What is a Consensus Algorithm?

The decentralized cryptocurrencies platforms of Blockchain model are powered by consensus algorithms, which is its most crucial aspect. It is true that the advent of Blockchain changed our life altogether and opened new horizons in the financial domain. But, this doesn’t mean that we limit ourselves just to what the initial model of Blockchain has offered us. Things evolve in any technological infrastructure with time and demand of the market. In Blockchain, the shared public ledger is all dependent upon efficiency and performance of its consensus algorithm.

A popular example of a consensus algorithm is Proof of Work (PoW) which is used both by the gigantic cryptocurrencies, Ethereum and Blockchain. There are multiple such algorithms introduced so far for different cryptocurrencies which were introduced to address a particular issue and to take the blockchain mechanism to an altogether newer level.

What does a Consensus Algorithm do?

A consensus algorithm in the blockchain model majorly performs two major things which are given as follows:

  1. Ensuring that the next block in line is every possible sense is the unique version of the transaction or truth.
  2. Countering the resourceful challengers from deteriorating or derailing the network/ system and ensuring successful forking of the chain.

Types of Consensus Algorithms:

The most common and widely used consensus algorithms are given below:

  1. Proof of Work — The first of the many blockchain based decentralized consensus algorithms was the Proof of Work (PoW). Despite having many other algorithms, it is still entrusted by the top of the line cryptocurrencies such as Bitcoin, Ethereum, Monero, Litecoin, Zcash and many more. However, Ethereum is on its way to move to the Proof of Stake (PoS) algorithm which we will be discussing in the next section. The performance of PoW is dependent upon the participants which it requires to do the computationally intensive work. Miners in case of the Bitcoin platform work to accumulate a set of transaction, called block, to be associated with the network maintained by the global blockchain. In order to get this done, the miner has to be the first one to rightly point out the ‘nonce’, which is actually a number that is appended at the end of the string, forming a hash. Hash initiates with the number of 0s required. The best part of PoW is that, it has proven itself with performance over a good number of years, which is far more than any of the consensus algorithms that it competes with. However, PoW has its share of downsides as well and the major ones are its excessive.
  2. Proof of Stake — Proof of Stake (PoS) algorithm is the best alternative for the PoW discussed above. In this one, rather than going for the costly computer equipment for mining blocks, an investment is made by the validator in the coins of the system. The term validator is used here as no mining is done for coin creation in PoS. Instead, all the coins are actually in existence right from the first day and the validator are strictly paid in the fee for transaction. In the case of PoS, the chance for user to be selected for creating the next block depends upon the particular fraction of the tokens that are under your ownership. It means that a validator that has 400 coins is 4 times as likely to be selected as compared to a user with only 100 coins. The block always needs to be fully committed to the blockchain once it is created by a validator. The PoS implemented in different networks varies considerably in handling such a process of block creation. If you consider Tendermint, then each and every node in the network is bound to sign off on the block, until the system reaches the status of the majority vote. On the other hand, in some other systems, PoS make the selection of signers group, randomly. There is one problem that how one should prevent a validator for creating a couple of blocks and in return, looking for double transaction fees? This phenomenon is known as ‘Nothing at Stake’. So, a person who has nothing to lose also doesn’t have any good reason not to behave badly. The blockchain engineers are driving hard to alleviate this problem. One probable solution insight is to make the validator to employ a virtual vault for locking their currency. The coins gets totally slashed if the validator is found forking or double signing the system. The PoS was first used by peercoin which was then followed by NXT and blackcoin. Currently Ethereum operates using the PoW but in line to benefit from the perks of PoS.
  3. Delegated Proof of Stake (DPoS) — This consensus algorithm was invented by Daniel Larimer which requires support from the coin owners to give their vote for the ‘delegates. The delegates further have their task cut out not only to validate the ongoing transactions but also maintaining the overall processing of the blockchain network. This algorithm, as you might can sense from its name is an alternate to the Proof of Stake (PoS) algorithm (discussed above), which is quite a familiar one these days. The working mechanism of DPoS is quite dissimilar from the conventional consensus algorithms mechanisms. Here, the stakeholders are responsible for electing the witnesses and the witnesses are then obliged and rewarded for producing blocks, which eventually become part of the blockchain. Stakeholders have the liberty to vote for as many witnesses as they want and nearly half of the stakeholders are of the opinion that the required decentralization has been accomplished by the number of witnesses elected. The voting process here is continuous, so this gives witnesses the potential for having an incentive in performing their function to the optimum level or otherwise they become vulnerable in losing their position. Moreover, the delegates are powerful enough to bring in changes to the network, such as in the block size, transaction fees and the amount to be paid to the witness. The real advantages of this algorithm are its ability to save on energy costs and then in promoting decentralization.
  4. Byzantine Fault Tolerance (BFT) — Byzantine Fault Tolerance (BFT) is known as a high-tech consensus algorithm, in nature. The BFT algorithm used by different cryptocurrencies projects enable the validators to oversee the state of the blockchain and at the same time, also share messages in between in order to reach the precise transaction record. Ensuring integrity in the carried transactions is also a key aspect of this consensus algorithm. The main application of the algorithm is in the Ripple cryptocurrency where Ripple foundation is responsible for preselecting the validators. The other notable application of BFT is in the Stellar cryptocurrency network, in which, anybody could be a validator and the level of trust is established or gained by the community itself. BFT is highly beneficial, mainly because of its ability to address scalability issues and offering transactions at a much reduced cost. But, just like the DPoS discussed above, it does introduce the entire network to a considerable component of centralization.

Guney Demirci
VP Operation (VPO)
Blockchain Fintech Product
CyBit Limited |
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