Types of Blockchain Consensus Algorithms
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Originally published in the NOWNodes blog.
Blockchain has become one of the most well-known technologies in recent times. It all started with the introduction of Bitcoin to the world in 2008. Bitcoin’s price rise from $0.008 in 2008 to almost $20,000 attracted eyeballs around the world. It catapulted Bitcoin to the position of most talked about topic of the financial world. There’s no doubt that Bitcoin is one of the best examples where blockchain technology was successfully put into use. So, is blockchain limited to bitcoin and cryptocurrencies alone? Absolutely not! Blockchain has many attractive features that make it a revolutionary technology. It has the potential to change many industries for good.
Let’s look at the digital record-keeping mechanism. For example, the online list of properties available for rent within a state. As and when a new property is enlisted, someone needs to add that entry to the database for the users to see. This person adds the property and updates the other necessary details about its ownership like price, possession type, etc.
Now, consider the same scenario in the context of blockchain technology. Blockchain is a decentralized network. There is no central authority who updates the database with changes or adds new data. Rather, there are hundreds of thousands of blockchain validators or block miners who validate and authorize the transactions, mine new blocks.
Each of these actions of each of the participants impacts the distributed ledger of the blockchain. In absence of a central authority approving each of these changes before they are reflected on the ledger, we need to have a set of rules. Obeying these rules should ideally ensure that the changes are authentic and fair.
These sets of rules are known as the consensus algorithm or the consensus mechanism. There are several consensus mechanism algorithms. In this article, we will list out a host of such consensus mechanisms.
Proof of Work (PoW)
This is one of the oldest and one of the most well-known consensus mechanisms. Proof of Work was invented by Satoshi Nakamoto, who also happens to be the founder of Bitcoin. According to this algorithm, the miner who finds the hash first gets the chance to block a mine. The process rewards those who have a high hash rate. Cryptos like Bitcoin and Litecoin use this mechanism. Ethereum has also started using the PoW mechanism.
Proof of Stake
This mechanism makes block mining potential directly proportional to the number of coins a staker has. In other words, the more coins the staker has, the more will be the staker’s chances to add a block. Opposite to the PoET mechanism, this consensus mechanism consumes a lot of power. Many crowdsale-funded platforms adopt this mechanism to distribute their native coins proportionate to the volume of investments.
Proof of Authority (PoA)
This mechanism helps to address the scalability trilemma involving the aspects of scalability, decentralization, and security. In this mechanism, the actual identities of the nodes of the blockchain are put at stake. This technique is meant to address the risk of how a stake can be valued by participants in a network.
In this mechanism, validators stake their reputation. As a reward, the only nodes allowed to validate blocks are that of the validators.
Since this model is dependent on the validators, the process of identifying validators should be foolproof. The number of validators should be limited so that they remain motivated to hold the title. Establishing the authority of the validators should be a rigorous, fair, and authentic process.
Proof of Elapsed Time (PoET)
This consensus mechanism was originally devised by Intel. Two ground-rules set the premise for applying PoET. One, each node in the system has to be identifiable. Secondly, each node has to be accepted into the network.
Once these two conditions are met, the PoET mechanism allocates a random amount of time to each participant. The one who gets the shortest time allocated becomes the first to commit the next block to the blockchain.
This mechanism is time-efficient as it allows each node to rest.
Proof of Capacity
The proof of capacity consensus-building mechanism is based on a system called plotting. What happens here is, all the possible hashing solutions are determined beforehand. Even before the actual mining process starts. Once mining starts the shortest solution gets the chance to mine the next block. Bitcoin uses this mechanism.
The PoC mechanism consumes much less energy than the bitcoin transactions. Mining requires no specialized software. To summarise, the process is efficient, cheap, and distributed.
Proof of Activity
Proof of Activity is nothing but a composite of the PoS and the PoW. In PoS, the one who has the maximum number of coins gets the chance to mine the next block. Whereas, in PoW it is the miner with the highest hash rate who gets to mine the next block. Now, imagine a mechanism where the process starts with Proof of Work. As and when the first miner mines a block, the mechanism shifts to Proof of Stakes.
There are some other aspects to PoA too. These aspects make it unique despite being a hybrid of two mechanisms. The newly created blocks contain two things. First is the block header, and the second is the miner’s address. The signing of a new block requires a group of validating nodes that will be different. The selection probability increases with the increasing size of the node’s purse. Lastly, it comes to the settlement of mining fees. The fees are split and settled between the miners and the validating nodes.
Decred (DCR) has been following the PoA consensus-building mechanism since 2016.
Practical Byzantine Fall Tolerance
This mechanism is one of the oldest ones in the field. Introduced in 1999, it aims to decide whether a block will be accepted or not on the blockchain network. Each party runs a computation, and it helps to reach a decision. The decision is about the transaction message they’ve received. Once all the parties are done with their computations, a final decision is reached upon. The PBFT mechanism relies on the number of nodes. The number of nodes acts as the determinant that confirms trust. Enough responses from the nodes make the transaction a valid and verified one.
Proof of Burn (PoB)
As the name suggests, this mechanism runs on the number of coins burned. At a basic level, the more is the number of coins burned, the greater are the odds of being selected. In principle, this mechanism rewards the short-term sacrifice of wealth. Sacrificing coins in the short term, one gets to mine the next block on the chain. It becomes an asset in the long run. Rewarding the aspiration of making long-term gains keep miners involved in the projects. It also helps to preserve the network.
Slim Coins and Counterparty uses PoB as their consensus-building mechanism. Counterparty uses PoB to fund one currency at the expense of the other one. For example, participants receive XCP coins in return for burning bitcoins.
It is important to mention here that burning implies sending the coins to eater addresses. These are unspendable addresses that burnt coins use as their storage cells.
Proof of Importance (PoI)
According to this consensus-building mechanism, importance is given to a host of key factors that play a role in providing value to the network. These factors include the total spending in the last 30 days, the vested amount to create blocks, the clustering of the nodes. Let’s put this in easy-to-understand words. The nodes that are more clustered than the others get higher weights.
Proof of Importance improves upon the existing mechanism of Proof of Stake. In PoI, the chances of hoarding are less. Since there is nothing at stake in PoS, it has the risk of losing users in the long run.
The XEM or New Economy Movement follows the proof of importance. To deploy a stake, the minimum requirement is that of 10,000 XEM.
