Blockchain networks employ a consensus mechanism called Proof of Importance (PoI) to verify transactions and protect the network. The NEM (New Economy Movement) blockchain first released it in 2015 in order to solve some issues that might come up with Proof of Stake (PoS) systems.
What is Proof of Importance (PoI)?
Proof-of-Importance (PoI) determines who can validate transactions and create new blocks in some blockchain networks. Proof of Importance emphasizes a node’s overall “importance” as opposed to more conventional techniques like Proof of Work (PoW) and Proof of Stake (PoS). Its financial stake (the quantity of bitcoin possessed) and network activity are used to calculate its significance.
PoI’s primary goal is to safeguard the blockchain by identifying the participants who can contribute new transaction blocks to the shared ledger. Proof of Importance helps stop harmful acts like double-spending in a decentralized system by ensuring that all participating nodes agree on the correct order of transactions and the integrity of the data.
Key Factors and the Importance Score
The “importance score” is a key idea in Proof of Importance. An significance score is assigned to each user or node, indicating their network influence and the possibility that they will be selected to approve transactions and produce new blocks.
This score is determined by two key factors:
- Financial Stake (How Much You Have): Proof of Importance takes a node’s cryptocurrency holdings into account. Because they are perceived as having a greater stake in the network’s success, nodes with more cryptocurrency have more clout. For example, an account must have 10,000 XEM or more in the NEM protocol in order to be harvested. They must be retained for a specific number of days, which is why they are referred to as “vested stake” coins (10% of the current unvested amount becomes vested every 24 hours, for example).
- Network Activity (How Active You Are): Proof of Importance also takes into account how involved and active a node is in the network. This comprises:
- Usage and movement of tokens: How frequently a node uses its tokens for transactions.
- Number and size of transactions performed: The number of transactions that a node starts or participates in.
- Interactions with other nodes/transaction partners: An account’s connections with other parties. An account’s overall score will be significantly impacted by how much it interacts with other accounts. “If a node performs transactions with a node of high importance score value, the first node’s likelihood of mining the next block increases” .
By rewarding users who actively participate and possess substantial amounts of cryptocurrency, the combination of these variables seeks to build a more equitable and dynamic network.
How PoI Works
Proof of Importance, sometimes known as “harvesting,” entails the following procedures:
- Calculate Importance Score: The node’s relevance score is determined by measuring and combining its financial stake (the quantity of bitcoin held) and network activity (interactions, transaction processing, and communication). Greater influence is indicated by a higher score.
- Node Selection: Higher significance score nodes are more likely to be chosen for transaction validation and block creation.
- Transaction Validation: The blockchain’s security and integrity are guaranteed by the chosen nodes’ validation and confirmation of transactions.
- Rewards: Depending on their relevance ranking, nodes who take part in transaction validation and block creation are rewarded with cryptocurrency.
Key Concepts of Proof of Importance
PoI is defined by a few fundamental ideas in addition to the important score:
- Node Participation: Higher significance scores result from a node’s active participation in network activities, guaranteeing that both wealth and active participation are taken into account.
- Transaction Validation: The procedure by which nodes with higher significance scores verify and append transactions to the blockchain.
- Balanced Incentives: Proof of Importance seeks to strike a balance between the benefits of actively participating in the network and owning a financial investment. This guarantees that nodes are not just holding a lot of cryptocurrency but are also actively supporting the network’s health and making financial investments.
- Node Rewards: Nodes receive rewards for their involvement, which encourages them to continue being involved and active.
Advantages of Proof of Importance
Proof of Importance has a number of benefits.
- Active Monitoring and Engagement: Proof of Importance encourages user participation, creating a vibrant blockchain ecosystem. Active network security nodes lower the risk of undiscovered hostile activities.
- Balanced Incentives and Fairer Rewards: PoI creates a more balanced incentive structure by rewarding nodes for both their active participation and financial stake. By paying people who actively participate, it seeks to make the network more equitable.
- Reduced Centralisation: A possible danger with pure PoS systems is the concentration of power in the hands of a small number of powerful token holders; PoI can help avoid this by taking activity and participation into account. It would be more difficult to take over a network if attackers required both a sizable stake and active participation.
- Increased Transaction Processing: A robust and effective network is facilitated by active nodes that routinely take part in block formation and validation.
- Resource Efficiency: PoI utilizes less energy than PoW because it requires less compute. The “high power consumption” problem is directly addressed.
