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Understanding Consensus Mechanisms

Blockchains use fault tolerant mechanisms called consensus mechanisms to allow the participants of the system to arrive at a system-wide agreement about the state of the network. They are essential for record keeping.

Currently, there are several consensus mechanisms being tested and experimented with, but the primary two are Proof of Work & Proof of Stake.

Proof of Work (or PoW) utilizes powerful mining rigs to solve complex hashing algorithms using a lot of electricity in the process. Proof of work requires capital in the form of electricity, mining rigs, cooling and all other costs associated with running a mining facility. People have invested capital in the equipment, infrastructure and energy required to participate in this process. Proof of Work is used by Bitcoin.

Proof of Stake (or PoS) takes a different approach to reaching consensus. Instead of putting equipment on the line and mining, validators put up the capital itself and wait for their turn to forge a block. Users here are invested because they put their capital at stake. Proof of Stake is being experimented with by Ethereum (as of this writing).

Whether it is a PoW or PoS style blockchain, there are always two layers of competition that all nodes are engaged in: selection, and the right to create the next block.

In PoW, these two forms of competition are merged into one process called mining. In other words, all the nodes are always working towards finding the nonce that will produce the required hash. The node that finds the nonce is the one that gets selected and at the same time produces the latest block. This race to be the first is exactly what results in competition and the hardware arms race.

In PoS, this process is split into two distinct steps. There is a selection process from among a group of nodes based on the age of the coin staked. The node selected will then create (or forge as it is known in PoS) the next block. The issue with PoS is that nodes disconnect from the network and age their coins offline. Lowering the count of honest nodes in the network makes it susceptible to attacks.

The consensus mechanism is one of many features that make blockchains secure. Regardless of which consensus mechanism a protocol uses, other features like merkle trees, and block structure etc. remain constant. While Proof of Work and Proof of Stake are the two primary consensus mechanisms right now there are many more under development and some which have even been deployed.

After understanding the basics of what a consensus mechanism is and the various features it uses to reach agreement, users developing new blockchain protocols can think about creating their own consensus mechanisms that may be more appropriate to the focus of their platforms.

Shaan Ray

Helping clients identify and invest in Emerging Technologies early on so that they can innovate and grow exponentially. Follow Lansaar Research for the latest in emerging technologies and new business models.



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