Consensus mechanisms are the real heart of blockchain technology. They make it possible for blockchains to achieve decentralization, ensure safe transactions, and build trust between peers.
You have probably heard of the Proof of Work consensus mechanism used by popular blockchains like Bitcoin and Ethereum. Although this algorithm is one of the most talked about, it is far from perfect. Thus, it is being phased out in favor of consensus mechanisms that are both more technologically advanced and better for the environment.
Its never too late to find out more about how blockchains work, so you could better understand its consensus mechanisms as well.
Let’s look at the top 4 consensus algorithms to find out the pros and cons of each one and determine which one will work best for your specific needs.
What is a Consensus Mechanism?
A consensus mechanism can also be called a consensus algorithm, consensus model, or consensus protocol. This system helps everyone agree on the current state of a blockchain in real-time. In other words, it ensures that all of the members or nodes in the blockchain network are in sync and that transactions are authorized and safe.
Once all nodes agree that the transaction is valid, it is approved and added to the blockchain to be stored permanently. When everyone in the network agrees on a decision, it is said to have reached a consensus.
When a network is decentralized, every member has the same power to decide how the system works. Thus, rules need to be made so that the changes are in line with what everyone agrees on.
How does a Consensus Mechanism work?
Several different consensus mechanisms can be used to make a decentralized network work. Each algorithm has its way of getting everyone to agree on a change to the configuration of a network.
Most of the time, consensus methods require that at least 51% of the nodes agree with the change that is coming. If they agree, the network system will be changed to take the new information into account. If this condition is not met, the change is turned down by everyone.
4 main types of Consensus Mechanisms used by Blockchains
Here is a list of the different ways that different blockchain networks reach a consensus:
Proof of Work (PoW)
The Proof of Work (PoW) algorithm is first used by Bitcoin and Ethereum networks. Here, the nodes, also called the miners, have to do a lot of math calculations to find a correct hash, which is a 64-digit hexadecimal number.
The first miner to solve the complex puzzle gets to add the next block to the network. Hence, getting the “block reward” is a set amount of cryptocurrency given to the miner who successfully made a new block.
This puzzle-friendly method uses a lot of computer power to reach a consensus. After that, valid transactions are added to the block by the miner. Proof-of-work is used by blockchains like Bitcoin, Ethereum, Dogecoin, and Litecoin.
The people who benefit most from PoW are the miners themselves. They can earn block rewards or even get a percentage of the transaction fees in the network.
Another important benefit is that hackers will have a hard time exploiting the network. Using the PoW consensus mechanism takes a lot of processing power and work, making it hard for hackers to change the system. Even if they tried, the cost of the machinery, electricity, and labor needed would be more than the money they could make.
The first downside of the PoW protocol is that it is bad for the environment. As the blockchain network upgrades or advances, solving a hash will become more challenging. This means that the whole process will need more and more computer power. Thus, miners have to use specialized equipment that is expensive and uses a lot of energy.
In addition, the PoW consensus method is linked with slow transaction speeds. It may take longer than ten minutes to validate a block and approve a single transaction. The fees that come with transactions are also quite high compared to other consensus algorithms.
Such drawbacks have led many people to look for more eco-friendly and energy-efficient ways to reach a consensus, such as Proof of Stake (PoS).
Proof of Stake (PoS)
Proof of stake (PoS) is seen as a more sustainable and eco-friendly solution than Proof of Work since it does not need to use as much energy as PoW.
As the name of the method might suggest, one of the most common ways to reach a decision is through staking. Here, miners must “stake” a certain amount of digital currency for a chance to be randomly chosen as a validator. The process is like playing the lottery, where the more money you bet, the more likely you will win.
While miners in the PoW system are given block rewards, validators in the PoS system only get a transaction fee in exchange for their work. Three well-known networks that use PoS are Cardano, Polkadot, Solana, and Tezos.
In Proof of Stake, validators don’t have to spend much money on specialized hardware since they can use their regular computers instead.
Thus, more people can afford to become nodes. Another benefit is that reaching a consensus doesn’t require mining, so it uses less energy overall. PoS also makes it possible for transactions to get done much faster since it can handle about 15 transactions per second.
Even though each PoS-powered blockchain protocol has its own rules and circumstances, most require validators to stake at least some of their cryptocurrency for a set amount of time. During this time, no matter what the cryptocurrency’s price does, you won’t be able to “unstake” and trade it.
It has also been criticized because it tends to lead to centralization since organizations with more tokens have an advantage in the system.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake (DPoS) uses a voting system based on reputation to reach a decision. People who use the network vote for “witnesses,” who are often called “block producers,” and will be in charge of keeping the network safe on their behalf.
To vote, users put their tokens into a “staking pool.” Then, each voter’s vote is weighted by how much they have at stake. This means that the more you have at stake, the more power you have to vote.
Only the most trusted witnesses, or those with the most votes, are allowed to check transactions. When chosen witnesses confirm a transaction, they get a reward that is usually shared with the people who voted for them. The DPoS algorithm is used by blockchains like EOS, Lisk, Steem, and Tron.
One of the most important things about the DPoS system is that it allows real-time voting, which makes it possible to keep an eye on network security all the time. As soon as voters find out that a delegate did not do their job or tried to make fake transactions look legitimate, they can vote to get rid of that delegate. This gives witnesses a reason to always be honest, which helps keep the blockchain’s integrity.
Also, DPoS is even more cost-effective and efficient than PoS regarding the amount of energy it uses. It has been shown to speed up the process of confirming and carrying out transactions, handling between 2,000 and 8,000 transactions every second.
Even though the DPoS system is praised for being decentralized and taking a democratic approach, there is still a chance that the network will become more centralized. This could happen if the delegates decide to combine their resources and form what are called cartels.
Another problem has to do with making sure the network is safe. It shouldn’t be a surprise that a successful blockchain network needs a large number of users who are actively taking part. When fewer people keep the network running, it is easier to plan a 51% attack.
Proof of Authority (PoA)
Proof of Authority (PoA) is a popular consensus mechanism among private or permissioned blockchain networks. PoA depends greatly on how trustworthy the miner or network participant is before allowing them to add a new block of transactions.
In PoA, validators don’t stake coins. Instead, they have to put their reputations at risk to get the right to validate blocks. This is a big change from the vast majority of blockchain protocols, which don’t usually require people to say who they are to participate.
Private networks like J.P. Morgan (JPMCoin) tend to choose it as a solution to their cybersecurity problems. VeChain (VET) is also another PoA-based project.
Since the PoA algorithm doesn’t need a lot of processing power, you don’t have to buy expensive equipment. Validators have real power and are rewarded for being part of the network, even though they have to reveal who they are.
The consensus algorithm is another option that gives business owners a high level of protection because it is based on real people whose reputations are at stake. Because every validator must undergo a strict screening process before getting permission and becoming a validator, the risk of an attack is very low.
Another benefit of PoA is that transactions can be done quickly and predictably. On average, it takes about five seconds to validate and add a new block of transactions.
In PoA-based systems, people can only join the network if they already have a good reputation. This means that becoming a validator is not easy and may even be impossible for the average person.
How much power is spread out is another point of disagreement. In contrast to the idea of decentralization, a PoA system means that a small group of trusted people runs the network.
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