VeChain uses a “Proof of Authority” consensus model to ensure that future developments are aligned with the vision of The VeChain Foundation. In a Proof of Authority (PoA) network, the transactions and blocks are validated by pre-approved, verifiable, openly-public accounts known as validators. In the case of VeChain, the blockchain is maintained by 101 Authority Masternodes (AM). AMs are geographically-dispersed servers that keep a complete copy of the blockchain and are always connected to the network. They are required for the pre-approval of new VeChain entities and also to produce blocks on the VeChainThor blockchain. These AMs run the VeChain code, which allows them to attest blocks and process transactions.
VeChain could be more accurately described as a distributed LEDGER technology. While they do implement blockchain and smart contracts like other cryptocurrencies, block production lies in the hands of 101 Authority Masternodes and what VeChain calls "Proof of Authority” (PoA).
These AMs not only have significant holdings of VET (must maintain a 25 million VET balance) but have also had their identities verified by the VeChain Foundation to pass KYC regulations to become an AM.
PoA's advantages are that once a node has been "authorized," it has an equal chance to publish a block (and gain 30% of the transaction fees as a reward). This means that an AM with 100 million VET has the same opportunity as an AM just meeting the 25 million VET threshold.
While the whitepaper claims this has the advantages of reducing time to consensus (and thereby making use of network bandwidth more efficiently/increasing transactions per second), it is not decentralized in the same way Bitcoin is decentralized.
The advantages of this system, over alternatives like Proof of Work (PoW)Proof of Stake (PoS), are that it can rely on a limited number of block validators, making it a highly scalable system with faster validation and easier to govern. VeChainThor is a PoA network in which one of the 101 pre-selected validators (Authority Masternodes) is “randomly” selected to propagate the next block.
However, there are significant trade-offs when using a Proof of Authority-based consensus algorithm. A PoA system lacks the open, permissionless, decentralized, and pseudonymous nature of typical blockchains like Bitcoin and Ethereum. In contrast to PoW, a PoA blockchain have only a limited number of validators, which are pre-selected by the foundation. A PoA network is extraordinarily centralized similar to a big company or government, requiring large amounts of trust in the entity behind the project. VeChain has foregone decentralization and an open, permissionless network in order to meet its objectives. PoA does not enable the building of a blockchain that is protected from censorship and blacklisting as other consensus mechanisms allow. A limited number of identified validators can freely cooperate to censor particular types of transactions based on the identity of the user or the purpose of the transaction.
The only precautions a PoA network takes towards negating malicious activity are vetting participants before being accepted into the network and the reputational risk that would follow should any entity act maliciously. However, the risk of damaging the reputation does not necessarily keep a person from participating in nefarious actions. The size of the gains that can be gathered with a reputation-destroying event can be more valuable than the reputation within the community.
While PoA’s identities are publicly known, the risk of third-party manipulation remains. VeChain is taking measures to address the issues of a PoA system by developing a “” consensus system by adding oversight to the validation nodes. This new consensus mechanism is called VeChain PoA 2.0 SURFACE (Secure Use-case-adaptive Relatively Fork-free Approach of Chain Extension). In this new system, when a new block is created, additional time is used in communicating, transmitting, and validating the data. By optimizing the amount of time spent in transmitting data to Masternodes, transactions per second (TPS) and bandwidth efficiencies can be made.
This includes the delayed validation of a block. Rather than validating a block in the consensus round in which it was generated (as in other networks), validation of the block takes place in the subsequent round. This allows the network to transmit and validate blocks simultaneously and in parallel.
As a PoA consensus system, the network is highly scalable but sacrifices decentralization to achieve high throughput. It is built on proven blockchain technology and innovations, including the use of seven types of smart contracts and several APIs to ease third-party development of dApps. VeChain Thor is a modified version of Ethereum’s codebase optimized for scalable enterprise solutions in a trusted environment. Thor is the main base layer for data exchange, key management, and state storage.
There are smart contracts for regulating authority, gas, gas payers, governance, block queries, reward information, and accounts. These smart contracts are built-in and shipped with the Thor source code and are implemented natively in Go rather than in Solidity for efficiency. However, the VeChainThor blockchain currently supports Solidity as the programming language for developing its smart contracts.
The permissioned-blockchain is capable of handling 10,000+ transactions per second from the data collected by sensors in the real world. VeChain designs and manufactures its own physical that can read and publish data to the VeChainThor blockchain. VeChain IDs are assigned digital identities created with a SHA256 hash and tracked with NFC, RFID, and QR codes. Only the value of the raw data is stored on-chain and can only be accessed by permissioned entities. Raw data is stored in a decentralized data encryption storage solution developed by VeChain.
