Cryptocurrency, how do we come to a consensus?
Coming to consensus:
A consensus mechanism is a fault-tolerant mechanism used in the computer as well as blockchain systems to achieve the necessary agreement among decentralised processes or multi-agent systems, such as cryptocurrencies, on a single data value or network state. It's useful for keeping track of things, among other things. Today we will cover the two most widely adopted mechanisms.
- A consensus mechanism is any of several methods for achieving agreement, trust, and security across a decentralised computer network.
- Proof-of-work (PoW) and proof-of-stake (PoS) are two of the most common consensus mechanisms in the context of blockchains and cryptocurrencies.
- Bitcoin miners’ critics claim that PoW is excessively energy-intensive, prompting the development of new and more effective mechanisms.
Proof of Work vs Proof of Stake
Proof of Work: Proof of work is a process of validating transactions on a blockchain whereby an algorithm generates a mathematical problem that computer systems compete to solve.
Each participating computer, known as a “miner,” solves a mathematical problem that aids in the verification of a group of transactions known as a block, which is then added to the blockchain ledger. The first computer to complete the task is rewarded with a small portion of cryptocurrency for its efforts.
The race to solve blockchain puzzles requires a significant amount of computer power and electricity. In practice, this means that after accounting for the costs of power and computing resources, miners may barely break even with the cryptocurrency they receive for validating transactions.
Proof of Stake: Some cryptocurrencies use a proof of stake verification method to reduce the amount of power required to check transactions. The number of transactions each individual can verify with proof of stake is limited by the amount of cryptocurrency they are willing to “stake,” or temporarily lock up in a communal safe, in exchange for the opportunity to participate in the process. It’s almost like bank collateral. Everyone who stakes cryptocurrency is eligible to verify transactions, but your chances of being chosen increase with the amount you stake (stake).
Because proof of stake eliminates energy-intensive equation solving, it is much more efficient than proof of work, allowing for faster transaction verification/confirmation. If a stake owner (also known as a validator) is chosen to validate a new group of transactions, they will be rewarded with cryptocurrency, potentially in the amount of the block’s aggregate transaction fees. To deter fraud, if you are chosen and verify illegitimate transactions, you will lose a portion of your stake.
The Role of Consensus in Crypto:
Consensus mechanisms are used to verify transactions in both proof of stake and proof of work. While each uses individual users to verify transactions, each verified transaction must be reviewed and approved by the majority of ledger holders. A hacker, for example, would be unable to change the blockchain ledger unless they were successful in convincing at least 51 percent of the ledgers to match their dishonest version. The amount of resources required to accomplish this makes fraud unlikely.
Transactions are public but pseudonymous:
Another distinguishing feature of cryptocurrencies is their anonymity. Because blockchains are public ledgers, anyone can see and review the transaction records that have occurred. They can, however, provide some level of anonymity. You have a private key, which is how you initiate transactions, and a public key, which is how someone in the market identifies you. The transactions on a blockchain are linked to the public key of a crypto wallet, but no one knows who owns that wallet. This is why cryptography is frequently referred to as pseudonymous — the public key is a person’s pseudonym.
Conclusion:
I hope this bite-sized article has provided you with a good overview of consensus in cryptocurrency and how they function on the blockchain. If you would like to stay up to date on everything Web3, Crypto, Metaverse, NFTs, DAO and Decentralisation, be sure to follow me on my social media platforms below. If you have enjoyed this article please be sure to give it a clap and share it with your friends, as it helps me out greatly.
