A Beginner’s Guide to Consensus Mechanisms in Blockchain

A Beginner’s Guide to Consensus Mechanisms in Blockchain

What is a consensus mechanism?

Blockchain consensus is the process through which the network’s peers come to an understanding of the current state of the data. Consensus algorithms accomplish this by establishing dependability and credibility in the Blockchain network.

Why Consensus Mechanisms Are Necessary for Blockchains?

The foundation and security of all cryptocurrency blockchains are consensus mechanisms. We must first define what it means for blockchains to reach a consensus before delving into the various consensus processes.

A blockchain is a digital ledger that is distributed, decentralized, and often public and used to record transactions. Each of these transactions is represented as a separate “block” of data that must first pass independent peer-to-peer network verification before being included in the chain. This technique tackles the issue of “double-spending” and assists in protecting the blockchain against fraudulent behavior.

Blockchain networks like Bitcoin and Ethereum use what are known as consensus mechanisms to ensure that all users (or “nodes”) concur on a single version of history (also known as consensus protocols or consensus algorithms). These mechanisms are designed to make the system fault-tolerant.

What Are Consensus Mechanisms?

A collection of peers, or nodes, in a network decides which blockchain transactions are valid and which are not through a consensus process.

Depending on the blockchain and its use, there are numerous distinct kinds of consensus processes. While they vary in terms of energy consumption, security, and scalability, they all serve the same function of making sure that records are accurate and truthful. Here is a summary of a few of the most popular categories of consensus techniques that distributed systems utilize to obtain consensus.

Types of Consensus Mechanisms

1-Proof of Work (PoW)

Proof of work (PoW), which is used by Bitcoin, Ethereum, and numerous other public blockchains, was the first consensus mechanism ever developed. Though there are several scaling difficulties, it is usually considered to be the most dependable and safe of all the consensus systems. Although the phrase “proof of work” was initially used in the early 1990s, Satoshi Nakamoto, the creator of Bitcoin, was the one to apply the concept in the context of digital currencies.

In PoW, users compete against one another to use powerful computers to solve incredibly difficult computational puzzles. The right to create a new block and validate transactions belongs to the first person to generate the 64-digit hash. Additionally, the successful miner receives a “block reward,” which is a fixed sum of cryptocurrency.

The running expenses of PoW are notoriously high since producing new blocks demands a significant amount of computer power and energy. This creates a barrier to entry for new miners, raising issues with centralized control and scalability.

Moreover, the expenditures aren’t the only thing that is excessive. The impact of power consumption on the environment is the most frequent complaint of PoW. Due to this, many people are looking for more environmentally friendly and energy-efficient consensus processes, such as proof of stake (PoS).

Proof of Stake (PoS)

This well-liked consensus approach is based on the staking procedure, as the name implies. A “stake” of digital money must be paid by miners in a proof of stake (PoS) system in order to be eligible to be selected at random as a validator. Similar to a lottery, the more coins you wager, the greater your chances are in this process.

In contrast to PoW, where block rewards (newly created currencies) are used to motivate miners, the PoS system just pays contributors with a transaction fee.

PoS is seen as a more secure alternative to PoW that is also more environmentally friendly and resilient to a 51 percent attack. The PoS method has garnered criticism for its potential to promote centralization because it favors entities with more tokens. Popular PoS platforms include Tezos, Cardano (ADA), and Solana (SOL) (XTC).

Delegated Proof of Stake (DPoS)

Delegated proof of stake (DPoS), a variant of the PoS consensus method, uses a reputation-based voting approach to reach consensus. The network’s users “vote” to choose “witnesses” (sometimes referred to as “block producers”) to guard the network on their behalf. Only the witnesses with the highest number of votes have the authority to ratify blockchain transactions.

Users stake their tokens in a pool to cast their votes. The size of each voter’s investment is then taken into account when weighing votes; the greater the stake, the greater the voting power. Those that voted for the elected witnesses earn a reward when they correctly verify transactions in a block.

Top-tier witnesses are constantly in danger of being replaced by others who are regarded as more reliable and receive more votes. If they do to carry out their duties or attempt to authenticate fraudulent transactions, they may potentially be voted out. This encourages witnesses to always be truthful, protecting the blockchain’s integrity.

Proof of Activity (PoA)

A mixture of the PoW and PoS consensus procedures is called proof of activity (PoA). The blockchain projects Espers (ESP) and Decred (DCR) both make use of it.

Similar to PoW, mining in PoA systems starts with competitors spending a lot of processing power to try to solve a complex mathematical problem. The system then turns to resemble PoS when the block has been mined, with the successfully created block header being sent to the PoA network. The new block is then randomly validated by a number of validators who sign off on the hash. The more crypto a validator possesses, similar to PoS, the better their chances are of being chosen. The block is introduced to the blockchain network and made available to record transactions once each selected validator has signed it. The miner and validators then split the block rewards.

