Proof of Authority is an algorithm designed to reach distributed consensus just like Proof of Work (PoW) or Proof of Stake (PoS). It is, in fact, a particular case of Proof of Stake protocol, instead of a financial buy-in, the identity of the node is kept at stake in here.
A PoA network does not involve intensive computational processes like the PoW mining. It also deters 51% attacks that are high probability issues for the PoS mechanism. The ‘nodes’ on the PoA network are secured by what is termed as validators, they are selected democratically by existing validators and then the new node can also perform the work along with other validators. The nodes on the PoA network are rewarded for validating the transactions on the network. The identity of the validator is kept anonymous by encryption and secured cryptographically. It is revealed only as a negative reinforcement when the validator processes a fraudulent or a malicious transaction.
The model involves both positive and negative reinforcement for the ‘validators’. They are paid an incentive in the form of transaction fees in case of ‘good’ validating work, however, if the validator processes a malicious or a fraudulent node, his node can be deleted and the identity of the validator is revealed causing him reputational harm.
A notary license is required that verifies the identity of the person formally, a notary licence is released by the Government after extensive verification. The identity of the validator is kept for cross-referencing with the notary data and the blockchain data.
Parity supports a Proof-of-Authority consensus engine to be used with Ethereum based chains. Proof-of-Authority is a replacement for Proof-of-Work, which can be used for private or centralised chain setups that can be instrumental in banking.
PoA deployments are used by the enterprises and by the general developer efforts (e.g. popular Kovan test network) to design a protocol that can be used efficiently by the existing networks and centralised servers to increase productivity and essentially improve the current outdated economic models.