Unraveling Consensus Mechanisms

Luis Wester
Sep 25, 2018 · 17 min read

Unraveling The Blockchain Myth

If you cringe in the midst of people discussing the innovative blockchain technology, you should know right now that you are not alone! It is a valid argument that one of the biggest threats to the pace of growth of blockchain technology is the seemingly complex nature of the technology. The natural assumption by anyone that is not IT-inclined is to dismiss blockchain as an overtly advanced and “not-in-my-league” type of technology when in fact there’s a whole lot to be gained from the use of the technology by everyone.

With this in mind, there’s no gainsaying that the fastest way to get more people onboard the “Blockchain bandwagon” is to inform and educate them in the most simplistic way possible. This way barriers would be broken, bridges built and the myth of blockchain technology will be unraveled on a global scale. One key aspect of blockchain technology that really puts the “block” in the chain is the consensus mechanism which is what this article will be focusing on.

Consensus Mechanism Explained

Now that you have been put in the mood, the first question you should naturally ask to get the ball rolling is — What exactly is a consensus mechanism?”Now that wasn’t hard, was it?! Actually, the terminology defines itself really, it is a particular means by which a mutual agreement or consensus (couldn’t help but chip it in) of a data point and the state can be guaranteed.

Does it sound a bit confusing?…well, consider the consensus mechanism as a layout for every data. A typical real-world example could involve students in a particular class writing an examination and asked to submit their written scripts. If a consensus mechanism is applied under this scenario the submitted scripts by every one of the students in the class would be completely identical. While this is a great example to explain what a consensus mechanism is in practical terms, if such a scenario occurred in a classroom scenario, you can only assume that the students would be accused of cheating.

However, in the world of blockchain technology, the consensus mechanism is just perfect as it guarantees that every player involved in the blockchain network receives an identical copy of a ledger. It must be said that varying consensus mechanisms have an effect on security as well as the economic infrastructure of the code of conduct or cryptographic protocol in a variety of ways.

You can now ask the next question -“Is there just one consensus mechanism?”The simple answer to this question is NO! Consensus mechanisms vary and each one produces a different outcome for each blockchain network in which it is utilized. Now if your next question is — “So which consensus mechanism is considered the best?”

You should know that blockchain technology and in fact, the creation of consensus mechanisms are still relatively new, so at this point in time, it is difficult to predict which consensus mechanisms may eventually be frequently utilized in the blockchain industry in the long-term. Consensus mechanisms can be created in two basic steps, namely;

  1. The expected result or outcome should be critically considered.
  2. You need to work out a way by which every player involved in the process is incentivized to help realize the expected result or outcome.

…sounds easy right?!

The PoW Consensus Algorithm

First of, PoW does not mean “Prisoners of War” (just to clear the air). PoW in IT and blockchain terminology means “Proof-of-Work” and in a blockchain network, it is known as the original and first ever consensus algorithm. This consensus algorithm in the blockchain network performs two basic tasks. The first task is to “Confirm Transactions” and the second task is to “Generate New Blocks” and arrange them in the blockchain network.

The transactions that need to be confirmed by the consensus algorithm involves the trade in cryptocurrency by users of a blockchain network, that simply involves the sending and receiving of digital assets. The trading transactions are completed by servers or nodes that are really special and also referred to as “miners”.

These miners get engaged in a process to verify transactions and create blocks, a process that is simply known as “mining”. Miners are therefore the executors of the PoW consensus algorithm model through the process of mining.

Miners under a PoW Systemhave to compete amongst themselves in order to execute and confirm transactions on a blockchain network in return for block rewards such as payment in cryptocurrency. Miners confirm transactions and then arrange new blocks in the chain.

It is like solving a “mathematical puzzle” and miners have to resolve the “puzzle” in quick time, create a new block in the chain and then confirm the transaction between users. Any complexity in this “puzzle” is completely dependent on several factors that include; the total number of users, the existing power and also the current load in the blockchain network. Now the “hash” of every block comprises of the “hash” of a previously formed block, this raises the level of security and protects the blockchain from any form of violation.

