“Consensus Mechanism”
Part 4 — Blockchain 101
We now learnt that Blockchain is a distributed decentralized network that provides immutability, privacy, security, and transparency. There is no central authority present to validate and verify the transactions, yet every transaction in the Blockchain is considered to be completely secured and verified.
In the previous articles, we learnt how transactions are grouped into blocks and added to the network. However, this only happens once the network participants have reached an agreement, or CONSENSUS, on the validity of the transactions.
The word consensus comes from Latin meaning, “agreement, accord.”
This ensures that all participants are working based on the same ledger containing the same set of historical transactions hence they are incentivized to “play by the rules,” boosting the security of the whole system and preventing the corruption of files.
Essentially, the consensus protocol makes sure that every new block that is added to the Blockchain is the one and only version of the truth that is agreed upon by all the nodes in the Blockchain.
Let’s now have a look at the two most used and developed consensus algorithms and how they work:
PROOF OF WORK
PROOF OF STAKE
PROOF OF WORK (PoW)
The PoW mechanism is the original consensus algorithm in the Blockchain network, and the most notable example of such is its function in the Bitcoin (BTC) network, thanks to Satoshi Nakamoto in 2008.
In this consensus mechanism, the responsibility to validate blocks bears on special nodes called miners through a process called MINING.
Miners are required to solve a mathematical puzzle that requires a lot of computational power, and thus, the node who solves the puzzle as soon as possible gets to mine the next block.
You will need either a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC) in order to set up a mining rig.
Miners are getting paid for their work as auditors. They are doing the work of verifying the legitimacy of Bitcoin transactions making the network reliable, extremely secure, and strengthen the trust in the trustless consensus.
Yet, PoW presents some issues such as:
- High energy consumption;
- “51% Attack” — where a controlling entity owns 51% or more than 51% of nodes in the network, the entity can corrupt the blockchain where it/they can monopolize generating new blocks and receive rewards since they’re able to prevent other miners from completing blocks;
- Centralization of the hash power — by controlling massive amount of equipment and especially in countries or jurisdictions where the energy offered is cheap and easily available;
- Halving Rewards lowering during overtime, presenting less incentives for the miners to securing the network;
Proof of Work was the original solution to the double-spend problem and has proven to be reliable and secure. Bitcoin proved that we don’t need centralized entities to prevent the same funds from being spent twice. With clever use of cryptography, hash functions, and game theory, participants in a decentralized environment can agree on the state of a financial database.
PROOF OF STAKE (PoS)
This is the most common alternative to PoW: in this type of consensus algorithm, instead of investing in expensive hardware to solve a complex puzzle, validators invest in the coins of the system by locking up (staking) some of their coins as stake.
After that, all the validators will start validating the blocks. Validators will validate blocks by placing a bet on them if they discover a block that they think can be added to the chain. Based on the actual blocks added in the Blockchain, all the validators get a reward proportionate to their bets, and their stake increase accordingly.
In the end, a validator is chosen to generate a new block based on their economic stake in the network. Thus, PoS encourages validators through an incentive mechanism to reach an agreement.
Proof of Stake has remarkable features such as:
- Speed and Efficiency (due to less energy consumption);
- Less hardware is required;
- Scalability;
Yet it presents some important weaknesses:
- Vulnerability of the network;
- “The rich get richer” concept due to the staked based consensus (the more is staked, more chances to become validators);
- Accessibility — validators must stake a minimum amount of crypto to run a full validator node;
The PoS algorithm provides for a more scalable blockchain with higher transaction throughput, however, it’s less secure than the completely decentralized POW algorithm.
We can concur that neither of these two consensus mechanisms is perfect, but the technological competition on the protocols and algorithms that will define the future of the Internet — which seems to head towards a decentralized future — is just at the beginning.
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