What is a blockchain consensus mechanism?
Blockchain technology has revolutionized the way transactions are processed and recorded on a distributed ledger, but there needs to be a way of preventing malicious uses. This system is called a consensus mechanism.
Until 2008, when Satoshi Nakamoto published the Bitcoin white paper which described a digital currency based on consensus protocols that would allow secure, peer-to-peer transactions, one of the issues that prevented the development of digital currencies was the double-spending problem. You can't spend the same dollar bill twice, but with cryptocurrency, there needs to be a way to prevent users from spending the same unit twice (or more) in different places before the system can record the transactions. The consensus mechanism, also called consensus algorithm, is used to prevent this.
Blockchain technology has a wide range of use cases, including financial transactions, supply chain management, and smart contract execution. Every cryptocurrency blockchain uses a consensus mechanism, which allows users of the blockchain to agree on the legitimacy of transactions, with no centralization or central authority needed. The blockchain consensus protocol that is used influences the way transactions are verified, how much energy is used, transaction fees and speed, and can have a significant impact on the security and efficiency of the network.
Although the idea of the Proof of Work consensus mechanism existed before the creation of the Bitcoin blockchain, it was implemented for the very first time for blockchain technology. A majority of cryptocurrency networks use the Proof of Work (PoW) mechanism, including Bitcoin, Litecoin, DogeCoin, and Bitcoin Cash.
This article will explore the different types of consensus mechanisms used in distributed systems, including Proof of Work (PoW), Proof of Stake (PoS), and more.
Types of consensus mechanisms
Proof of Work
The most well-known consensus mechanism is PoW, used by the first and most famous public blockchain, Bitcoin. PoW requires nodes, or miners, to compete against each other to solve complex mathematical problems by finding a cryptographic hash of a particular block, in order to add a new blocks to the blockchain. The node that solves the problem first gets to add the next block and receives a block reward. PoW requires specialized computing systems to run through all possible solutions until the winning solution is found, an energy-intensive process, which has led to the development of other consensus mechanisms.
Proof of Stake
Proof of Stake has gained popularity in recent years, particularly in the Ethereum blockchain, which moved from PoW to PoS in 2022 (Ethereum Merge). Other prominent platforms on PoS include Cardano (ADA), Solana (SOL), and Tezos (XTC). In the PoS consensus, validators, or users with a stake in the network, are selected to add new transaction blocks to the blockchain. The more stake a validator has, the more likely they are to be selected to add a new block. Much less computational power is required for validating transactions, making Proof of Stake more energy-efficient than PoW.
Delegated Proof of Stake
Delegated Proof of Stake (DPoS) is a variation of PoS, in which token holders vote for a limited number of validators to add new blocks to the blockchain, rather than validators being selected at random. Because of this stake-weighted voting mechanism, DPoS is one of the fastest blockchain consensus models and is considered more democratic than PoS. Some of the real-life use cases of this blockchain consensus mechanism are Steem, EOS, and BitShares.
Hyperledger, a blockchain platform developed by the Linux Foundation, uses a consensus mechanism called Practical Byzantine Fault Tolerance (PBFT), which is based on the Byzantine Generals Problem. PBFT is a consensus mechanism that is more suitable for permissioned blockchains, where the network is comprised of known and trusted participants.
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Other consensus mechanisms include Proof of activity (PoA), a hybrid of the PoW and PoS consensus mechanisms. Not to be confused with Proof of Activity, proof of authority (also 'PoA') works by selecting its validators based on reputation.
Proof of Elapsed Time (PoET) is usually used on permissioned blockchain networks (those that require participants to identify themselves), is considered one of the fairest mechanisms, as it leverages trusted computing to enforce random waiting times for block construction.
Proof of Capacity (PoC) allows sharing of memory space of the contributing nodes on the blockchain network. The rights a node has for maintaining the public ledger depends on the memory space they have available: the more memory space the node has, the more rights it is granted.
With Proof of Burn (PoB), which is a quite novel consensus mechanism, miners compete by destroying ('burning') a proof-of-work cryptocurrency as a proxy for computing resources.
Proof of Transfer (PoX) enjoys the security provided by the PoW blockchain, but also enables more day to day activities by users and more programmability. This mechanism was designed to leverage the security of Bitcoin, while allowing more complex interactions within the Stacks ecosystem.
Consensus mechanisms are a vital component of the blockchain system. Many types of algorithms have been developed to address the scalability and energy consumption issues of the first generation of blockchain protocols, and as the space continues to grow and evolve, more will be developed to improve the security and efficiency of blockchain networks.