Consensus Mechanism in Blockchain and Its Underlying Technology
The heart of blockchain technology is Consensus. Every cryptocurrency blockchain operates using consensus mechanisms and each crypto blockchain may use its own unique consensus mechanism or one copied from an existing blockchain.
Consensus mechanisms influence how transactions are verified, how much energy is used, network fees, transaction speed, and other details for the currency and network applications.
The blockchain’s consensus mechanism is what ensures that data entered into the system cannot be tampered with or altered without being detected. A consensus mechanism in a blockchain network sets a set of rules for the members (or nodes) to follow.
As a crypto investor and enthusiast, it is essential to understand some of the mechanisms and the technology behind the space. To know how Bitcoin and other cryptocurrencies work, you must understand the significant role of consensus mechanisms.
Consensus Mechanism Defined
Consensus mechanisms are the protocols, algorithms or other computer systems that allow cryptocurrencies to work. Infact, it is a system that cryptocurrencies like Bitcoin and Ethereum use to validate the authenticity of transactions and maintain the security of the underlying blockchain.
A consensus mechanism is a process for achieving agreement on the state of a distributed system. It is used to ensure that all participants in the system agree on what happened, and it allows them to make changes to their local records. A consensus algorithm decides which nodes will be allowed to propose new blocks and which nodes are allowed to vote on these blocks.
The role of a consensus mechanism is to come up with a way to ensure that the data stored in the blockchain is accurate and not corrupted. It makes decentralised record-keeping more similar to a centralised database.
How Consensus Works
There are several consensus mechanisms to operate on a decentralised network. Various algorithms have different methods for resolving global network update agreements.
Typically, consensus protocols require at least 51% of network participants to agree on upcoming changes. The network system is updated with the new change if they agree. Each participant automatically checks their validity with every other participant.
The algorithm makes sure that consensus among nodes in the network is reached without needing central supervision or control, which makes it very attractive for running decentralised digital currencies like Bitcoin.
In the blockchain, there are three main consensus mechanisms. Proof-of-Work (PoW), Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS). Others include Proof-of-Authority, Proof-of-Capacity (PoC), Proof-of-Activity, Proof-of-Elapsed Time (PoET), Proof-of-Burn, Practical Byzantine Fault Tolerance (PBFT) etc.
Some of the Major Types of Consensus Mechanism Concepts Explained
(i) Proof of Work or PoW: It is the most common consensus mechanism in the blockchain used by popular cryptos such as bitcoin, Litecoin and Ethereum.
It is based on mining where miners are rewarded for solving cryptographic puzzles to earn bitcoin and other cryptocurrencies. However, miners have to compete with one another to solve complex computational puzzles using high-powered computers to earn these rewards.
The PoW consensus mechanism relies on much computational power and time to validate transactions, acting as a barrier to new miners. The criticism surrounding PoW includes high fees and its environmental impact.
Following the controversies around PoW, Ethereum is in the process of switching from PoW to PoS before the end of September 2022. The ETH team opines that the new upgrade will reduce the network’s energy consumption by at least 99.95%.
(ii) Proof of Stake or PoS: Unlike PoW, PoS does not require miners to spend electricity on repetitive processes of solving the same puzzle. In this method, miners have to stake their coins by locking them up for a while before they can mine blocks and earn rewards.
The more coins a miner has staked, the better his chances are to mine a block successfully. It relies on the number of coins an individual has as opposed to computational power or time.
One major disadvantage of PoS is that the only way to acquire coins is from someone that already has them.
(iii) Delegated Proof-of-Stake or DPoS: Also known as a delegated voting system, it relies on a group of delegates, also known as node operators, witnesses or block producers, to validate blocks on behalf of all nodes in the network.
Users of the network vote and elect delegates to validate the next block. The witnesses receive special rewards upon successful verification of all transactions in one block. A number of blockchains, including Cardano, EOS and TRON, use DPoS.
(iv) Proof-of-Capacity (PoC) or Proof-of-Space: It is an energy-efficient consensus mechanism that allows nodes on a blockchain to use the empty space on their hard drives to mine crypto.
It allows sharing of memory space of the contributing nodes on the blockchain network. A node gets more rights to maintain the public ledger based on the number of memory or hard disk space they have.
(v) Proof-of-Activity or PoA: It is a hybrid that combines both PoW and PoS and it is used on the Decred blockchain. PoA allows miners to mine or add a blank template block with header information and mining reward address — similar to Proof-of-Work. Once it is almost empty, the mechanism switches to Proof-of-Stake.
PoA is utilised to ensure that all miners arrive at a consensus. Here, validators are selected based on the number of coins they hold. The disadvantage of PoA is its high energy consumption, which requires expensive hardware for computation.
(vi) Proof-of-Burn (PoB): It requires transactors to send small amounts of cryptocurrency to wallet addresses that are inaccessible to burn them out of existence. It is a process in which coins or tokens get permanently eliminated from regular circulation. It does not require miners to stake coins to add new blocks to the network.
Conclusion: Now that you have understood what consensus mechanism means and how it applies to some of the cryptocurrencies you trade, you can buy, sell, store or receive Bitcoin and altcoins on the top cryptocurrency exchange, LBank exchange.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
