The issue of the environmental impact of blockchain systems is complex. Blockchain can be an energy-intensive technology – sometimes requiring a huge amount of processing power and consumption. At Fnality, we have adopted a specific mechanism for our network of payment systems, which minimises energy consumption by design to overcome the sustainability challenges often presented by distributed ledger technology (DLT) – while unlocking the many benefits that it offers.
In this blog, we explain the consensus mechanism adopted by Fnality and why this supports a key organisational goal of promoting sustainability and environmental stability.
Energy-intensive: Proof-of-Work consensus
In the first application of DLT, Bitcoin and other public networks operated using a consensus mechanism called Proof-of-Work (PoW). In effect, when users validate transactions in a PoW implementation, they compete to solve a complex problem first using their computing power. To win this race, they attempt as many solutions as possible to find the answer. This is a brute-force approach, where the sheer volume of participants and solutions work quickly to solve the challenge, with the reward for the first participant to find the answer being a specified amount of cryptocurrency.
This mechanism is, by design, environmentally costly. Cryptography and the application of this computational power act as an alternative to centralised authority, ensuring that transactions are impractical for participants to reverse. A huge amount of power is expended across a vast network of devices competing to solve the computational challenge. It takes a lot of hardware and electricity, with the costs built into the mechanism deliberately to prevent anyone from taking over the network or reversing transactions. PoW enables secure, peer-to-peer transactions, making it highly suitable for a public environment. Anyone – even potential attackers – can participate in it. The competitive nature of it does provide a layer of protection for the network, but the impact in terms of emissions and energy consumption is vast.
Consensus in the Fnality Payment System
The Fnality Payment System (FnPS) is a private and permissioned network. This means that only permitted users can participate. In the case of the first available Fnality Payment System, the Sterling FnPS (£FnPS), participants must be regulated depositary institutions, members of the Sterling Monetary Framework, and compliant with Fnality’s rulebook requirements. Implementing the use of a private and permissioned distributed ledger means that there’s no need to use the PoW mechanism, nor any alternative consensus mechanism which is based on solving a computationally expensive puzzle. Instead, we will use a mechanism called Proof of Authority (PoA), designed to facilitate near-instant transactions, enabling real-time settlement while minimising energy consumption.
What is Proof of Authority?
The FnPS uses a Proof of Authority consensus called QBFT. In this system, block validity is determined by at least two-thirds of validators voting in favour of its validity. Validators process each block based on the rules of that system as encoded in the relevant smart contract. PoA systems place reputation at the forefront of the validity mechanism, fostering trust between network participants and reducing the ability of malicious actors to gain entry to the market.
In PoA, each node is responsible for validating the block by assessing the same regulations and signatures. In permissioned networks, predefining authorised signatures is a fundamental requirement for the network to operate successfully and ensure accountability. Legitimacy is determined by executing several checks through a smart contract and verifying signatures through a consensus calculation. Because voting is done via a secure, efficient digital signature, it does not entail the high computational cost associated with PoW algorithms and allows us to remain compliant with Settlement Finality regulations.
PoA is the most logical solution for consensus within our FnPS. Networks are allocated the privilege of participating and producing new chains for the block using an effectively arbitrary system. It’s a closed market, where responsibility is shared and trust is baked in. Energy-intensive mining activities are not required, which enables the FnPS to operate effectively without the undesirable energy consumption profile of a public blockchain network.
Towards a sustainable future
By adopting a Proof of Authority consensus mechanism we dramatically reduce our consumption and carbon footprint to promote a future that is friendlier to the environment, while realising the full benefits of the blockchain.
If you are interested in learning more about who we are, how we work and where we are going, why not start by visiting our website at https://www.fnality.org/home
