Consensus Algorithms in Blockchain
Consensus algorithms, or consensus mechanisms, are something that everyone who’s even remotely interested in crypto has heard about. Proof of work, proof of stake — these words are well-known among crypto enthusiasts. But how many people know what exactly they do, how consensus algorithms work, and what types exist out there?
What is a Consensus Algorithm?
Blockchains are gigantic digital data ledgers. They are fully trustless and anonymous and do not require the involvement of any third parties to verify and record information in their databases. Naturally, they are quite sought after — the benefits they provide, both in terms of transparency and privacy, are attractive to many businesses and individuals.
A consensus algorithm is basically an alternative to that third party that is usually present in other methods of recording data. It is a method of deciding what information is genuine and can be recorded on a blockchain.
The word “consensus” is Latin in origin and means “agreement.” A consensus algorithm is a tool all participants of a blockchain network can use to reach an agreement on whether the information is true or not. It helps to create trust between hundreds, if not thousands of people, without breaching their privacy or involving a third party.
Different Types of Consensus Algorithms
Although most blockchains use proof-of-stake and proof-of-work algorithms, they are not the only consensus mechanisms out there. New algorithms pop up all the time, and a few newcomers have already made a name for themselves.
Let’s take a look at some of the most popular consensus algorithms.
Proof of Work (PoW)
→ Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and many others
How it works
This consensus mechanism verifies new blocks and adds them to the blockchain via a process called mining, which involves hundreds of thousands of users solving complex computational puzzles. This process is extremely power-hungry and time-consuming.
While this may seem like a downside (and in some ways, it is), their power-hungry nature makes proof-of-work blockchains more secure: in order to consistently add their own blocks to a PoW blockchain, criminals need to have control over at least 51% of the entire network’s hash rate.
Pros: secure; the best protocol for achieving an actual consensus
Cons: unsustainable; slow and expensive transaction processing
Proof of Stake (PoS)
→ Solana (SOL), Cardano (ADA), Algorand (ALGO)
How it works
The proof-of-stake consensus mechanism requires users to lock up their funds in order to get a chance to be the one to add the next block. While technically it functions as a lottery, the likelihood of you being the “winner” goes up the more coins/tokens you stake.
Unlike PoW, cryptocurrencies that use this protocol can easily afford to have a supply of static coins as there are no miners that need to be incentivized with inflation for spending their resources and energy to validate transactions. While this protocol also requires criminals to own at least 51% of all the funds on the network in order to take over it, PoS is not as safe and secure as PoW: it is much more susceptible to attacks and malicious actions of all types.
Pros: energy-efficient; secure; fast and cheap transaction processing
Cons: can be hard to reach a consensus; lacks security in comparison to PoW; whales can have too much influence
Proof of Authority (PoA)
→ VeChain (VET), POA Network (POA)
How it works
On proof-of-authority blockchains, all transactions get verified and added to the blockchain by validators — verified and/or public individuals or companies. Instead of monetary motivation, PoA nodes are incentivized by having their reputation on the line; if a validator messes up, everyone will be able to tell they did it and will react accordingly. In networks with the PoA protocol, validators are basically staking their own identity.
Validators don’t need to oversee all transactions personally as the verification process is automatic. Instead, their main responsibility is to take care of their machines and keep them uncompromised so that they can carry out the validation process properly.
Pros: fast and cheap transactions; no need to own a large amount of a coin or token to become a validator; energy-efficient
Cons: centralized; for many people, the risk of ruining one’s reputation is not as severe as the risk of losing money
Proof of Burn (PoB)
→ Slimcoin (SLM)
How it works
Just like the name suggests, this consensus mechanism requires users to burn — irretrievably destroy — their tokens or coins for a chance to mine and validate transactions. While most PoB projects require their users to burn the cryptocurrency they’re mining, some of them also allow the burning of other cryptos like BTC or ETH.
Just like when it comes to PoS, the more coins you burn, the bigger your chance to “win” and become the validator for the next block will be. Because the stakes always rise, proof-of-burn cryptocurrencies often lead to investing increasingly larger amounts of funds into the coin or token the users are burning.
Pros: energy-efficient; theoretically creates long-term price stability
Cons: some projects promote the burning of non-PoB coins; wastes resources
Proof of Capacity (PoC)
→ Burstcoin (SIGNA), Chia Network (XCH)
How it works
This consensus mechanism is sometimes called “Proof of Space,” or PoS. It is similar to the proof of work, but instead of using computing power, PoC miners have to allocate storage space on their computers in order to get a chance to solve the puzzle and become the next block validator.
This is a much greener approach to mining than what PoW offers — not only does it consume less electricity, it also doesn’t constantly require you to purchase new, better equipment to keep up. Not to mention, the hard drives used for PoC mining can also be reused afterward.
Pros: doesn’t require any expensive dedicated hardware, up to 30 times more energy-efficient than ASICs mining
Cons: vulnerable to malware
Practical Byzantine Fault Tolerance (pBFT)
→ Hyperledger, Zilliqa (ZIL)
How it works
This consensus algorithm was introduced back in the 90s. The idea behind it is somewhat similar to how a democratic government should function: nodes combine new data with the information in their possession to decide whether to validate it or not. Nodes share their decisions with each other, and the verdict is given based on the percentage of votes for or against accepting this new piece of data. The threshold for acceptance is predetermined.
Pros: high throughput; extremely efficient; provides transaction finality
Cons: doesn’t work that well with a larger amount of nodes; a lot of trust required to function properly
What Is the Best Consensus Algorithm?
All consensus mechanisms have their own pros and cons, and the perfect algorithm is not even close to being conceptualized yet. In addition to things like efficiency and sustainability, many crypto developers also have to consider such things as ease of use and profitability. After all, the majority of the crypto market is filled with people who are simply looking to make money.
In recent years, many industry experts and influencers have criticized the high power consumption of PoW blockchains, yet proof-of-work cryptocurrencies are still on top and are regarded by many as the standard. It is hard to say whether this will change any time soon — Ethereum was supposed to switch to the PoS algorithm in 2021, yet the company keeps putting the switch off.
At the end of the day, the crypto industry is extremely diverse, and the best protocol will depend on what coin we’re talking about. Some projects can benefit from PoC more than PoS, some won’t be able to implement protocols like eBFT at all simply due to being too large, and others will have to stick to PoW because of the politics and attitudes within the community.
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