Proof By Collective - An Identity Based Blockchain Consensus Mechanism Enabled By Verifiable Credentials

Keeping Everyone In Agreement

Consensus mechanisms allow distributed computing to exist. Without an incentive structure encouraging actors to keep the chain honest you can’t be certain that the information you see on a distributed ledger is correct. Current consensus mechanisms share at least two parts of their incentive structure. A reward for encouraged behaviour and a penalty for behaviour adverse to the groups aim.

In a based proof of work mechanism (Bitcoin, Ethereum 1.0 etc.) the reward is the underlying token and the cost is hard to compute, but easy to verify, computational work. However, in the real world proof of work is incredibly energy intensive with energy consumption, as of May 2021, at 0.55% of global electricity production (or about the consumption of Sweden). Additionally, the economies of scale associated with the energy economics of proof of work based mining leads to a risk of centralisation and chain insecurity.

In a proof of stake system (Solana, Ethereum 2.0 etc.) validators are instead risking assets instead of potentially wasted computational resources. Each validator stakes some proportion of an underlying token alongside their validation activity which they forfeit in the case of dishonest activity. Whilst this has become a favoured mechanism, in part to due to decreasing the environmental damage from excessive computation, it also highly rewards a small group of token rich individuals.

Both of these consensus mechanisms rely on maximising a penalty in order to keep anonymous actors honest with each other. That penalty allows every transaction to exist independent of each other, verified by a distributed network of unverified machines, in a trustless system. However, what do our consensus mechanism trade-offs look like if we start verifying machines in our network and take a reputation based approach to distributed computing?

Proof By Collective

Verifiable credentials allow us to uniquely identify actors with a digital identity whilst maintaining the pseudo-anonymity that blockchain participation affords. Zero knowledge proofs create an environment where we can track a machines participation in the validation of a network whilst knowing little else about them. With a decentralised identifier we can identify that actors are distinct and that they haven’t acted dishonestly before, at least whilst associated with that identity.

Proof By Collective relies on using a pool of randomly selected distinct actors to validate a block, as identified by their verifiable credentials, with an equal participation reward allocated to each participant and an on-chain blacklist kept for dishonest actors - barring them from future participation. Functionally proof by collective rewards identity, specifically possessing a distinct identity, as a method for decreasing the likelihood of bad actors gaining consensus in a block.

The Benefits & Trade Offs

Proof By Collective is similar in outcome to a proof of stake mechanism, except in the equitable outcome of token distribution to validators. Instead of validators receiving token rewards as a function of the tokens staked, validators receive tokens proportional to the number of validation events they participate in - a number unaffected by their ownership stake of an underlying token.

Whilst democratising the value generated in keeping a given blockchain secure is valuable, proof by collective isn’t an outright better mechanism than proof of stake. Distributed compute resists centralised control, a politically motivated aim, by being permissionless. Anyone can run a node and participate without verification by a central body. Proof by Collective requires a trusted central body to issue a decentralised identifier that the protocol can use to identify distinct actors and ban dishonest ones. It’s up to the community to decide whether an equitable reward structure is a sensible trade for a blockchain protocol which requires a permission based architecture.

Verifiable credentials are also not created equal. A decentralised identifier equivalent to a United States social security number is not as trustworthy as one issued by an insecure government in an economically challenged country with poor governance and high corruption. This creates very different market values for a validation in a network backed by the first verifiable credential vs the second due to a higher number of distinct actors being required to reach the same level of trust where an identity is easier to fake.

Tackling UBI

Cryptocurrency has been looked at as a mechanism to both create wealth and distribute wealth for the purpose of creating a universal basic income (UBI). However, it’s hard to believe a new coin with no intrinsic underlying value can create a backbone for UBI (even though Dogecoin has a non zero market cap and fiat currencies are unpegged and heavily influenced by central banks).

However, Proof By Consensus presents a value driven mechanism for UBI. Ethereum has a market cap of 246 billion as of 17th May 2022. Staking is designed to give a 7% yearly return, providing 17 billion in compensation for keeping the chain honest. In a proof of stake system that return is distributed across the staked token holders. In a proof by collective system that return is distributed equitably across individuals (prior to any correction made for the value provided by the greater, or lesser, validity of a set of verifiable credentials).

Conclusion

This isn’t a low level suggested implementation for a Proof By Consensus mechanism. There are still underlying problems to tackle, and a debate to be had over whether these ideas make sense and are practicable. However, on the surface Proof By Consensus presents a value driven system for the implementation of a universal basic income, using distinct identity and reputation as the basis for keeping a distributed network honest.