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In the previous post we addressed the decentralisation and immutability of the blockchain ledger. We saw that to ensure security in a public blockchain ledger it is necessary, in addition to cryptographic mechanisms, a consensus algorithm. This consensus serves to invalidate the processing of transactions produced by malicious nodes.
In this post we will address the various types of consensus used in blockchains.
Blockchain Consensus
Blockchain consensus is the process through which the network’s peers come to an understanding on the current state of the data. Consensus algorithms accomplish this by establishing dependability and confidence in the Blockchain network.
Key Takeaways
- Consensus mechanisms are used to confirm transactions and uphold the security of the underlying blockchain. They are often referred to as consensus protocols or consensus algorithms.
- Consensus processes come in a wide variety, each with unique advantages and disadvantages.
- Two of the most popular consensus mechanisms are proof of work (PoW) and proof of stake (PoS).
Why Do Blockchains Need Consensus Mechanisms?
The foundation and security of all cryptocurrency blockchains are consensus mechanisms. We must first define what it means for blockchains to reach consensus before delving into the various consensus processes.
A blockchain is a digital ledger that is distributed, decentralised, and frequently public and used to record transactions. Each of these transactions is represented as a separate “block” of data that must first pass independent peer-to-peer network verification before being included in the chain. This technique tackles the issue of “double-spending” and assists in protecting the blockchain against fraudulent behaviour.
Consensus methods are employed by blockchain networks like Bitcoin and Ethereum in order to ensure that all participants (or “nodes”) concur on a single version of history (also known as consensus protocols or consensus algorithms). This system’s fault tolerance is the goal of these mechanisms.
What Are Consensus Mechanisms?
A collection of peers, or nodes, in a network decides which blockchain transactions are valid and which are not through a consensus process. Methodologies that foster consensus are employed to realise this accord. These sets of guidelines aid in guarding networks from bad behaviour and hacker attacks.
Depending on the blockchain and its use, there are numerous distinct kinds of consensus processes. While they vary in terms of energy consumption, security, and scalability, they all serve the same function of making sure that records are accurate and truthful. Here is a summary of a few of the most popular categories of consensus techniques that distributed systems utilise.
Types of Consensus Mechanisms
Proof of Work (PoW)
Proof of work (PoW), which is used by Bitcoin, Ethereum, and numerous other public blockchains, was the first consensus mechanism ever developed. Though there are several scaling difficulties, it is usually considered to be the most dependable and safe of all the consensus systems. Although the phrase “proof of work” was initially used in the early 1990s, Satoshi Nakamoto, the creator of Bitcoin, was the one to apply the concept in the context of digital currencies.
In PoW, participants compete against one another to use powerful computers to solve incredibly difficult computational puzzles. The right to create a new block and validate transactions belongs to the first person to generate the 64-digit hexadecimal hash. Additionally, the successful miner receives a “block reward,” which is a fixed sum of cryptocurrency.
The running expenses of PoW are notoriously high since producing new blocks demands a significant amount of computer power and energy. This creates a barrier to entry for new miners, raising issues with centralised control and scalability.
And the costs aren’t the only thing that’s high. The environmental impact of PoW’s power usage is its main point of criticism. Many people have turned to more energy-efficient, sustainable consensus procedures like proof of stake (PoS) as a result of this.
Proof of Stake (PoS)
This well-liked consensus approach is based on the staking procedure, as the name implies. A “stake” of digital money must be made by miners in a proof of stake (PoS) system in order to be eligible to be selected at random as a validator. Similar to a lottery, the more coins you bet, the greater your chances are in this process.
In contrast to PoW, where block rewards (newly minted coins) are used to motivate miners, the PoS system just pays contributors with a transaction fee.
Any node that tries to sabotage the PoS network loses, partially or totally, the staked tokens.
PoS is considered as a more resilient and environmentally friendly substitute for PoW and it is also more secure from a 51% attack. The PoS method has garnered criticism for its potential to promote centralization because it favours entities with more tokens. Popular PoS platforms include Tezos (XTZ), Cardano (ADA), and Solana (SOL).
Delegated Proof of Stake (DPoS)
Delegated proof of stake (DPoS), a variant of the PoS consensus algorithm, uses a reputation-based voting approach to reach consensus. The network’s participants “vote” to choose “witnesses” (sometimes referred to as “block producers”) to guard the network on their behalf. Only the witnesses with the highest number of votes have the authority to approve blockchain transactions.
Participants stake their tokens in a staking pool to cast their votes. The number of tokens staked by the participant is then taken into consideration when weighing votes; the more tokens staked, the greater the voting power. A witness is elected when they correctly verify transactions in a block and receive a reward. Those who voted for the elected witnesses earn a share of the reward.
Top-tier witnesses are constantly in danger of being replaced by others who are regarded as more reliable and receive more votes. If they do to carry out their duties or attempt to validate fraudulent transactions, they may potentially be voted out. This encourages witnesses to always be truthful, protecting the blockchain’s integrity.
Many believe that DPoS is more effective, democratic, and financially inclusive than PoS, while being less common. It is implemented by Lisk (LSK), EOS.IO (EOS), Steem (STEEM), BitShares (BTS), and Ark (ARK).
Proof of Activity (PoA)
A hybrid of the PoW and PoS consensus mechanisms is called proof of activity (PoA). The blockchain projects Espers (ESP) and Decred (DCR) both make use of it.
