Consensus Mechanisms in Blockchain: A Beginners Guide

Consensus for blockchain is a procedure in which the peers of a Blockchain network reach agreement about the present state of the data in the network. Through this, consensus algorithms establish reliability and trust in the Blockchain network.

Key Takeaways

  • Consensus mechanisms (also known as consensus protocols or consensus algorithms) are used to verify transactions and maintain the security of the underlying blockchain
  • There are many different types of consensus mechanisms, each with various benefits and drawbacks
  • Proof of work (PoW) and proof of stake (PoS) are two of the most widely used consensus mechanisms

Why Blockchains Need Consensus Mechanisms

Consensus mechanisms form the backbone of all cryptocurrency blockchains, and are what make them secure. Before we delve into the different consensus mechanisms, we need to first define what it means for blockchains to achieve consensus.

A blockchain is a decentralised, distributed, and oftentimes public digital ledger that is used to record transactions. Each of these transactions is recorded as a ‘block’ of data, which needs to be independently verified by peer-to-peer computer networks before they can be added to the chain. This system helps to secure the blockchain against fraudulent activity and addresses the problem of ‘double-spending’.

In order to guarantee that all participants (‘nodes’) in a blockchain network agree on a single version of history, blockchain networks like Bitcoin and Ethereum implement what’s known as consensus mechanisms (also known as consensus protocols or consensus algorithms). These mechanisms aim to make the system fault-tolerant.

To learn more about the underlying principles of blockchain and the challenge of achieving consensus in a distributed, decentralised system, read this: What is Blockchain? From the Byzantine Generals Problem to Consensus

What Are Consensus Mechanisms

Consensus is the process by which a group of peers – or nodes – on a network determine which blockchain transactions are valid and which are not. Consensus mechanisms are the methodologies used to achieve this agreement. It’s these sets of rules that help to protect networks from malicious behaviour and hacking attacks.

There are many different types of consensus mechanisms, depending on the blockchain and its application. While they differ in their energy usage, security, and scalability, they all share one purpose: to ensure that records are true and honest. Here’s an overview of some of the best known types of consensus mechanisms used by distributed systems to reach consensus.

Types of Consensus Mechanisms

Proof of Work (PoW)

Used by Bitcoin, Ethereum, and many other public blockchains, proof of work (PoW) was the very first consensus mechanism created. It is generally regarded to be the most reliable and secure of all the consensus mechanisms, though concerns over scalability are rife. While the term ‘proof of work’ was first coined in the early 1990s, it was Bitcoin founder Satoshi Nakamoto that first applied the technology in the context of digital currencies.

In PoW, miners essentially compete against one another to solve extremely complex computational puzzles using high-powered computers. The first to come up with the 64-digit hexadecimal number (‘hash’) earns the right to form the new block and confirm the transactions. The successful miner is also rewarded ​​with a predetermined amount of crypto, known as a ‘block reward’.

As it requires large amounts of computational resources and energy in order to generate new blocks, the operating costs behind PoW are notoriously high. This acts as a barrier of entry for new miners, leading to concerns about centralisation and scalability limitations.

And it’s not just the costs that are high. The most common criticism of PoW is the impact the electrical consumption has on the environment. This has led many to seek more sustainable, energy-efficient consensus protocols, such as proof of stake (PoS).

Proof of Stake (PoS)

As the name suggests, this popular method of consensus revolves around a process known as staking. In a proof of stake (PoS) system, miners are required to pledge a ‘stake’ of digital currency for a chance to be randomly chosen as a validator. The process is not unlike a lottery whereby the more coins you stake, the better your odds.

Unlike in PoW where miners are incentivised by block rewards (newly generated coins), those who contribute to the PoS system simply earn a transaction fee.

PoS is seen as a more sustainable and environmentally-friendly alternative to PoW, and one that’s more secure against 51% attack. However, as the system favours entities with a higher number of tokens, PoS has drawn criticism for its potential to lead to centralisation. Prominent PoS platforms include Cardano (ADA), Solana (SOL), and Tezos (XTC).

Delegated Proof of Stake (DPoS)

A modification of the PoS consensus mechanism, delegated proof of stake (DPoS) relies upon a reputation-based voting system to achieve consensus. Users of the network ‘vote’ to select ‘witnesses’ (also known as ‘block producers’) to secure the network on their behalf. Only the top tier of witnesses (those with the most votes) earn the right to validate blockchain transactions.

To vote, users add their tokens to a staking pool. Votes are then weighted according to the size of each voter’s stake – so the more skin in the game, the more voting power. Elected witnesses who successfully verify transactions in a block receive a reward, which is usually shared with those who voted for them.

Witnesses in the top tier are always at risk of being replaced by those deemed more trustworthy and who therefore get more votes. They can even be voted out if they fail to fulfil their responsibilities or try to validate fraudulent transactions. This helps to incentivise witnesses to remain honest at all times, ensuring the integrity of the blockchain.

Though less prevalent than PoS, DPoS is regarded by many as being more efficient, democratic, and financially inclusive than its predecessor. It is used by Lisk (LSK), EOS.IO (EOS), Steem (STEEM), BitShares (BTS), and Ark (ARK).

Proof of Activity (PoA)

Proof of activity (PoA) is a hybrid of the PoW and PoS consensus mechanisms. It is used by the Decred (DCR) and Espers (ESP) blockchain projects.

In PoA systems, the mining process begins like PoW, with miners competing to solve an elaborate mathematical problem using immense computing power. Once the block is mined, however, the system switches to resemble PoS, with the successfully generated block header being broadcast to the PoA network. A group of validators are then randomly selected to sign off on the hash, validating the new block. Like with PoS, the more crypto the validator holds, the higher their chances of being selected. Once every chosen validator has signed the block, it is added to the blockchain network and ready to record transactions. The block rewards are then shared among the miner and validators.

