Blockchain technology is no longer just a buzzword associated with cryptocurrencies; it is revolutionizing several industries worldwide. It has a wide range of use cases, from finance to supply chain management. Businesses are using blockchain to create new revenue streams and secure their data. But what makes this technology practical is the consensus mechanism that lies at its core.
The consensus mechanism ensures smooth functioning among participants in a blockchain network. Imagine a distributed network where every vote is counted, with each participant having the same rights. Also, every transaction is verified by the decision made with a majority of votes, and that too without any need for a central authority. It's exactly what consensus mechanisms enable in the world of blockchain technology. Let’s explore consensus mechanisms and some of the most commonly used options available.
Here, "consensus” refers to a general agreement or understanding among a group of people or entities. For example, a group of friends decides on a restaurant to eat at. They each suggest different options, but through discussion and negotiation, they reach an agreement on one restaurant to go to. Everyone agrees on the decision, and that's their consensus.
In the context of distributed systems and blockchain, "consensus" is the process of reaching an agreement on the state of the system among all the participating nodes. For example, while verifying a transaction in the blockchain, validators can reach a consensus on the state that whether the transaction is legitimate or not. Consensus in a blockchain network is achieved through the use of a consensus mechanism.
Consensus Mechanisms are algorithms or protocols that are designed to ensure that all nodes in the system agree on the same state. These are simply the algorithms used to reach consensus on a Blockchain. Different nodes may have different views of the system's state due to network delays, failures, or malicious actors. A consensus mechanism ensures that all nodes in the system agree on the same state.
The consensus mechanism includes several steps to get a response from the access nodes. Nodes need to validate transactions to ensure that they are legitimate. Transactions are grouped into blocks and added to the blockchain. The consensus mechanism is used to reach an agreement among the nodes on which block should be added next. An algorithm may require at least 51% of nodes to reply to reach a consensus or agreement on a data value or transaction.
The purpose of the blockchain is defined by the consensus algorithm employed by it. Each consensus mechanism has its own way to reach an agreement. First, the validators are selected based on certain criteria, the block is added to the chain, and then rewards are distributed to the validators in the form of native cryptocurrency. For example, in Proof-of-Work (PoW), the node that solves a complex mathematical puzzle first (using computational power) gets the right to add the following block and take rewards. While in Proof-of-Stake (PoS), the node that holds the most coins gets the right to add the next block. Whenever the next block is added to the blockchain, all nodes in the network update their copies of the blockchain to ensure that they are all in the same state.
A consensus mechanism is a choice that organizations and blockchain developers make with an understanding of the desired outcome. There are several different types of consensus mechanisms, each having its own strengths and weaknesses.
Consensus Mechanism | Feature | Pros | Cons | Use cases |
Proof of Work (PoW) | Miners (nodes) compete to solve a difficult mathematical puzzle. The first miner to solve a puzzle using computational power adds a block to the blockchain and gets rewards. | More secure, as it requires a significant amount of computational power to carry out an attack. Widely established and proven effective. | Slow transaction processing. High energy consumption. Centralization of mining power. Mining requires expensive computational equipment. | Bitcoin, Litecoin, and Dogecoin. |
Proof of Stake (PoS) | Nodes use their own cryptocurrency to participate in block validation. Then Validators are selected randomly based on the size of the cryptocurrency they stake in to participate. A higher stake means a higher chance of selection in the validating process. | Highly scalable and enable faster transaction processing. Low energy consumption. Reduced risk of centralization. Cost-effective as there is no need for expensive hardware. | Highly dependent on validators to be honest.
Vulnerability to reorganization attack. Inadequate security as an attacker can easily obtain a large number of coins and can control the network. | Ethereum 2.0, Cardano, and Polkadot |
Delegated Proof of Stake (DPoS) | Users in the network use their stake or coins to vote for candidates or delegates. The top delegates are elected to validate transactions and add new blocks. | Increased speed and scalability. Low energy consumption. Less Hardware is required. | Less secure, and a 51 percent attack is easier to carry out. Possibility of vote buying. Trust issues related to Candidates. | Bitshares, Steem, Lisk, and Ark |
Proof of Burn (PoB) | Nodes burn coins by sending them to an address from which they cannot be recovered. The validators are then selected at random, with the probability of selection proportional to the number of coins burned. | Secure and resistant to Sybil attacks. Energy efficient. Cost-effective and less hardware required as compared to PoW. | Wastage of resources in terms of burned coins. Lack of incentives for burning. More complex to implement. | Slimcoin |
Proof of Activity (PoA) | Uses a hybrid approach of PoW and PoS. First, block is mined using the PoW approach. Then block is sent to a group of validators, who use PoS to validate it and ensure that it is legitimate. If the block is valid, the miner is rewarded. | A more scalable approach than PoW. Increased security and fault tolerance due to the combined approach. Less computationally intensive than PoW. | Complex to implement than other consensus mechanisms. Still requires computational power to mine blocks. Reliant on Validators. | Decred |
Proof of Capacity (PoC) | Nodes contribute disk space to the network, which is then used for generating a large number of hashes. The node with the most hashes will validate the block and get incentivized. | A low-cost investment in terms of hardware, as it only needs a hard drive to store the hashes. More energy efficient. Mining data can be easily erased, and the drive can be reused for other purposes. | Vulnerability to disk failure can affect mining activities. Risk of data breaches and manipulation. | Burstcoin |
Used in private blockchains where the organization controls and selects validators based on their identities. Validators have the right to add the transaction to the next block and broadcast it to the rest of the network. | No possibility of malicious nodes or bad actors because participation is only permitted after identity authentication. Very high throughput. Fewer computational resources are required. | Centralized as validators are pre-approved. Not suitable for public networks as the identity of validators is accessible to anyone. Heavily reliant on validators | VeChain, JPMCoin, and Ethereum testnets ( Kovan, Goerli, and Rinkeby) | |
Uses timestamps to validate transactions. Nodes generate a hash of the network's current state. These hashes are then arranged into a Merkle tree, with the root of the tree representing the network's entire state. This root hash is then used as the timestamp for the next block and is used by other nodes to validate transactions. | High throughput and the ability to handle large number of transactions. More secure due to the timestamping used for validation. Lower transaction fees. | Limited use cases and adaptability. Less decentralized as the timestamping node may have more power and influence than other nodes. | Solana | |
Proof of Elapsed Time (PoET) | Network assigns a random wait time to each node. The node with the shortest wait time is selected to create the next block. | Energy efficient, as it uses a random wait time algorithm instead of any computing power. Cost-effective for businesses. | Only compatible with closed or permissioned networks. Less decentralized and can be manipulated. | Hyperledger Sawtooth |
Proof of Importance (PoI) | Nodes on the network are given an importance score based on several factors, including transaction history, network reputation, and other metrics. The node with the highest importance score creates the next block. This block is then broadcast to the network, where it is validated by the other nodes. | Fairness due to the influence of several factors. Energy efficient. Identity-based | Limited applications. Centralized. Complexity in implementation due to the scoring system. | NEM |
Blockchains are able to maintain a level of decentralization and scalability due to their consensus mechanism. The consensus mechanism defines the fundamentals and properties of blockchain as well as its domain of application. It is like the heart of a blockchain; it decides how the network operates, who has the power to validate transactions, and how new blocks are added to the chain.
There are several consensus algorithms, each with its own set of pros and cons. But there is no one-size-fits-all solution for all blockchains. Different types of blockchains will use different consensus algorithms. Businesses and organizations should select a consensus mechanism that fulfills their specific needs and objectives.
