Anybody who knows about Bitcoin and other cryptocurrencies would know that the purpose of the underlying technology, Blockchain is to record and verify the information. Bitcoin uses a proof of work mechanism, but other cryptocurrencies use varied consensus mechanisms, depending on the utility of their currency. The performance of a cryptocurrency depends on the consensus mechanism used.
So, what is a consensus mechanism? They are protocols to make sure all nodes are synchronized with each other and reach an agreement on a single data value. It is a mechanism that ensures that each player in the network has a copy of the same ledger. It is crucial for record-keeping, verification of transactions, among other things.
Not all blockchain networks can use the same consensus mechanism as different outcomes are desirable for different applications. Blockchain developers and organizations need to choose their preferred mode of blockchain consensus mechanism cautiously as, without a sturdy consensus, blockchains are at risk of various attacks.
Let us explore few types of blockchain consensus mechanisms:
1. Proof of Work:
Used by Bitcoin, Proof of Work is the first blockchain consensus mechanism and many cryptocurrencies followed BTC’s way of adopting PoW.
The process of PoW is called Mining and the nodes are known as miners. Miners require a lot of computation power to solve complex mathematical puzzles and the first one to solve the problem (find the hash) gets rewarded and is allowed to add a new block to the blockchain.
PoW has been at the receiving end of a lot of criticism for the amount of electricity and resources it utilizes and isn’t considered sustainable – the reason why green mining is emerging as the next promising thing in the crypto space.
2. Proof of Stake (PoS)
An environmentally sustainable alternative to Proof of Work, the mechanism of PoS work on the premise that owners of the coins in this network have a vested interest in keeping the network moving and appreciating the value of its coins.
Proof of Stake uses a randomized process to determine who gets a chance to produce the next block. Usually, a staker with more coins is given the opportunity to add a new block of transactions to the blockchain. The staker does not receive any block reward in PoS but only receives a transaction fee.
Because of its’ low energy consumption, PoS is preferred over PoW by platforms with static coin supply. Crowdfunding platforms often utilize the mechanism of PoS to distribute tokens based on the investment. For instance, iOWN Token, an ERC223 token that is used within the blockchain-based equity crowdfunding platform iOWNX, currently operates on Proof of Work but will migrate to Proof of Stake (ETH 2.0) as the switch is expected to be completed by early 2022.
3. DPOS (Delegated Proof of Stake)
A variation of PoS, coin holders in DPoS can stake their coins and vote for a certain number of delegates. For example, if a user X stakes 5 coins for a delegate and user Y stakes 1 coin for a delegate, user X’s vote will weigh 5 times heavier than user Y.
DPoS is considered much more efficient at processing transactions in comparison to other protocols and it gives coin holders more ownership in the network.
4. Proof of Capacity (PoC)
In PoC, solutions to complex mathematical puzzles are stored in digital storage like hard disks that are used to create new blocks. This process is called plotting.
The user who creates the fastest solution to the puzzle gets the opportunity to create a new block. The logic is simple, if a user has more storage capacity, he can store more solutions and that increases his odds of creating a new block.
5. Proof of Coverage
This consensus verifies that hotspots are located where they claim they are and are creating a wireless network coverage from that location on an ongoing basis.
The Helium blockchain uses Proof of Coverage to create a physical wireless network based on the amount of reliable coverage it can create for users deploying connected devices on it. The power of Proof of Coverage lies in the fact that the data generated by the ongoing proofs and stored in the Helium blockchain is definitive verification of the wireless coverage provided by hotspots on the network.
6. Proof of Elapsed Time (POET)
In this consensus mechanism, the user to produce the next block is randomly decided based on the time they have waited. To arrive at this decision, the process assigns a random wait time to each node (user) and the node to finish their time first gets to produce the next block.
For the mechanism to work fairly, no user should be able to run multiple nodes and the waiting time should be assigned randomly.
7. Proof of Authority (PoA)
Unlike PoS, the consensus in Proof of Authority (PoA) stakes the actual identities of the nodes (validators) in the network.
The drawback of this protocol is that by identifying the validator, PoA becomes centralized and may be best suited for financial services, banks or insurance companies.
To conclude, all algorithms share the same goal to reach consensus in a decentralized network although their approach is extremely distinct.
While there is no one perfect consensus mechanism, it is fascinating to see how they have evolved over time from Proof of Work. The other consensus includes Proof of Burn, Proof of Vote, Proof of Importance, Direct Acyclic Graphs (DAGs), Proof of Activity, to name a few. And the list of consensuses will continue to grow as the mechanisms evolve over time to the ever-changing needs.
Did we miss mentioning any consensus mechanism? Leave a message in the comments section and let us know!