So Where Can PoW Be Applied?

This is a good question and a major reason why Proof of Work (PoW) is important to blockchain technology. The simple answer to this question is — PoW can be implemented by platforms dealing with digital assets or cryptocurrencies. Bitcoin is one popular cryptocurrency that uses Proof of Work (PoW), actually, Bitcoin was the first cryptocurrency to make use of Proof of Work (PoW) consensus algorithm and form the basic standard by which other cryptocurrencies would eventually adopt. Now the “puzzle” is Hashcash and the PoW algorithm enables the conversion of the puzzle’s complexities by virtue of the network’s overall power.

You should know that the formation of a new block by a miner usually takes about 10 minutes to execute. Other cryptocurrencies similar to Bitcoin like Litecoin also makes use of the Proof of Work (PoW) consensus algorithm. The Ethereum blockchain utilizes Proof of Work (PoW) and as a matter of fact blockchain most projects powered by Ethereum blockchain make use of the Proof of Work (PoW) consensus algorithm model as well. So PoW is pretty much a commonly used consensus mechanism.

Benefits Of The PoW Consensus Algorithm

The major benefits of the Proof of Work (PoW) consensus algorithm model include;

  • Effective protection against DoS attacks:The Proof of Work (PoW) implements constraints and limitations on certain actions on the blockchain network. DoS attacks require a tremendous amount of computational power as well as time for calculations to be done. While DoS attacks are a possibility, they are really not worth the effort as they would be pretty expensive to execute.
  • Increased mining opportunities:Having huge amounts of cryptocurrency in your digital wallet is not what is required to resolve “puzzles” and create new blocks in a blockchain network. The decision making for a blockchain network is not up to holders of huge amounts of cryptocurrency, but by miners who have huge computational power capable of resolving complex puzzles and then creating new blocks in the blockchain network. So in a world where cash rules, this is not really the case in a Proof of Work (PoW) system.

Disadvantages Of PoW

While the Proof of Work (PoW) consensus algorithm has noteworthy benefits, it also has some obvious disadvantages. These obvious disadvantages include;

  • Mining is an expensive venture:Operating as a miner can be a very expensive venture to pertain in. The simple reason for this is that the mining process requires the use of specialized and highly advanced computer hardware. Now the algorithms have to solve complex mathematical puzzles and this requires the use of high-end computer hardware to execute. The cost of mining is therefore very high and these days there are mining pools available to cater to the mining process. The advanced computer hardware makes use of a lot of power/energy (i.e. electricity) to function which further raises the cost of operating as a miner. So while you are not required to have a huge crypto balance to operate as a miner, you do need to make some heavy capital investments if you are intent on being a miner.
  • Mining is a specialized field:With the amount of money spent on acquiring specialized and advanced computer hardware as well as on huge amounts of power/energy, you would think that miners massive computational powers can be applied somewhere else other than for confirming transactions and creating new blocks on a blockchain network. Well, this is not exactly the case as the miner computational powers cannot be used elsewhere. While miners help to secure and sustain a blockchain network, they are practically useless in their application in other fields such as science and business.
  • The problem of “majority attack”:This is also called the “51% attack” where an individual-miner or group of miners are in complete control of most of the mining power. The majority attackers acquire a lot of power and as a result control majority of the actions taking place on a blockchain network. The creation of new blocks are monopolized by these majority attackers and most of the block reward goes to them as they inhibit other miners from participating in the creation of blocks and earning rewards in the process.

Majority or 51% attackers are also capable of reversing transactions. If for example, Jack sent some crypto to Bill through a blockchain network and Jack is active in the majority attack scenario whereas Bill is not involved. A new block will be created for the transaction between Jack and Bill, however, the majority attackers will not allow the crypto sent by Jack to reach Bill, this is what is known as a “fork” occurring in the blockchain network.

Miners tend to join a created branch in the blockchain network in order to leverage on the mining prowess of the created branch, this branch could eventually become a majority and have more blocks than others. The good news is, 51% attacks are not a really profitable venture as it requires a humongous amount of computational and electrical power to operate.

