Proof of Importance (PoI) in Blockchain

Proof of Importance (PoI) in blockchain sets new standards for network participants or coin hoarders to become eligible for harvesting a new block of transactions in the network. It rewards users with importance scores, which eventually help them become block harvesters. Let's understand more!

Today, in this series of understanding various consensus mechanisms in Blockchain, we picked one of the lesser-known yet significant algorithms, Proof of Importance (PoI).

We all are aware of the renowned consensus algorithms like proof of work (PoW) and proof of stake (PoS) in the blockchain (a decentralized network). However, these algorithms come with their limitations. The PoS mechanism worked on resolving limitations of the PoW algorithm, such as massive energy consumption. 

Similarly, Proof of Importance (PoI) improves the PoS mechanism. It worked out of the shortcomings of PoS.

Proof of stake (PoS), in short. PoS is a consensus mechanism where the majority of network participants agree on the next global change in the network. Here, participants who want to add their block, stakes (or hold up) a share of their total coins in an escrow network account.

This process of staking shows the interest of participants to become network validators. One of the validators based on stakes and reputation gets selected to add their block. The rest of them validate the transactions of the block proceeded by the selected validator. 

Table of Content

• Limitations of the Proof of Stake (PoS) Mechanism
• What is Proof of Importance (PoI)?
• How does the Proof-of-Importance (PoI) Algorithm work?
• Is the PoI mechanism prone to Sybil attacks in Blockchain?

Limitations of the Proof of Stake (PoS) Mechanism

One of the biggest disadvantages of PoS is to promote the rich getting richer syndrome. It means the staking mechanism in PoS increases the chances of selection for participants with higher stakes in the process. Therefore, only rich participants get the opportunity to forge their block of transactions.

Traditional PoS moto, the longer participants hold, the more they get incentivized by the network. The main purpose of replacing currency with cryptocurrency is to make capital more work and promote transactions. PoS motivates and incentivizes holding, not usage, which eventually kills the purpose.

What is Proof of Importance (PoI)?

The PoI consensus algorithm was introduced by the NEM (New Economy Movement) blockchain in 2015 to overcome the drawbacks of PoS. Their cryptocurrency coin is called XEM. 

Proof of Importance in blockchain resolves the limitations of PoS by assigning consensus addresses and importance scores. Think of importance scores as a trust or reputation score in the network. A higher score means the network trusts you more to verify or forge the new block of transactions. Hence, higher chances of getting selected as block harvesters (miners in the PoI mechanism).

Below are the conditions a network participant needs to meet for harvesting a block.

Scale-up the importance score by vested stake:

• PoI only counts the vested stake coins. In order to become a vested stake, coins need to be held for a number of days in an account. 
• After every 24 hours, 10% of the current unvested amount is added as a vested stake.
• The importance score is directly proportional to the vested stake coins.
• In the case of NEM Blockchain, the block harvester must have at least 10,000 XEM, which is called a minimum vested stake.

Elevate the importance score by making regular and quality transactions:

• PoI incentivizes nodes that make regular transactions instead of just holding the coins. It promotes the circulation of cryptocurrency among transaction partners.
• Fraudulent transactions just to increase the importance score get detected and will be eliminated by the network.
• PoI provides the importance score for certain types of transactions. For example, higher transactions get higher scores compared to lower transactions.
• In the case of the NEM blockchain, an account has to transact at least 1000 XEM in the last 30 days to the quality accounts with at least 10,000 XEM at a vested stake.

Note: The net transfers in the last 30 days derive the importance score of an account or a node in the network.

Hence, the importance score depends on factors such as the number of vested coins, transaction partners, the number and size of transactions.

How does the Proof-of-Importance (PoI) Algorithm work?

Let’s take an example to understand the Proof of Importance(PoI) mechanism on the NEM Blockchain network.

Harry Potter is a reputed coin hoarder with 30,000 XEMs in his account. He wishes to become a block harvester. So, what could he do to ensure his selection?

Target 1: Reach at least a minimum vested stake. (at least 10,000 XEM in this case)

On day 4, Harry will cross the threshold of minimum vested coins stake. Hence, target one is achieved.

Target 2: Make regular transactions to quality accounts (with more than 10,000 XEM at vested stake)

Harry’s account made more than 1000 XEM transactions to the quality accounts in the last 30 days (having more than 10,000 XEM at a vested stake). 

Now, Harry is eligible to become one of the block harvesters in the network.

Proof of Importance in blockchain raises a major concern about the Sybil attack on the network. Let’s understand how PoI tackles this problem.

Is the PoI mechanism prone to Sybil attacks in Blockchain?

FYI, A Sybil attack is one where an attacker pretends to be so many people at the same time. It manipulates the network and controls the whole network by creating multiple fake identities.

Hence, there’s a possibility that an attacker can have multiple accounts with over 10,000 XEM staked and transacting between them for a higher importance score. 

However, PoI removes this possibility of Sybil attacks in the following ways:

1. By stopping an account staking all 10,000 XEM at once. 10% of your non-staked XEM becomes staked after every 24 hours. It means an account needs to hold way more than 10K XEM in an account. 
2. Another is using the net loss of the account to help measure the importance score. Basically, if an account sends XEM and receives it back, it’ll lower its importance score.

Hence, Proof of Importance provides security against Sybil attacks by fake vesting transaction partners.

Conclusion

The above article covered details and the process of NEM’s Proof of Importance (PoI) blockchain consensus algorithm. It started with going through the proof of stake (PoS) algorithm and its limitations. Hence, PoI overcomes the shortcomings of PoS.