Consensus algorithms define the rule by which a blockchain works. These rules also define how decentralized a blockchain is, based on the way the rules define the interactions between different parties in a blockchain including general users, miners, validators and mining rewards.
The Proof of Work (PoW) algorithm is the most popular consensus algorithm in use today. Bitcoin and the current version of the Ethereum blockchain uses PoW. Proof of Work has proved to be very reliable and stable against different kinds of social and technical attacks. However, the current versions of PoW algorithms are subject to certain very important problems, which can be categorised as scalability and speed-related issues.
As a result, other consensus algorithms were created to cater for uses cases which require a higher transaction throughput along with cheaper transaction fees.
Proof of Authority
Proof of Authority (PoA) is a reputation-based consensus algorithm which partly solves the transaction throughput and speed problem.
The PoA consensus algorithm is based on the principle that block validators stake their reputation instead of staking energy usage as in PoW or coins as in Proof of Stake (PoS). This inevitably means that validators in PoA blockchains need to have their identity public. The PoA also requires that there are a limited number of block creators or validators, which in turn ensures that blocks can be created at more regular intervals.
Limitations of Proof of Authority
The main limitation levelled at Proof of Authority blockchains is based on the perceived level of decentralisation. It is usually considered that PoA consensus algorithms have a limited level of decentralisation since they are based on a fixed number of known block validators, which are the equivalent for miners in a Proof of Work blockchain. This means that the probablity of controlling at least 50%, or in some cases, 33% of the block validators is quite high. This would allow a malicious player to corrupt the whole blockchain network.