- Scalability: Without requiring an exorbitant amount of processing power, PoI can facilitate scalable blockchain operations and is often scalable with balanced incentives.
- No Specialized Hardware: PoI is more accessible to a wider range of consumers because it doesn’t require specific hardware for participation.
- Speed: Fast transaction processing is provided via Proof of Importance, which is essential for broader blockchain adoption.
Limitations of PoI
Despite its advantages, PoI has drawbacks.
- Calculation Complexity: The process of determining significance scores, which combines network activity and financial stake, can be intricate. These complex algorithms can be difficult and prone to mistakes to design, implement, and maintain.
- Integration Challenges: Proof of Importance integration into current blockchain systems frequently necessitates major technological adjustments to procedures and infrastructure.
- Barrier to Entry: Achieving a high significance score may be difficult for new or smaller participants because it requires both a sizable stake and a lot of network engagement.
- Behavioural Impact and Manipulation: In order to maximise their significance score, nodes may change their conduct, which could result in manipulative or less-than-ideal network practices without really promoting network health. The integrity of the consensus process could be compromised if the scoring system is poorly designed.
- Operational Costs: More infrastructure and resources could be needed to keep the network engaged and active.
- Potential for Centralization (despite mitigation): Proof of Importance can still result in a situation where a few very active users control the network, even though it lowers some of the risks associated with centralization.
- Dependence on Network Activity: A certain amount of network activity is necessary for Proof of Importance to be successful; during times of low activity, the importance score might not be as significant.
Security Mechanisms of PoI
PoI includes a number of security measures:
- Prevention of Centralization: Proof of Importance ensures that both financial investment and active involvement are required for influence by combining stake and activity, reducing the risk of centralization that may arise if only financial stake were taken into account.
- Algorithmic Complexity: Malicious actors find it difficult to readily influence the system due to the intricate algorithms employed for the relevance score.
- Selection Process: High-importance nodes are chosen for validation in order to guarantee that active, financially committed participants uphold network integrity.
- Investment Alignment: Because their assets are at danger, nodes with large stakes are financially incentivized to behave honourably and make constructive contributions.
- Resistance to Sybil Attacks: Proof of Importance discourages Sybil assaults, in which an attacker builds a large number of phoney nodes in order to gain influence, by requiring both activity and financial stake. To penalize self-transfers, the NEM blockchain, for instance, analyses the net loss of an account to determine importance and prohibits the instant staking of all 10,000 XEM, requiring coins to become “vested stake” over time.
Applications of PoI
The New Economy Movement (NEM) is the most well-known real-world cryptocurrency that has used PoI. NEM’s PoI was introduced in 2015 with the goal of establishing a safe and balanced network by taking node activity and financial stake into account.
Important facets of implementing NEM include:
- Importance Score Calculation: Based on transaction activity and the quantity of XEM stored.
- Node Types: According to their relevance ranking, “Harvesters” and “Normal Nodes” are used by NEM to create blocks and validate transactions.
- Supernodes: Supernodes, which offer more network services and earn greater rewards, can be created from high-importance nodes.
- Active Participation and Balanced Incentives: NEM promotes and incentivises network contribution and active engagement.
- Other implementations related to NEM include
- Mijin: The NEM team created a private blockchain system with PoI specifically for enterprise use.
- Catapult: With improvements to the original PoI system, the next-generation blockchain platform created by NEM offers sophisticated capabilities for businesses, such as enhanced scalability and security, and supports tokenization.
- Tokenised Platforms: In order to balance voting power in governance models and encourage user participation, certain platforms have investigated PoI-like procedures.
Comparison with Proof of Stake (PoS)
To enhance the Proof of Stake (PoS) process, PoI was created. One of PoS’s main drawbacks is that it may “promote the rich getting richer syndrome,” which encourages holding over usage by giving participants with larger stakes a better chance of being chosen. This “motivates and incentivizes holding, not usage,” which may run counter to the goal of cryptocurrencies, which is to encourage capital work and transactions.
PoI overcomes these drawbacks by relying on the volume and calibre of transactions handled in addition to stakes. By taking into account vesting, transaction partners, and the quantity and magnitude of transactions over the previous 30 days, it concentrates on a node’s total network support. Although network efficiency and security are the goals of both PoI and PoS, PoI places more emphasis on network activity and wider contributions, while PoS is mostly concerned with cryptocurrency ownership.