A consensus mechanism is how a blockchain deals with conflicting thoughts on which transactions should be accepted. The greater the number, the better. However, this also results in a greater variety of perspectives and points of view. Let’s start by defining what we mean when we talk about “consensus” before we get into the specifics of how consensus is reached in the Blockchain network.
Collecting everyone’s approval on a single modification in a decentralized network such as blockchain sounds tiresome. That is the case!
Although it is difficult to win the approval of every member of the network, people were able to accomplish this goal by establishing governance. In addition to competing against a monarchy that giants dominate, blockchain also has its unique difficulties. One of the key challenges is getting everyone on the same page or coming to a worldwide agreement.
What exactly is the consensus?
A decision has reached a state of consensus when all of the network’s participants agree with it. For instance, there are no disagreements among a group of friends when they decide to take a trip to Goa. A consensus or mutual agreement situation might exist when it has been decided that all of us will travel to Goa.
However, getting a conclusion that is conflict-free and agreed upon by every group member is impossible. Somebody might rather go to Manali instead. How is it even possible for a group of close friends to agree on something? In addition, how can a network consisting of a large number of unrelated people reach a consensus?
A technique or algorithm for reaching consensus is necessary for the system to prevent it from becoming centralized and to resolve conflicts that may arise among its participants.
What is meant by the term “Consensus Mechanism”?
In a democratic setting, the members of a network can be kept in sync with the help of a consensus algorithm. When a network is decentralized, every member of the network possesses equal power to make decisions within the system. Therefore, rules need to be developed for network members (also known as nodes) to make new changes to the system by a global consensus.
“In a decentralized network, the goal of the Consensus method is to allow a collection of independent nodes to distribute the right to update as well as validate the change in the network equally. As a result, decide on the subsequent update of a decentralized network.
Each member in a blockchain shares the same copy of the network transactions, allowing the participants to remain synchronized and connected.
Why do Blockchains Need Consensus Mechanisms?
As it is already mentioned above, the blockchain network must be able to reach a consensus on every new modification. Otherwise, the blockchain cannot be decentralized because any modification made by one party results in contradictions that will result in the system reverting to an earlier state.
The history of digital currencies is full of instances when a single person or a small group altered a transaction. In most cases, such actions were not sanctioned by most network participants.
This is exactly what happened when a group of bitcoin miners decided to modify some transaction history. They did this to exclude additional bitcoins from the blockchain. Although such actions were taken by a small portion of the network participants, they were able to gain control over the blockchain.
The currency ceased to exist as a result of this change. This is why we need to put in place adequate measures or algorithms that would help us replace a single node and reach a consensus without compromising on the network’s decentralization.
How Does Consensus Work?
Before a new transaction is added to the blockchain, all transactions that have happened till now must be validated through proof-of-work.
The next step is to check if each of the transactions is valid. For instance, Alice can transfer three bitcoins to Bob or Alice can spend her bitcoins twice by transferring them to both Bob and Charlie. In case of double spending, the network participants will discard a single transaction, and another one will be accepted as an original transaction.
When we come across such situations, the proof-of-work algorithm helps us restore the copy of the chain and reach a consensus on what has been modified. In return for these efforts, Alice gets rewarded with three bitcoins for her work. In reality, however, she did not do any work. All she needed to do was to carry out an official transaction from her wallet application to Bob’s wallet application.
Individuals who participate in transactions must confirm them by carrying out complex mathematical calculations. The more computing power you have, the better your chances are. While you can accomplish this independently, it is often more cost-effective to pool resources with others.
For a blockchain to remain decentralized and secure, consensus algorithms were developed by its developers as a way to resolve conflicts. These algorithms eliminate any disagreements among network participants by establishing mutual agreements.
Types of Consensus Mechanisms:
Proof of Work (PoW)
Proof of work, also known as PoW, was the first consensus mechanism ever developed. It is currently utilized by public blockchains such as Bitcoin and Ethereum. Concerns about its ability to scale are widespread, although it is generally acknowledged as the most trustworthy and safe of all the consensus processes.
Although the phrase “proof of work” was not used for the first time until the early 1990s, Satoshi Nakamoto, the creator of Bitcoin, was the first person to apply the concept in the context of digital currencies.
Miners are effectively pitted against one another in the competition known as Proof of Work, in which they use powerful computers to attempt to solve incredibly difficult computational puzzles.
The person who discovers the hexadecimal number with 64 digits (called a “hash”) first will be awarded the privilege of forming the next block and validating the transactions. A ‘block reward’ is a predetermined amount of cryptocurrency awarded to the miner who successfully created a new block.