What’s more, as soon as the public gets wind of what is going on, the blockchain network will be deemed to have been compromised which will eventually lead to a lot of users leaving the network and as a result, the value of the digital asset or cryptocurrency will significantly depreciate in value and worth.

Once again if you are not familiar with the term, you could be forgiven for thinking that PoS stands for “Point of Sale”, well you cannot be any further from the truth. The fact is PoS is an acronym for “Proof-of-Stake” another consensus mechanism utilized by blockchain technology.

Proof of Stake (PoS) is also a consensus algorithm working towards the validation of transactions and the creation of new blocks in a blockchain network, just like Proof of Work (PoW) only in a different way. If you recall, Proof of Work (PoW) involves miners who are rewarded (block rewards) for the use of their computational power in resolving complex mathematical puzzles and the building of new blocks within a blockchain network.

With the Proof of Stake (PoS) consensus mechanism, those that will create new blocks are actually selected based on their overall stake or wealth. What this means is that whereas in a Proof of Work (PoW) system a miner gets rewarded for solving puzzles and creating new blocks, in the Proof of Stake (PoS) consensus mechanism there is no block reward, all that is given to the selected “miners” are the transaction fees. Miners under a Proof of Stake (PoS) system are aptly referred to as “forgers”.

While the concept of a Proof of Stake (PoS) was first mentioned on a forum hosted by bitcoin in 2011, the first actual use of this consensus mechanism was back in 2012 by a cryptocurrency known as Peercoin. Joining Peercoin in using Proof of Stake (PoS) algorithm are BlackCoin, Nav Coin, NuShares/NuBits, Nxt, ShadowCash, and Qora. You should also know that the Proof of Stake (PoS) consensus algorithm comes in two variants which are often used rather than the typical PoS in its raw, original and true form. These variants are DPoS (Delegated Proof of Stake) and LPoS (Leased Proof of Stake), these two forms of PoS also have their respective benefits when utilized.

LPoS — Leased Proof of Stake

In the typical Proof of Stake (PoS) consensus mechanism any holder of a small cryptocurrency balance will be very unlikely to create a block in the blockchain network. This is similar to miners not being able to engage in the mining of a block in Bitcoin because the miners have a low hashrate.

A user with a small cryptocurrency balance may spend a long time without being able to create a block, so the operation as a node will require holders having significant balances which invariably would mean that only a few holders would eventually work as nodes or forgers and end up monopolising the creation of blocks in the blockchain network.

However, for the best form of security for the blockchain network, it is better if there are more people participating in the process. It is therefore vital to incentivize the system so that holders of small balances can also actively participate.

With LPoS, holders will be allowed to lease out their respective crypto balances to a staking node or forger. The holder of the digital assets that are leased out will still be in complete control of their funds and they can be transferred or spent the funds whenever needed, of course, the lease agreement would invariably come to an end if the funds are spent.

The leased out cryptocurrency will boost the chances of the staking node or forger being able to create a block in the blockchain network. Rewards that are received for creating a block will be proportionally shared between the leasee and the leaser. Waves os a platform that uses this consensus approach as a way of getting more people involved as nodes or forgers.

DPoS — Delegated Proof of Stake

In Delegated Proof of Stake (DPoS), holders of cryptocurrency make use of their respective balances to vote for a number of nodes or forgers that will be given the chance to create new blocks on a blockchain network. In the DPoS consensus mechanism every crypto holder is fully engaged, however, they may not necessarily be directly rewarded in the same manner as in the Leased Proof of Stake (LPoS) approach. The crypto holders are equally allowed to vote on any changes to the blockchain network parameters which gives them a sense of ownership in the blockchain network.

Proof of Work vs. Proof of Stake

PoW v PoS

Did you know that Ethereum blockchain intends transitioning from a Proof of Work (PoW) to a Proof of Stake (PoS) system? If you are wondering why they intend switching consensus mechanisms, it’s simply because miners under the PoW system require a lot of energy/power (i.e. electricity), as a matter of fact a study back in 2015 showed that to achieve a single Bitcoin transaction, the amount of energy required for the mining process would sufficiently supply about 1.57 million homes in the United States of America for a single day; now that’s huge! As a matter of fact, a recent study suggested that transactions in Bitcoin will use up as much energy as the Scandinavian country of Denmark by the year 2020, imagine that!

