Proof of Importance (PoI)

What Is Proof of Importance (PoI)?

Introduced by NEM (XEM) in 2015, the Proof of Importance (PoI) consensus mechanism aims to solve two predominant drawbacks of the Proof of Stake (PoS) system: 

  1. The rich getting richer In the PoS mechanism, the more a user stakes, the higher their chances of adding a block. Ergo, the more capital a participant has, the higher their potential to receive a reward.

  1. Discouragement of usage The PoS system prioritises entities based on the participants’ holdings, a design often labelled counterproductive, as it incentivises users to hold on to their cryptocurrencies, as opposed to using them.

The PoI consensus algorithm solves these two issues by assigning an ‘importance score’ to miners (known as ‘block harvesters’) on the network. A higher PoI score means the network and its users have a higher trust in a specific miner to validate and mine new blocks. Thus, a miner with a higher score has a higher chance of selection.

How Does Proof of Importance (PoI) Work?

Unlike PoS, the PoI algorithm takes more into account than just the number of tokens held; it also calculates how long these tokens have been in a digital wallet, amongst other factors. Depending on the implementation, only the tokens held for a certain, predefined period are considered ‘vested’; and only vested tokens are used to determine the ‘importance score’. 

The PoI algorithm prioritises three factors:

  • Users with regular transactions. This incentivises the circulation of tokens instead of hoarding.

  • Transaction size. The PoI algorithm takes the total transacted amount into account.

  • Transaction frequency. The algorithm favours active users with frequent transactions over infrequent users.

An example of a PoI consensus algorithm is NEM (XEM).

Key Takeaway

Proof of Importance (PoI) is a consensus mechanism that uses ‘importance scores’ to determine which nodes are eligible to mine new blocks. This helps to ensure that the network runs smoothly and all participants are contributing to its success.

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