An Easy Guide to Blockchain Consensus Mechanisms

Coming to a consensus to validate a transfer

Last week, we gave our readers a simplified explanation of blockchain. It’s a decentralised digital system that enables transactions to be made without an intermediary. Easy peasy!

But blockchain IS a complicated technology. It’s a constantly evolving landscape with endless possibilities. Add a sprinkling of cryptocurrencies, NFTs (non-fungible tokens), and DeFi (decentralised finance) into the mix and you’ll fall into a rabbit hole. Ciao.

But don’t sweat! We’re here to guide you along every step of the way.

In this short series of articles, we’ll dive deeper into the intricacies of blockchain, break down some of those much-feared acronyms, and translate that fancy ASDFGHJKL jargon into everyday examples.

We’re here to uncomplicate the complicate

In centralised systems, there’s a decision maker constantly regulating, authenticating, and maintaining the transactions/records. Think banks, government agencies etc. Hence its ‘centralised’ nature.

But how do we agree that a transaction is actually legitimate in a self -regulating and decentralised system without a central authority?

Blockchain Consensus Mechanisms

KPMG defines it as “ a method of authenticating and validating a value or transaction on a blockchain or a distributed ledger without the need or trust to rely on a central authority.”

These mechanisms (sometimes known as consensus protocols or algorithms) are critical measures that guarantee the synchronization of the nodes (the devices connected to a blockchain like supercomputers) and the legitimacy of the transfers in that network.

Simply put, before a transaction can be added to the blockchain, it has to be authenticated first. But in a decentralised system with no central authority, the only way to do it is by coming to a consensus; or the nodes in the network ‘agreeing’ that a transfer is valid.

Think of it as a form of digital governance that replaces an intermediary’s responsibility of authenticating a transfer.

Consensus protocols enables transactions to be validated in a decentralised system

Let’s breakdown three of the most common consensus mechanisms:

1. Proof of Work (PoW)

• The very first blockchain consensus mechanism and hence adopted by Bitcoin — the very first cryptocurrency.
• When there’s a transfer that needs to be validated, nodes (supercomputers) submit a “proof of work” by solving a complex mathematical equation to verify it so that it can be added to a block in the chain (This is also known as ‘mining’). Miners (people behind the supercomputers) are then rewarded with cryptocurrency for their work.
• Unfortunately, it takes a HUGE amount of electrical energy to solve the mathematical problem — Bitcoin consumes more energy than the UAE, which brings us to our next consensus mechanism.

2. Proof of Stake (PoS)

• This mechanism addresses the PoW energy consumption problem by eliminating the need to solve complex equations.
• Rather, validators (no more mining)are randomly chosen to validate transfers as long as they have a stake (They need to own an amount of that cryptocurrency) hence the term “proof of stake”. Validators then earn a cut of the transaction fee.
• It’s said to be a ‘greener’ mechanism.

3. Delegated Proof of Stake (DPoS)

• Essentially the same as PoS but in a way more ‘democratic’.
• Instead of a random selection, users (stakeholders) can vote for the delegates they want to validate the transactions.

Still mind blown? So are we! But check out this simple infographic by Euromoney Learning

These are simplified explanations of just three consensus mechanisms. Remember, blockchain is an emerging technology so new things are popping up everyday.

But hopefully you’re a little less confused about how transfers are auntheticated in a decentralised network.

Keep Tokenizing! Till next week.

Here at Tokenize, we strive to provide the best possible platform for cryptocurrency trading. More importantly, we believe in sharing our passion on all things blockchain, crypto, and DeFi.

Stay tuned for the next Tokenize Research articles!

Or let us know if you’re curious about a topic and we’ll try our best to explain it :)