Though the PoA system was designed with the intention of combining the very best features of PoW and PoS, while avoiding their shortcomings, it has drawn criticism for its energy-intensive mining phase and inherent partiality towards validators holding a greater number of coins.

Proof of Authority (PoA)

Not to be confused with proof of activity (also ‘PoA’), proof of authority (PoA) works by selecting its validators based on reputation. A modified version of PoS, it was proposed by Ethereum co-founder and former CTO Gavin Wood in 2017.

In PoA, validators don’t stake coins. Instead, they must put their reputations on the line for the right to validate blocks. This is very different from the majority of blockchain protocols which usually do not require you to reveal your identity to take part.

As this mechanism requires almost no computing power, it is far less resource-intensive than some of its predecessors, in particular PoW. It is also one of the less costly options, making it a heavily favoured solution for private networks, such as JP Morgan (JPMCoin). Other PoA-based projects include VeChain (VET) and Ethereum Kovan testnet.

Though highly scalable, where it compromises is in the decentralisation area, as only a select few can participate in the network. Additionally, the requirement for the validators to be identifiable also increases the risk of corruption and third-party manipulation.

Proof of Burn (PoB)

Another more sustainable alternative to Bitcoin’s PoW algorithm is proof of burn (PoB). In PoB, miners gain the power to mine a block by ‘burning’ (destroying) a predetermined amount of tokens in a verifiable manner – namely, sending them to an ‘eater address’ where they cannot be recovered or spent. The more coins burned, the greater the chances of being randomly selected.

Unlike in PoS where miners are able to retrieve or sell their locked coins should they ever leave the network, burned coins are irretrievably lost. This method of requiring miners to sacrifice short-term wealth in order to gain the lifetime privilege to create new blocks helps to encourage long-term commitment from miners. The act of burning coins also leads to coin scarcity, limiting inflation and driving up demand.

Cryptocurrencies that use the proof of burn protocol include Slimcoin (SLM), Counterparty (XCP), and Factom (FCT).

Proof of Capacity / Proof of Space (PoC / PoSpace)

Unlike the majority of its predecessors which grant mining rights based on computational power or coins staked, proof of capacity (PoC) – also known as proof of space (PoSpace) – bases its mining algorithm on the amount of space available in a miner’s hard drive.

In PoC, miners generate a list of all the possible hashes beforehand in a process called ‘plotting’. These plots are then stored on a hard drive. The more storage capacity a miner has, the more possible solutions. The more solutions, the higher the chances of possessing the correct combination of hashes and winning the reward.

As it doesn’t require expensive or specialised equipment, PoC opens up opportunities for the average person to participate in the network. As such, it is a less energy-intensive and more decentralised alternative to some of the more prevalent consensus mechanisms covered in this guide. However, as of yet, not many developers have chosen to adopt the system, and there are concerns about its susceptibility to malware attacks. The mechanism is currently used by Signum (SIGNA) – formerly Burstcoin (BURST), Storj (STORJ), and Chia (XCH).

Proof of Elapsed Time (PoET)

Usually used on permissioned blockchain networks (those that require participants to identify themselves), proof of elapsed time (PoET) leverages trusted computing to enforce random waiting times for block construction. It was developed by Intel in early 2016 and is based on a special set of CPU instructions called Intel software guard extensions (SGX).

A time-lottery-based consensus algorithm, PoET works by randomly assigning different wait times to every node in the network. During the waiting period, each of these nodes goes to ‘sleep’ for that specified duration. The first to wake up (that is, the one with the shortest waiting time) is awarded the mining rights. This randomisation guarantees that every participant is equally as likely to be the winner, ensuring fairness within the network.

The PoET consensus mechanism is highly efficient, less resource-intensive, and scalable. It has been implemented in Hyperledger’s Sawtooth.

Proof of History (PoH)

As the name suggests, proof of history (PoH) provides proof of historical events. Developed by Solana, PoH allows for ‘timestamps’ to be built into the blockchain itself, verifying the passage of time between transactions without having to rely on other nodes.

This timestamping method is enabled by what’s known as a SHA-256, sequential-hashing verifiable delay function (VDF). It works by taking the output of a transaction and using it as input for the next hash, which enables everyone to clearly see which event took place in a particular sequence. As the VDFs can only be solved by a single CPU score, PoH severely reduces the processing weight of the blockchain, making it faster and more energy-efficient than many of his contemporaries.

As PoH is only employed by Solana, it has yet to be tested on a large scale.

Proof of Importance (PoI)

First introduced by NEM (XEM), proof of importance (PoI) selects its miners based on certain criteria in a process called ‘harvesting’. Common factors include the number and size of transactions in the last 30 days, amount of vested currency, and network activity. It’s based on these factors that an importance score is attributed to nodes. The higher the score, the higher the probability of being chosen to harvest a block and receive the accompanying transaction fee.

Though similar to PoS, PoI’s use of additional metrics does away with the former’s tendency to inherently reward the rich by taking into account participants’ overall support of the network. As such, simply staking high in POI does not necessarily guarantee a chance of winning the block.

In Conclusion

There’s no one-size-fits all approach when it comes to verifying the authenticity of distributed blockchain platforms. Each consensus mechanism comes with its own set of advantages and trade-offs. While PoW and PoS are certainly the most prevalent, a variety of new and evolving algorithms are continuing to emerge. For a more in-depth discussion on the underlying principles of consensus, read this: How to Agree: Different Types of Consensus for Blockchain

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