The Ultimate Guide to Blockchain Consensus Mechanisms
Proof of work, proof of stake or rather proof of authority? To ensure the reliability of a blockchain, the participants must come to an agreement on the status of the network. To achieve this, many new consensus processes have been developed over the years. In this article, we take a closer look at what constitutes a consensus mechanism and why it is essential to the functioning of any blockchain.
Blockchain technology has been around since 2009 when pseudonymous Satoshi Nakamoto launched the Bitcoin blockchain. What started as an experiment is now a worldwide movement. Due to this growth, specially designed hardware is now required to mine Bitcoin using the consensus mechanism called proof of work.
In the past, mining was possible on your own computer. The first computer processors were enough, then it was necessary to move on to graphics cards. Mining today only pays off if you are a professional farm with cheap electricity.
In the case of Bitcoin, a lot of electricity is needed for mining via proof of work. This is because specialized mining devices consume computing power to solve an algorithm. The algorithm is called Sha-256 and if the solution is successful, a so-called block reward is paid – and that reward is Bitcoin.
Due to high power consumption, many blockchains are now moving away from proof of work as the preferred consensus mechanism. With the impending “The Merge” update, Ethereum will no longer depend on proof of work. Consensus will then be reached by a different method, the so-called proof of stake.
But what exactly is the consensus mechanism, and why is it needed? Let’s take a closer look at how blockchains work.
This is how the blockchain works
The word consensus means “agreement”. More specifically, it means the unanimous opinion of people on an issue. It represents the central element of each blockchain.
In a blockchain, transactions are stored in blocks by so-called validators. These then form a chain that continues indefinitely. Hence the name “blockchain”. A blockchain is a distributed public database maintained by an independent community of computers around the world.
This independent community forms a peer-to-peer network run by nodes and validators. They confirm the status of the blockchain. In order to ensure that the database is not tampered with, the majority of all participants must recognize the same status of the blockchain: finding consensus.
A consensus mechanism is therefore an algorithm that reaches an agreement on the status of a blockchain between its participants. These mechanisms are used to ensure that all participants have an identical copy of the database.
In this case, the network can only be overthrown if the majority accepts the same manipulated status, called 51% attack. This is a danger, especially for small proof-of-work blockchains, because you can rent computing power from some websites.
Partly because of high power consumption and 51% attacks, other consensus methods have been developed in recent years. Some have had more success than others. The perfect consensus procedure does not yet exist.
The best-known consensus procedures
proof of work
Proof of work (POW) is the oldest consensus method. This is where consensus is achieved through computing power. Participants are faced with a complex arithmetic problem that they must solve using materials. They receive a reward for the use of resources (material and energy). We are currently moving away from PoW, mainly due to high power consumption. Well-known POW-based blockchains are Ethereum, Bitcoin, and Monero.
Proof of Stake
Proof of Stake (POS) is probably the most popular consensus mechanism after POW. It means “proof of stake” because the consensus is made here by the assets provided and the duration of the provision. Proof of Stake was launched in 2012 in response to Bitcoin’s high power consumption. Since there is no point-of-sale mining, it is not possible to mine the network with computing power. Attackers would need to acquire more than half of the coins in circulation to do this. Well-known examples of proof-of-stake blockchains are Solana and Avalanche.
Delegated Proof of Stake
DPOS is a well-known advancement in proof-of-stake. Here the delegates are democratically elected and are responsible for certain tasks in the network. Tasks include validating blocks and confirming blockchain status. Voters’ voting rights are generally weighted according to the number of tokens. Blockchains like Cardano, EOS, Tron, and Cosmos use DPOS.
Lesser known consensus mechanisms
Proof of person is a lesser-known consensus mechanism. Here, network participants prove that they are real people and therefore allowed to participate in network activity. This proof can be provided by certain tasks or by biometric data. This is particularly advantageous for decentralization since each person can only be represented once in the network. Blockchains based on a form of POP include Idena and Humanode.
Proof of authority
Proof of authority is used to select trustworthy participants who are then authorized to perform certain tasks. The selection usually depends on the reputation of the participants. Participants go through an application process before being considered as validators for the blockchain. The process is usually based on the actual identity of the applicant. This guarantees a high level of reliability for POA networks, but at the same time involves security risks. The best-known example of a proof-of-authority blockchain is BNB Chain, formerly known as Binance Smart Chain.
Proof-of-work vs. proof-of-stake: which is the best?
Although proof-of-work is considered the most secure consensus algorithm, many blockchains now prefer proof-of-stake. This mainly has to do with environmental factors, but the scalability of blockchains also plays a major role. The Bitcoin network, as digital gold, can manage with low transaction volume and choose security as the first priority, but the situation is different with networks such as Ethereum, which fundamentally depend on fast and cheap transactions. .
Therefore, proof of stake is the most attractive consensus method for these blockchains. But there are also some weaknesses here. The main criticism is that it makes the “rich richer” and generally creates centralized networks. For example, validators on the Ethereum network need 32 ETH (about $87,000) to be approved. This creates a major barrier to entry for newcomers and small investors, while investors with the necessary capital easily collect staking rewards, widening the gap between small and large investors.
The blockchain trilemma applies to the choice of consensus procedure. This states that a blockchain cannot meet the desired qualities of decentralization, scalability, and security at the same time, because one of the factors can only be achieved at the expense of the other. As a general rule, scalable blockchains are not very decentralized and secure blockchains are rather slow. The only question is – which of the desired qualities do you prefer?
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