Blockchain Consensus Algorithms Don’t Have to Be Confusing: PoW, PoS, and DPoS (Part 1)

Blockchain technology is a significant technological advancement. Decentralized, peer-to-peer systems are only possible due to consensus algorithms. But what do these consensus mechanisms do, how do they work, and what makes them different? Here’s a rundown on everything you need to know.

Besides being in the news for large price movements, bitcoin has drawn mainstream attention for another aspect, energy consumption, due to the Proof-of-Work (PoW) consensus algorithm used to secure transactions. Now, many in the cryptocurrency space are discussing possible solutions and implementations for reducing energy usage and improving efficiency for both bitcoin and other cryptocurrencies. But what do these consensus mechanisms do, how do they work, and what makes them different? Here’s a rundown on everything you need to know.

What is a Consensus Algorithm?

A consensus algorithm is a process in computer science used to achieve agreement on a single data value among distributed processes or systems. Consensus algorithms are designed to achieve reliability in a network involving multiple unreliable nodes.

With a distributed network of computers, it’s crucial that each participant is on the same page. For a cryptocurrency system, that means ensuring a sufficiently large number of nodes in the network are in agreement about what the transaction history is, and how to validate a transaction. This is what establishes the singular version of the truth that is a blockchain. Additionally, these consensus algorithms make abusing decentralized networks by a singular party incredibly difficult.

Proof-of-Work (PoW)

As seen in: Bitcoin, Ether, Litecoin, Monero and more.

Proof-of-Work (PoW) is the original consensus algorithm first introduced by Satoshi Nakamoto in the original Bitcoin whitepaper. PoW is what is still used to this day for maintaining the Bitcoin network.

The benefit of PoW is that we know that it works, though PoW requires an enormous amount of energy and effort.

PoW is used to create and add new blocks of data to the blockchain by requiring miners to solve complex computational puzzles — a cryptographic hash function — to prove a block is accurate. The ideal cryptographic hash function has five main properties:

  1. It is deterministic so the same message always results in the same hash;
  2. Quick to compute the hash value for any given message;
  3. Infeasible to generate a message from its hash value except by trying all possible messages;
  4. A small change to a message should change the hash value so extensively that the new hash value appears uncorrelated with the old hash value;
  5. Infeasible to find two different messages with the same hash value.

In return for solving these complex puzzles, miners get block rewards in the form of newly-minted bitcoin for all their efforts. Because PoW respects the longest chain, the network remains secure and correct so long as 50% of the nodes are acting in good faith.

However, as bitcoin mining difficulty rises and hashing power is consolidated into large mining pools, more and more computing power is required over time. This means more and more electricity is needed, leading some in the bitcoin ecosystem to explore other methodologies.

Proof-of-Stake (PoS)

As seen in: DASH, Peercoin, and Ethereum (in the future).

Proof-of-Stake (PoS) is a different approach to consensus intended to improve on PoW by reducing the amount of unnecessary work and PoW’s heavy reliance on energy. Rather than having miners on the network solving complex problems consuming excessive amounts of computational power, a network running via PoS has “validators,” sometimes called “minters.” These validators are responsible for creating new blocks and adding them to the chain by betting/voting on the correct block.

The amount of influence one gets in the betting is dependent upon the amount of currency staked by them, because those who hold a significant stake in a network are incentivized to act in its interests.

Validators put their currency on the line to validate the new block and lose what is at stake for intentionally going against the network. Along with vastly reduced energy consumption, PoS also makes it incredibly expensive to attack the network with enough influence to alter the future of the blockchain.

PoS is viable, but vulnerable, too, as the same stake may hold different value by different actors.

Credit: BlockGeeks

As described in PoA Network, “Take Alice, an early adopter of the blockchain technology with a massive portfolio of digital assets, and Bob, a newbie who is just exploring the emerging token economy. Let’s say they both hold the same stake in a hypothetical network, Elixirium, 1,000 ELX each. In isolation, we could assume that Alice and Bob are equally interested in Elixirium’s success. We cannot be as confident, however, when we consider their other holdings. If 1,000 ELX is only 1% of Alice’s total wealth, while for Bob it represents nearly 50%, their incentives are tough to compare. Alice might care about Elixirium much less than Bob does, even though they have the same stake. Consequently, her desire to act in the interest of the network might also not be as strong as Bob’s.”

Delegated-Proof-of-Stake (DPoS)

As seen in: EOS, BitShares, Dispatch, and Steemit.

Next up on the list is a newer implementation of PoS introduced by Daniel Larimer. Larimer is a renowned software programmer and cryptocurrency entrepreneur. Larimer created the cryptocurrency platform BitShares, co-founded the blockchain Steem, and is currently CTO of Block.one, a company involved with the development of EOS.

DPoS is similar to PoS in how it uses validators/minters for creating new blocks but changes up the process by only allowing specific elected parties to vote on new blocks.

Larimer saw that Bitcoin mining was wasteful and believed it would eventually transition from a decentralized ecosystem to a centralized model as the mining cost-per-bitcoin rises, resulting in massive mining pools controlling the network. His idea was to increase block speeds by partially centralizing the process; rather than having the entire network voting on new blocks, somewhere between 21–100 elected delegates do the voting. Voting power is determined by token “hodlers”, so more influence is wielded by those most invested in the network. Voting is perpetual and bad actors can be removed at any time.

Credit: Lisk Academy
“I like to think of Delegated Proof of Stake as technological democracy. Just think about how many jerk bosses there are out in the world. Have you ever wanted a system in which you, the employee, get to fire your incompetent boss? Well, there is a new system that is very close to the reality of employees getting to fire their managers. It’s called Delegated Proof of Stake.” — Hackernoon

Wrap Up

For those not proficient in computer science, understanding consensus algorithms can appear an intimidating prospect. In Part 1 of this series, we hope we’ve simplified some of the most popular models. It’s important to remember, however, that no consensus algorithm is perfect. When leveraging consensus to optimize decentralized models, there is no universal approach.

As blockchain technology continues to develop, algorithms will be updated, hybrid-approaches will be explored, and wholly new and revolutionary models will emerge by demand. In Part 2, we will cover some newer and equally promising models and their use-cases to further explore the developing science of consensus.


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