The PoA system has come under fire for its energy-intensive mining phase and inherent favoritism towards validators holding a bigger amount of coins, despite being built with the purpose of integrating the best aspects of PoW and PoS while avoiding their drawbacks.

Proof of Authority (PoA)

Proof of Authority (PoA), which should not be confused with proof of activity (also known as “PoA”), chooses its validators based on reputation. Gavin Wood, a co-founder of Ethereum and former CTO, suggested a modified version of PoS in 2017.

Validators don’t stake coins in PoA. Instead, in order to have the ability to validate blocks, they must risk their reputations. The bulk of blockchain systems, in contrast to this, often do not need participants to disclose their identities.

This approach is significantly less resource-intensive than some of its predecessors, especially PoW, as it requires essentially little computational power. It is also among the more affordable choices, making it a highly preferred alternative for private networks, like JP Morgan (JPMCoin). The Ethereum Kovan testnet and VeChain (VET) are two further PoA-based initiatives.

Although very scalable, the decentralization aspect suffers because only a small number of people can join the network. The necessity that the validators be recognized further raises the danger of fraud and outside interference.

Proof of Burn (PoB)

Proof of burn is another more environmentally friendly substitute for Bitcoin’s PoW algorithm (PoB). By “burning” (destroying) a predetermined number of tokens in a verifiable manner — specifically, by sending them to an “eater address” where they cannot be retrieved or used — miners are given the ability to mine a block in PoB. The likelihood of being randomly chosen increases with the number of coins burned.

Burned coins cannot be recovered, in contrast to PoS, where miners can sell or retrieve their locked money if they ever decide to leave the network. This strategy of requiring miners to give up short-term wealth in exchange for the lifelong right to generate new blocks encourages miners to commit over the long run. Burning coins also make coins scarcer, which reduces inflation and increases demand.

Cryptocurrencies like Factom, Counterparty and Slimcoin all employ the proof-of-burn system (FCT).

Proof of Capacity / Proof of Space

Proof of capacity (PoC), sometimes known as proof of space (PoSpace), is a mining algorithm that bases mining rights on the amount of accessible space on a miner’s hard drive, in contrast to the majority of its predecessors, which award mining rights based on the computational power of coins staked.

In PoC, the process of “plotting” is used by miners to create a list of all feasible hashes beforehand. Then, a hard disc is used to store these plots. There are more potential solutions for the more storage space a miner has. The likelihood of having the right hash combination and receiving the reward increases as the number of solutions increases.

PoC makes it possible for the typical person to take part in the network because it doesn’t call for expensive or specialized equipment. As a result, it is a more decentralized and less energy-intensive alternative to some of the more widely used consensus mechanisms discussed in this article. The system hasn’t yet been adopted by many developers, and there are worries that it could fall victim to virus assaults. Signum (SIGNA), originally known as Burstcoin (BURST), Storj (STORJ), and Chia is now using the technique (XCH).

Proof of Elapsed Time (PoET)

Proof of elapsed time (PoET) uses trusted computing to enforce random waiting times for block construction and is typically employed on permissioned Blockchain networks (those that demand participant identification). It is based on a unique collection of CPU instructions known as Intel software guard extensions and was created by Intel at the beginning of 2016. (SGX).

PoET, a consensus mechanism based on time lotteries, operates by distributing various wait periods among all network nodes at random. Each of these nodes enters a state of “sleep” for the duration of the waiting period. The mining rights are given to the person who wakes up first and has to wait the least amount of time. This randomization ensures fairness inside the network by ensuring that each player has an equal chance of winning.

Proof of History (PoH)

Proof of History (PoH) offers evidence of historical occurrences, as the term implies. Solana’s PoH technology enables “timestamps” to be incorporated directly into the blockchain, independently confirming the interval between transactions.

This timestamping technique is made possible by a sequential-hashing verifiable delay function, like SHA-256 (VDF). It functions by using the outcome of a transaction as the input for the subsequent hash, allowing everyone to plainly understand which event occurred in a specific order. PoH significantly minimizes the processing weight of the blockchain because the VDFs can only be solved by a single CPU core, making it faster and more energy-efficient than many of its peers.

Proof of Importance (PoI)

Proof of Importance (PoI), first established by NEM (XEM), chooses its miners based on specific criteria in a procedure known as “harvesting.” The volume and quantity of transactions over the previous 30 days, the amount of vested currency, and network activity are typical determinants. These elements form the basis of the significance score given to nodes. The likelihood of being selected to harvest a block and collect the associated transaction fee increases with the score.

Although comparable to PoS, PoI avoids the latter’s propensity to automatically reward the wealthy by taking into consideration participants’ total network support. As a result, simply placing a large POI bet does not ensure that you will win the block.

Final Thoughts

When it comes to confirming the legitimacy of distributed blockchain systems, there is no one-size-fits-all method. Each consensus technique has a unique set of benefits and drawbacks. While PoW and PoS are undoubtedly the most common, new and developing algorithms are constantly emerging.

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