All you Need to Know About Consensus Mechanisms
Blockchains, as we know, are distributed databases designed to record, communicate, and transact information without the need for a central authority. But how can we be certain that every transaction on the blockchain is completely secure and verified? This is only possible because of the presence of consensus mechanisms. It is a core part of any blockchain network. In this article, we will have an in-depth look at the consensus mechanisms in the crypto world.
What is a Consensus Mechanism?
A consensus mechanism is a fault-tolerant mechanism. It is used in computer and blockchain systems to achieve the necessary agreement on a single data value or a single network state among distributed processes or multi-agent systems, such as cryptocurrencies. In layman’s terms, a consensus mechanism is a process by which a group of peers — or nodes — on a network determine which blockchain transactions are valid and which are not.
In theory, an attacker with 51% control of the network can undermine consensus. Consensus mechanisms are designed to make this ‘51% attack’ impossible. There are numerous types of consensus mechanisms. They are classified according to the blockchain and its application. Even though they differ in terms of energy consumption, security, and scalability, they all serve the same purpose: to ensure that records are accurate and honest.
Why are Consensus Mechanisms Important?
In the world of cryptocurrency, the goal of a consensus mechanism is to prevent fraud and cheating. ‘Double-spending’ is a classic example of cryptocurrency cheating. For example, A tries to defraud B by transferring 20 tokens to him and then transferring the same 20 tokens to C. Due to the presence of consensus mechanisms, C would already be aware that A no longer possesses the 20 tokens he was proposing to send.
Consensus mechanisms bring together all of the blockchain network’s peers to reach an agreement on the current state of the distributed ledger. Consensus mechanisms achieve reliability in the blockchain network and build trust between unknown peers in a distributed computing environment in this manner. Consensus mechanisms not only solve the problem of double-spending by making it expensive and difficult to propose a new block of validated transactions, but they also incentivize ‘good’ nodes to propose blocks that they genuinely believe will be accepted in order to receive valuable rewards.
The consensus mechanism ensures that all miners agree on the next block of transactions and distributes all new block information to all other miners. Anyone can download a copy of the blockchain and use it as a node on their device. Each ledger copy is identical. The consensus mechanism ensures that the wallets continue to agree on which assets belong to which wallets.
Popular Types of Consensus Mechanisms
There are many types of consensus mechanisms like:
- Proof-of-Work (PoW),
- Proof-of-Stake (PoS),
- Proof-of-History (PoS),
- Proof-of-Capacity (PoC),
- Delegated Proof-of-Stake (DPoS),
- Proof-of-Burn (PoB),
- Practical Byzantine Fault Tolerance (PBFT),
- Proof-of-Retrievability (PoR),
- Proof-of-Authority (PoA),
- Proof-of-Publication (PoP),
- Proof-of-Elapsed Time (PoET),
- Proof-of-Importance (PoI), and
- Proof-of-Ownership (PoO), etc.
However, we will discuss 3 of the most popular types of consensus mechanisms:
Proof of Work (PoW)
Proof of work (PoW), which is used by Bitcoin, Ethereum, and many other public blockchains, was the very first consensus mechanism invented. It is widely regarded as the most dependable and secure of all consensus mechanisms. Miners compete against one another in PoW to validate the next transaction block and earn a reward. Miners use high-powered computers to solve extremely complex computational puzzles. The first successful miner is also rewarded with a set amount of cryptocurrency, known as a ‘block reward.’ This is a very energy-intensive consensus mechanism that requires a lot of computational power. This is why PoW’s operating costs are notoriously high.
Proof of Stake (PoS)
Proof-of-stake (PoS) is a consensus mechanism in which the holders of the most number of network currencies validate new blocks. In a Proof of Stake (PoS) system, miners must pledge a ‘stake’ of digital currency in order to be chosen at random as a validator. The procedure is similar to a lottery, where the more coins you stake, the better your chances are to win. In contrast to the PoW system, where miners are rewarded with block rewards (newly generated coins), those who contribute to the PoS system simply earn a transaction fee. PoS has evolved as a low-cost, low-energy-consuming replacement for the PoW mechanism. While Ethereum intends to transition to a proof-of-stake (PoS) protocol, platforms such as Solana and Cardano already use it.
Proof of Authority (PoA)
Proof of Authority (PoA) selects validators based on their reputation. Within a PoA consensus blockchain, validators are typically users who have been chosen and approved by other network participants to act as system moderators. Validators do not stake coins in this scenario. Instead, they must risk their reputations to validate blocks. As a result, validators are typically institutional investors or other strategic partners within the blockchain ecosystem who have a vested interest in the network’s long-term success and are willing to reveal their identities for accountability. This mechanism is far less resource-intensive than some of its predecessors, particularly PoW because it requires almost no computing power. It is also one of the less expensive options, making it a popular choice for private networks such as JP Morgan (JPMCoin). VeChain and Ethereum Kovan Testnet use the PoA consensus mechanism as well.
Decentralized networks can reach a consensus on a single source of truth in a variety of ways. Each consensus mechanism has advantages and disadvantages. As the blockchain sector matures and more industry conventions are established, the design of these consensus mechanisms will have varying and significant implications on the security, accessibility, and sustainability of each network. The list of notable blockchain consensus mechanisms provided above is not exhaustive. While PoW and PoS are certainly the most common, new and evolving mechanisms such as PoA are constantly emerging.