The Proof-of-Work algorithm is known for having famously high running costs because it demands significant quantities of computer resources and energy to generate new blocks. This creates a barrier to entry for new miners, leading to concerns about the possibility of centralization and scalability constraints.
And the expenditures aren’t the only thing that is excessive. The most prevalent objection to power-on-demand is that it harms the environment due to the amount of electricity it consumes. This has motivated many people to search for consensus methods that are more ecological and energy-efficient, such as proof of stake (PoS).
Proof of Stake (PoS)
Proof-of-Stake (PoS) is a consensus algorithm aiming to scale the block creation process by giving power to those willing to put up the most resources.
In PoS, miners are no longer rewarded with cryptocurrency tokens. Instead, they can mint new coins through “staking.” Stakers make money only if they contribute towards raising the block generation height. This idea has been introduced previously.
Peercoin launched the first proof-of-stake blockchain in 2014. Today, there are many popular blockchains utilizing this consensus model. And the chance to get rewarded is far more attractive than in Proof of Work (PoW) because it requires much less energy consumption.
Proof of stake has achieved widespread adoption because it incentivizes people to participate and work towards consensus by offering rewards in the form of coins, tokens, or otherwise available cryptocurrencies.
Delegated Proof of Stake (DPoS)
This relatively new consensus mechanism rewards the nodes of the network that contribute the most to the block generation process. Delegated proof-of-stake does not directly relate to wealth and cryptocurrency, like in proof-of-stake. Instead, stakeholders vote for delegates (other nodes) to secure the network.
Delegated proof of stake (DPoS), a consensus mechanism that is a variation of proof of stake (PoS), relies on a voting system based on reputation to establish consensus.
Users of the network participate in a “vote” to choose “witnesses,” often referred to as “block producers,” who will be responsible for securing the network on their behalf. Only the most trusted witnesses, or those who have received the most votes, are granted the authority to verify transactions on a blockchain.
Users stake their tokens in a staking pool to cast a vote. Following that, votes are weighted according to the magnitude of each voter’s stake, so the more skin in the game, the more voting power one has. When elected witnesses can verify all of the transactions in a block, they are rewarded with a reward typically split with those who voted for them.
There is always a chance that witnesses in the top tier will be replaced by other individuals who are perceived as more trustworthy and who, as a result, receive more votes.
If they fail to fulfill their tasks or attempt to legitimize fraudulent transactions, they risk being voted out of the network. This incentivizes witnesses to maintain their honesty at all times, which helps ensure that the blockchain maintains its integrity.
Even though it is less widespread than PoS, DPoS is widely recognized as more effective, democratic, and financially inclusive than its forerunner. Lisk (LSK), EOS.IO (EOS), Steem (STEEM), BitShares (BTS), and Ark are the cryptocurrencies that utilize (ARK).
Proof of Activity (PoA):
Proof of Activity (PoA), an ingenious consensus model that is being tested by the Bitcoin network, has been described as a hybrid between proof of work (PoW) and proof of stake (PoS).
It aims to solve the very real scalability problem that has plagued bitcoin for years; it’s hard to mine bitcoin with just your regular laptop. PoA is set to introduce a new level of scalability to the Bitcoin network by allowing miners to mine blocks with the same ease as a regular desktop computer.
In traditional Proof of Work (PoW) or Proof of Stake (PoS) models, a miner should use hardware that has the high computational power to solve cryptographic puzzles and add a block on the blockchain. However, this method can be very costly because it consumes a lot of energy and generates waste.
Proof of Burn (PoB):
Proof of Burn (PoB) is a consensus algorithm that rewards its participants for destroying their cryptocurrencies. PoB is similar to an earlier consensus model known as Proof of Work (PoW). However, PoW requires burning massive amounts of energy to secure blockchains.
In this case, ‘burning’ means sending coins to an unspendable address on the blockchain. By burning these coins, miners say they consider these assets useless. Proof of burn is an additional algorithm that provides a more sustainable alternative to Bitcoin’s proof of work (PoB).
In Proof of Burn, miners earn the ability to mine a block by ‘burning’ (destroying) a certain quantity of tokens in a verifiable manner. This involves sending the tokens to an ‘eater address,’ where they cannot be recovered or spent again. The more coins that are burned, the greater the likelihood that one will be chosen at random.
In contrast to Proof-of-Stake mining, in which miners retain the ability to retrieve and sell locked money even if they leave the network, burned coins are permanently and irretrievably lost.
It is helpful to encourage long-term commitment from miners by using this strategy, which requires miners to sacrifice short-term riches to acquire the privilege of creating new blocks for the rest of their lives. Coins become scarcer as a result of the practice of burning them, which has the effect of lowering inflation and increasing demand.
