algorithms Proof of Work (PoW) and Proof of Stake (PoS) and how they add value to cryptocurrency mining.

Bitcoin uses PoW, and Ethereum is set to transition to PoS. Both are the dominant consensus algorithms in the cryptocurrency space, but one algorithm is seeking to upgrade both PoW and PoS via a hybrid of the two: Proof of Activity (PoA).

So what is PoA, and what exactly can it achieve?

What Is Proof of Activity (PoA)?

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PoA is a blockchain consensus algorithm that marries the best aspects of PoW and PoS and is described by its creators as “an elaborate extension to the Bitcoin (PoW) protocol” to remedy probable security threats.

The idea for PoA came from four influential figures in the cryptocurrency community, one of them being Litecoin founder Charlie Lee. In their Proof of Work white paper, published 2014, four authors wrote that by combining the powers of PoW and PoS, PoA “offers good security against possibly practical future attacks on Bitcoin, and has a relatively low penalty in terms of network communication and storage space.”

In other words, PoA sets out to improve the overall security of Bitcoin’s PoW and provide miners with the benefits of PoS without added network traffic.

How Does Proof of Activity Work?

As written in the paper, the PoA algorithm begins with PoW and ends with PoS. But in the middle of mining for a block, PoA introduces what is called a "follow-the-satoshi" subroutine, where the algorithm “[transforms] some pseudorandom value into a satoshi (smallest unit of the cryptocurrency) that is picked uniformly among all the satoshis that have been minted thus far.”

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Here’s a step-by-step guide on how PoA works, according to the PoA proposal:

  1. Mining begins with PoW. A miner spends hash power to generate an empty block header.
  2. The successfully generated block header is broadcasted to the PoA network.
  3. Here, the follow-the-satoshi subroutine is invoked: miners on the network who are online then check whether or not the broadcasted block header is valid. When performing the validation, they also check whether or not they are the “lucky ones” holding the randomly generated satoshi.
  4. At this stage, PoS takes place. According to Charlie Lee, the “lucky ones” chosen are “evenly distributed by coins held.” This means that if A has 200 coins and B has 100, A is twice as likely to be the “lucky winner.”
  5. The “lucky winners” then get to sign off the hash of the block header, as per standard PoW protocol, and broadcast their signature to the PoA network.
  6. This process goes on until the last “winner” signs the block and proceeds to create a wrapped block header, and broadcasts it to the PoA network for validation.
  7. Block rewards generated are then shared between the last miner and the lucky winner(s).

If the selected “winners” are not present to sign off a hash, the protocol will move to the next winning block. This process repeats until the block obtains the required signatures from the first miner and all "winners."

Proof of Activity: Pros And Cos

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The main advantage of PoA is its buffed-up security: by combining the strengths of PoW and PoS, PoA greatly minimizes the risk of a 51% attack. This is because an attacker has to overwhelm both PoW and PoS systems—i.e., by owning a hash rate of over 50% and owning a substantial number of coins—before they can take down PoA.

Proponents of PoA state that the follow-the-satoshi step can measure the participation level of miners and stakeholders on the network, which incentivizes them to participate in the validation process. In turn, by allowing PoW and PoS nodes to interact with one another, PoA promotes an “enhanced network topology.”

However, merging PoW and PoS also requires double the computational power needed to run the protocol. This leads to excessive carbon consumption, which is evidently harmful to the environment. Although PoA claims lower transaction fees, running a computationally demanding consensus algorithm like PoA requires advanced mining hardware, a hefty investment for some miners.

Some in the crypto community also think that despite a more robust validation process, PoA will still not stop the double-signing problem.

Do Any Cryptocurrencies Use Proof of Activity?

As of writing, there are only two cryptocurrencies that use PoA:

  • Decred (DCR): new blocks are every 5 minutes in Decred. When new blocks are mined, 60% of the block reward goes to PoW miners, 30% goes to PoS holders, and the remaining 10% goes back to funding the protocol’s development.
  • Espers (ESP): launched in 2016, ESP brands itself as a blockchain project with the goal of “offering secured messaging, websites on the chain and an overall pleasing experience to the user."

Proof of Activity Is Secure But Energy Intensive

PoA is an ambitious consensus algorithm that fuses the best of PoW and PoS and provides added layers of defense to a blockchain. However, as outlined above, the protocol still has its downsides and does not completely prevent blockchain attacks.

Nevertheless, PoA is a real-life example of how blockchain researchers are constantly trying to improve consensus algorithms to enable more secure, cost-efficient transactions.