In PoA systems, mining begins similarly to PoW, with miners competing to solve an intricate mathematical problem using massive computing power. However, once the block has been mined, the system switches to PoS mode, with the successfully generated block header being broadcast to the PoA network. A group of validators is then chosen at random to sign off on the hash, thereby validating the new block. As with PoS, the more crypto the validator owns, the more likely they are to be chosen. After each validator has signed the block, it is added to the blockchain network and is ready to record transactions. Finally, the miner and validators share the block reward.
Though the PoA system was designed to combine the best features of PoW and PoS while avoiding their flaws, it has received criticism for its energy-intensive mining phase and inherent preference for validators with a larger number of coins.
Proof of Authority (PoA)
Proof of authority (PoA), works by selecting validators based on reputation. It is a modified version of PoS that was proposed in 2017 by Ethereum co-founder and former CTO Gavin Wood.
Validators do not stake coins in PoA. Instead, they must risk their reputations in order to validate blocks. This is in stark contrast to the majority of blockchain protocols, which typically do not require you to reveal your identity in order to participate.
This mechanism is far less resource-intensive than some of its predecessors, particularly PoW, because it requires almost no computing power. It is also one of the less expensive options, making it a popular choice for private networks such as JP Morgan (JPMCoin). VeChain (VET) and the Ethereum Kovan testnet are two other PoA-based projects.
Although highly scalable, it falls short in the decentralisation department, as only a select few can participate in the network. Furthermore, the requirement that validators be identifiable raises the risk of corruption and third-party manipulation.
Proof of Burn (PoB)
Proof of burn is another more sustainable alternative to Bitcoin’s PoW algorithm (PoB). Miners gain the ability to mine a block in PoB by ‘burning’ (destroying) a predetermined amount of tokens in a verifiable manner, namely by sending them to a ‘eater address’ where they cannot be recovered or spent. The more coins burned, the more likely it is that you will be chosen at random.
Burned coins cannot be recovered, in contrast to PoS, where miners can sell or retrieve their locked money if they ever decide to leave the network. This strategy of requiring miners to give up short-term wealth in exchange for the lifelong right to generate new blocks encourages miners to commit over the long run. Burning coins also makes coins scarcer, which reduces inflation and increases demand.
Slimcoin (SLM), Counterparty (XCP), and Factom are cryptocurrencies that use the proof of burn protocol (FCT).
Proof of Capacity / Proof of Space (PoC / PoSpace)
Unlike the majority of its predecessors, which granted mining rights based on computational power or coins staked, proof of capacity (PoC) – also known as proof of space (PoSpace) – bases its mining algorithm on the amount of hard drive space available to a miner.
In PoC, the process of “plotting” is used by miners to create a list of all feasible hashes beforehand. Then, a hard disc is used to store these plots. There are more potential solutions the more storage space a miner has. The likelihood of having the right hash combination and receiving the reward increases as the number of solutions increases.
PoC makes it possible for the typical person to take part in the network because it doesn’t call for expensive or specialised equipment. As a result, it is a more decentralised and less energy-intensive alternative to some of the more widely used consensus mechanisms discussed in this article. The system hasn’t yet been adopted by many developers, and there are worries that it could fall victim to malware attacks.
Signum (SIGNA), formerly Burstcoin (BURST), Storj (STORJ), and Chia are currently using the mechanism (XCH).
Proof of Elapsed Time (PoET)
Proof of elapsed time (PoET) uses trusted computing to enforce random waiting times for block construction and is typically employed on permissioned blockchain networks (those that demand participant identification). It is based on a unique collection of CPU instructions known as Intel software guard extensions (SGX) and was created by Intel in the beginning of 2016.
PoET, a consensus mechanism based on timelotteries, operates by distributing various wait periods among all network nodes at random. Each of these nodes enters a state of “sleep” for the duration of the waiting period. The mining rights are given to the person who wakes up first and has to wait the least amount of time. This randomization ensures fairness inside the network by ensuring that each player has an equal chance of winning.
The PoET consensus mechanism is highly efficient, requires fewer resources, and is scalable. However, Proof of elapsed time does not promote decentralization and openness like proof of work does because it requires a certificate to be issued to anyone that wants to join the network. It has been incorporated into Hyperledger Sawtooth.
Proof of History (PoH)
Proof of history (PoH) offers evidence of historical occurrences, as the term implies. Solana’s PoH technology enables “timestamps” to be incorporated directly into the blockchain, independently confirming the interval between transactions.
This method of timestamping is made possible by a SHA-256, sequential-hashing verifiable delay function (VDF). It works by taking the output of a transaction and using it as the input for the next hash, allowing everyone to see which event occurred in a specific sequence. PoH significantly reduces the processing weight of the blockchain, making it faster and more energy-efficient than many of his contemporaries because the VDFs can only be solved by a single CPU score.
PoH has not yet undergone extensive testing because Solana is the only company that uses it.
Proof of Importance (PoI)
Proof of importance (PoI), first established by NEM (XEM), chooses its miners based on specific criteria in a procedure known as “harvesting.” The volume and quantity of transactions over the previous 30 days, the amount of vested currency, and network activity are typical determinants. These elements form the basis of the importance score given to nodes.The higher the score, the more likely it is that you will be chosen to harvest a block and receive the associated transaction fee.
Although comparable to PoS, PoI avoids the latter’s propensity to automatically reward the wealthy by taking into consideration participants’ total network support. As a result, simply placing a big POI stake does not ensure that you will win the block.