Coins such as Slimcoin (SLM), Counterparty (XCP), and Factom are examples of cryptocurrencies that implement the proof of burn protocol (FCT).
Proof of Capacity:
Instead of burning coins, an energy-intensive process that produces waste, PoC aims to use excess computing power by replacing PoW as the foundation for securing a blockchain. In contrast to the vast majority of its forerunners, proof of capacity (POC) – also referred to as proof of space (PoSpace) – bases its mining algorithm on the amount of free space currently present in a miner’s hard drive. This contrasts with most of its forerunners, which grant mining rights based on computational power or coins staked.
In Proof-of-Concept mining, the process of generating a list of all possible hashes in advance is referred to as “plotting.” After that, the outlines are written down and saved into a hard drive.
The miner has access to a greater number of potential solutions in proportion to the size of their storage capacity. The greater the number of possible solutions, the greater the likelihood one will possess the appropriate combination of hashes and be awarded the prize.
PoC allows for more options for the typical individual to engage in the network because it does not necessitate using expensive or specialized equipment. As a result, it is an alternative to some of the more prominent consensus methods discussed in this guide that uses less energy and is more decentralized.
However, a relatively small number of developers have chosen to embrace the system, and there are concerns over the system’s sensitivity to malicious software assaults. Signum (SIGNA), originally known as Burstcoin (BURST), Storj (STORJ), and Chia, are the three cryptocurrencies that are currently utilizing the process (XCH).
Proof of Elapsed Time (PoET)
Proof of elapsed time (PoET) is a method that uses trusted computing to impose random waiting times for block generation. This method is typically implemented on permissioned blockchain networks, defined as those in which participants must identify themselves. Intel created it at the beginning of 2016, based on a unique collection of CPU instructions referred to as Intel software guard extensions (SGX).
PoET is a technique for reaching a consensus based on a time lottery. It accomplishes this by randomly allocating a unique wait time to each node in the network. The waiting period causes each of these nodes to enter a state known as “sleep” for the amount of time that has been determined.
The mining rights are given to the first person who awakens, with the least waiting time. The use of randomization helps to ensure that all of the participants have an equal chance of winning, which helps to keep things fair within the network.
The PoET consensus process is extremely resource-friendly, in addition to being highly efficient and scalable. Sawtooth, which Hyperledger develops, now incorporates it.
Proof of History (PoH)
Proof of History (PoH) is exactly what it sounds like: it offers evidence of things that happened in the past. PoH is a protocol that was developed by Solana that enables ‘timestamps’ to be incorporated into the blockchain itself. This verifies the elapse of time between transactions without the need to rely on other nodes.
This timestamping approach is made possible by a device known as a sequential-hashing verifiable delay function that is SHA-256 compliant (VDF). It does this by taking the result of one transaction and using it as the starting point for the next hash. This makes it possible for anyone to determine which step came first in a given series with absolute certainty.
PoH drastically reduces the processing weight of the blockchain by using the fact that a single CPU score can only solve the VDFs. As a result, the blockchain is quicker and more energy-efficient than many of his contemporaries.
Because Solana is the only company that uses PoH, it has yet to be put through extensive testing.
Proof of Importance (PoI)
In a procedure called “harvesting,” miners for the proof of importance (PoI) network are chosen according to particular criteria. This innovation was pioneered by NEM (XEM). Several common indicators include the total quantity of vested currency, the number of transactions that have taken place in the past 30 days, and the size of those transactions.
Considering these many aspects, a significance rating is given to each node in the network. The higher the score, the greater the likelihood that you will be selected to harvest a block and be awarded the transaction fee that goes along with it.
Although it is very similar to PoS, PoI’s use of additional measures eliminates the former’s inherent inclination to reward the wealthy by considering participants’ overall support of the network. This is accomplished, although PoS uses the same measurements. As a result, simply placing a huge bet in POI does not necessarily guarantee that a player will win the block.
Conclusion: The Future of Consensus
Several methods have yet to be seriously tested in a live setting. This includes proof of space and proof of time, which remain in the early stages of development. There are also ongoing initiatives to provide more environmentally friendly and sustainable solutions.
For example, the Proof of Burn (PoB) method, which is used with Burstcoin (BURST), awards tokens based on how many coins have been sent to an “end location” – i.e., burned in the furnace. Proof of Activity (PoA) is another solution. This involves using a relatively small amount of energy on standby to prove that a given node has worked hard on the cryptocurrency network.
When it comes to the future of consensus, there is truly no limit to its novelty. The industry has developed many different mechanisms that are both complex and innovative, and there are many more waiting in the wings just over the horizon.