Now the cost of using all this electricity is paid in full with Fiat currencies such as USD ($), Euro (€) or GBP (£); this further adds pressure on the cryptocurrency as it depreciates in its trading value and worth. The Ethereum blockchain ecosystem has therefore decided to explore the use of the PoS system as a viable alternative to Proof of Work (PoW).

Proof of Stake (PoS) is believed to be a more cost effective and less energy consuming consensus mechanism. As mentioned before, the reward system for both the PoW and PoS are different. In a Proof of Work (PoW) system, it is possible that the miner has no stake in the cryptocurrency that is being mined, in other words, miners may not own any of the cryptocurrencies that they are mining. However, a forger has a stake in the mined cryptocurrency. A forger always owns the digital assets involved in the mining process or it is acquired through a leasing agreement as in the case of the Leased Proof of Stake (LPoS).

Casper Will Aid Forger Selection!

I guess by now you are getting use to the trend?! Well, Casper is not your friendly neighbourhood ghost, but rather your brand new forger-friendly Proof of Stake (PoS) consensus protocol. Once Casper is deployed on the Ethereum blockchain, a validator pool will be established. Users would be able to dive into the validator pool and stand the chance of being chosen as a forger. The procedure for joining the pool and becoming a forger will be driven by a function of the call of the Casper smart contract and the transfer of Ethereum’s native cryptocurrency known as Ether.

According to the founder of Ethereum — Vitalik Buterin, users that join in the validator pool will be automatically inducted after a while. He also said that induction into the validator pool does not require any “priority scheme” and virtually anyone can join the pool at any point in time regardless of the number of users that are already in the pool.

Vitalik also said the reward for every validator or forger will be between a minimum of 2% to a maximum of 15%. There will also be no constraint or limitation to the number of forgers that are actively engaged. However, if the number of forgers is very high, Ethereum will regulate through economic means by reducing the interest rate.

Where the number of forgers in the validator pool is considered low, then the reward will be increased to encourage more users to join in. Forgers are required to submit some deposit in order to take part in the validator pool and the Casper protocol will ensure that any forger that violates the laid down rules will lose their respective deposits through the deployment of an algorithm. This is also known as the “slashing conditions”, where forgers are not expected to break any of the constituted rules and laws.

So with the Proof of Stake (PoS) consensus mechanism, forgers are not required to utilize their computational power, the factors that determine their opportunities are the volume of their stake or wealth as well as the present complexities of the blockchain network.

The Proof of Elapsed Time or PoET Consensus Mechanism

The Proof of Elapsed Time (PoET) consensus mechanism is utilized on a “permissioned blockchain”, what this means is that each of the servers or nodes in the blockchain network must be…

  • completely identifiable
  • must have been fully permitted to operate on the blockchain network.

To better understand what the Proof of Elapsed Time (PoET) is all about, imagine a class of 20 students writing an exam and there’s a big old wall clock in front of the class. The wall clock is set to coincide with the duration of the examination and the time left for the submission of the paper is 30 minutes.

After 30 minutes all 20 students submit their scripts and then leave the exam hall at the same time. Now, this is a good example for the Proof of Elapsed Time (PoET) consensus mechanism, but there’s a bit of a difference with regards to the “time”. With a Proof of Elapsed Time (PoET) consensus mechanism, each and every node has a separate “time-to-wait” that is assigned to them at random by the blockchain network.

Once the time-to-wait assigned to a node has elapsed, the node can then create a new block for the blockchain network. So in Proof of Elapsed Time (PoET) the node with the shortest amount of time is better off than the node with a longer time-to-wait. Another example of a Proof of Elapsed Time (PoET) consensus mechanism in a real-world scenario is a case of drawing straws, only, in this case, the person that draws the shortest straw takes priority over the person that draws the longest straw.

