In a centralized system, a single authority makes every decision. For instance, most businesses use a centrally controlled accounting ledger to record all economic transactions. However, in a decentralized system, decisions are made collectively and not by a single entity. The collective is composed of scattered, independent people with similar levels of authority over the entire network.
Obtaining the consensus across several computers is a challenging feat. It becomes even more difficult if some nodes malfunction or purposefully act against the network’s interests.
To ensure transactions and protect network security and integrity, blockchain networks employ consensus algorithms.
What are consensus algorithms?
A blockchain consensus is a process through which network computers agree on the current state of the blockchain’s ledger. This process also prevents double-spending by providing transaction proofs.
Consensus algorithms ensure network stability. It creates trust amongst unknown peers in a distributed environment. This process also serves as the underlying foundation for all blockchains. Thus, they are the true backbone of the whole cryptocurrency ecosystem.
In this article, we’ll briefly discuss some of the most popular consensus algorithms.
Proof-of-Work (PoW)
The Proof-of-Work algorithm is the first blockchain consensus mechanism. It is responsible for confirming transactions and adding new blocks to the chain.
PoW requires nodes to compete against one another by solving a complex mathematical equation. It is done by repeatedly running a hashing algorithm until a solution is found. Then, other network nodes cross-check the solution to ensure its authenticity.
Once the solution is verified, the miner who solved the problem can create the new transactions block. The miner will also receive a reward for the computing work.
Proof-of-Work is an outdated and energy-intensive consensus mechanism. It is implemented by Bitcoin, Litecoin, Ethereum, and Dogecoin.
Proof-of-Stake (PoS)
In contrast to PoW, the Proof-of-Stake works by granting block creation rights to network nodes with the highest account balance (or stake). These nodes are referred to as validators. Validators who stake more value have a higher probability of creating the next block.
Any party with a significant stake in a blockchain has a vested interest in preserving the network’s integrity. So if a corrupt validator introduces fake transactions into the network, they could lose their stake.
Today, PoS is widely accepted as a replacement for PoW. The PoS approach does not require extensive computational power for mining. Hence, the process consumes significantly less electricity and is cleaner for the environment. Moreover, the PoS consensus can confirm transactions in much less time, making it more efficient than PoW.
Some PoS algorithm examples include Ethereum 2.0, Cardano, and Binance Chain (Hybrid PoW/PoS).
You can learn more about Proof-of-Stake here.
Proof-of-Authority (PoA)
The Proof-of-Authority consensus algorithm does not involve any mining. All transactions and blocks are validated by approved accounts known as validators. Transaction execution and block generation are then carried out automatically using only the validator’s computer resources.
In PoA, the transactions are verified by authorized accounts. These accounts operate as the system’s “admins.” They serve as the authority from which other nodes derive their truth.
PoA is designed for private networks and has a high throughput. Because of its centralized character, PoA is mainly employed in private networks. It is also unlikely to run on a public chain.
Proof-of-Reputation (PoR)
To make the network secure, the Poof-of-Reputation consensus model is dependent on the nodes’ reputation. A participant must have a strong standing. Any attempt to abuse the system would result in substantial financial and brand consequences.
This is a relative concept from the traditional world. In traditional finance, most firms would suffer heavily if authorities caught them trying to cheat. Also, large businesses often have more to lose and are hence preferred over smaller companies.
PoR is similar to PoA. Once an entity has proven its reputation and passed verification, it can be voted into the network as an authoritative node. At this point, the entity starts acting like a PoA network. The authoritative nodes sign and validate blocks. Just like Proof-of-Authority, PoR is also used by private, permissioned networks.
Proof-of-History (PoH)
Instead of relying on the transaction’s timestamp, Proof-of-History users can prove the transaction before or after a particular activity. For instance, a user can capture the cover of the Washington Post as transaction proof. The newspaper’s publication date will confirm it.
The PoH can create historical evidence verifying that the event occurred at a specific point in time. It is a verifiable delay function with a high frequency. In PoH, the function requires a certain number of sequential steps to assess. These steps will prove the transaction’s authenticity. It then yields a unique output that can be efficiently and publically validated.
Presently, Solana employs the PoH consensus process to provide high transaction rates at a low transaction cost.
Conclusion
Apart from the popular consensus algorithms discussed above, there are a few more worth mentioning. Some of the widely used consensus protocols are Proof-of-Burn (PoB), Proof-of-Capacity (PoC), Proof of, and Proof-of-Elapsed Time (PoET).
Two factors determine the consensus algorithm used by various blockchains:
1) The applications types
2) The network threats
Permissionless systems reach consensus among a large number of untrusted peers by using complex computations. At the same time, private blockchains use a less scalable but higher throughput approach that guarantees speedier transactions.
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