It was in 2016 that the Proof of Elapsed Time (PoET) consensus mechanism was created by Intel. It is utilized by Hyperledger Sawtooth which is a platform capable of building, implementing and operating distributed ledgers. Proof of Elapsed Time (PoET) conserves energy better than the Proof of Stake (PoS) as each of the nodes have “time-to-rest”.

Trustless And Distributed Consensus Mechanism

With a trustless and distributed consensus mechanism, users can transfer funds (i.e. send or receive funds) without having to put their trust in the services of a third-party. Now in the traditional ways of making payment (i.e. sending or receiving funds), you ultimately have to trust in the services of a third party that is responsible for the setup of the transaction.

For example; traditional banks, Mastercard, Visa, and PayPal act as a third party for transactions between people or corporate entities. With a trustless system, copies of the ledger are given to everyone involved in the transaction and there would be no need for any of the parties to put their trust in a third party in order to set up a transaction as the parties to the transaction can easily authenticate all of the written information directly.

PoI — Proof of Importance

PoI is an acronym for “Proof of Importance” which is a consensus mechanism that was first deployed by NEO which is a blockchain network and system digital asset. Unlike in a Proof of Stake (PoS) system, your crypto balance really doesn’t matter in the staking of a block of transactions on the blockchain network. With the Proof of Importance (PoI) holders of crypto would stand a clear chance of creating blocks on the blockchain network based on several factors that include;

  • The crypto balance of the holder of the digital asset.
  • The reputation of the digital asset holder which is determined by a different type of mechanism.
  • The volume of transactions from and to the address of the crypto holder.

With these factors, a holder of crypto on a blockchain network can be rated as a “useful” member of the blockchain network.

Proof Of Existence (PoE)

The Proof of Existence or PoE was created by Manuel Araoz and Esteban Ordano back in 2013. It is an open-sourced online service which confirms the existence of computer-based files for a specified time schedule through those transactions on the Bitcoin blockchain network that are timestamped.

The Proof of Existence can be utilized for the following activities;

  • To properly document time stamping.
  • To prove data ownership.
  • To demonstrate the ownership of data while still keeping the data discrete.
  • To verify the integrity of the document(s).
  • To “Digital Sign Agreement” while still keeping the content discrete.

In Closing

There are quite a variety of consensus mechanisms available and it is truly an ongoing concern. While there are quite a few platforms that make use of both Proof of Stake (PoS) and Proof of Work (PoW), with PoW used in the distribution of digital assets while the PoS consensus algorithm is used to regulate the blockchain network. Two typical examples are Crown and DASH who make use of a combination of Proof of Work (PoW) and Masternodes to both verify transactions and also to obtain a block reward share from engaging in the mining process.

Some other consensus mechanisms currently available include the following; Proof of Authority, Proof of Weight, Proof of Reputation, Proof of Capacity, Proof of Stake Velocity, Proof of Burn, Proof of Identity, Proof of Activity and Proof of Time. You also have Proof of Believability, Stellar Consensus, RAFT, Delegated Byzantine Fault Tolerance (dBFT), Byzantine Fault Tolerance, Proof of Retrievability and Directed Acyclic Graphs.

References:

Read this article and others on OnePeople.io.

1. Cointelegraph (https://cointelegraph.com/explained/proof-of-work-explained)

2. Proof of Work vs Proof of Stake: Basic Mining Guide (https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/)

3. Consensus mechanism (https://medium.com/the-daily-bit/9-types-of-consensus-mechanisms-that-you-didnt-know-about-49ec365179da)

4. Consensus Algorithms : A complete list of all consensus algorithms

(https://hackernoon.com/consensuspedia-an-encyclopedia-of-29-consensus-algorithms-e9c4b4b7d08f)

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Welcome to OnePeople.io a professional network of blockchain experts and marketers. We provide quality service to our clients. Read our case studies and articles here.

Luis Wester

Written by

Luis is a marketing expert, the founder of OnePeople.io and the author of Blockchain Maximalist and numerous articles on technology, predominantly blockchain.

OnePeople.io

Welcome to OnePeople.io a professional network of blockchain experts and marketers. We provide quality service to our clients. Read our case studies and articles here.