Last updated on July 29th, 2023 at 11:16 am
Introduction
When people live and work together in groups, they often need to establish guidelines and a shared sense of responsibility, known as a “consensus.” This consensus represents a set of agreed-upon rules or principles that guide the group’s actions and decision-making process. Without consensus, it becomes difficult to reach a unified decision.
Similarly, blockchain networks are composed of various components, each of which plays a crucial role in ensuring their proper functioning. One such critical component is the consensus mechanism.
In blockchain technology, multiple computers contribute to adding and verifying data blocks. Therefore, blockchains need to have a mechanism that determines how this data is treated and establishes the network’s security system.
This article aims to explain the concept of blockchain consensus, highlight its importance, and explore the different types of blockchain consensus mechanisms available today.
What Is a Blockchain Consensus Mechanism?
A blockchain consensus mechanism refers to a set of algorithms that determine whether a node is authorized to create and add new blocks to the blockchain network. These mechanisms are crucial for keeping all nodes in sync and validating the transactions accurately.
In simple terms, a blockchain consensus mechanism is a protocol that establishes how data blocks are verified and keeps the network secure. It decides who can join the network, how new blocks are added, how data is checked, and if there are rewards for participating.
A blockchain is a network of distributed ledgers where participating computers maintain identical data records. The consensus mechanism ensures the integrity of these records by requiring all nodes to agree on the validity of each block before adding it to the blockchain. This guarantees that all participating nodes have the same distributed database.
Why are Consensus Mechanisms Important in Blockchain Networks?
Consensus mechanisms are crucial in blockchain networks for two key reasons:
1. To maintain a single source of truth
In a public blockchain network, where there are no central servers, distributed computers (nodes) must independently verify and maintain only one correct version of the ledger. Think of it like you and your friends keeping joint transaction records without relying on a bank. To keep things consistent, you and your friends need to agree on rules for logging transactions. If anyone changes their record, the others can quickly spot the difference. The analogy above is similar to how consensus mechanisms establish parameters for validating data on the blockchain.
2. To secure decentralized networks
Ensuring a single source of truth applies to network security. The goal is to prevent malicious actors from infiltrating the network and ensure that all data flowing through the network is legitimate. Without a consensus mechanism, bad actors could take advantage of the network’s lack of rules and compromise its security.
Consensus mechanisms are vital for maintaining trust and integrity within a blockchain network, enabling decentralized validation and safeguarding the network against malicious activities. By establishing agreed-upon rules, consensus mechanisms uphold the core principles of transparency and security that underpin blockchain technology.
Types of Consensus Mechanisms
Blockchain networks employ various consensus mechanisms, each with its unique principles. While some principles may overlap, there are distinct differences in how they accomplish the goals of a blockchain network. At present, we have eight different types of consensus mechanisms, and among them, the most widely used ones are Proof-of-Work (PoW) and Proof-of-Stake (PoS). Now, let’s delve into these consensus mechanisms and explore them in detail.
Proof-of-Work (PoW)
The Proof-of-Work (PoW) consensus mechanism is one of the earliest used in blockchain networks. In PoW, nodes on the network solve complex math problems to validate data and secure the blockchain. The first node to solve the problem correctly creates a new block and receives rewards. This process repeats for each new block added to the chain.
Nodes that add new blocks to PoW blockchain networks are called miners, and this process is known as mining. PoW secures popular blockchain networks like Bitcoin, Dogecoin, and Litecoin.
Proof-of-Stake (PoS)
The Proof-of-Stake (PoS) blockchain consensus mechanism works by validating data and securing a network based on the number of staked tokens. Basically, nodes in this network have to deposit (stake) some of their tokens as a show of goodwill, and if they do something shady, they might end up losing those tokens. The nodes that add new blocks to PoS blockchain networks are called validators, and the process is called validation.
Ethereum made the switch from Proof-of-Work (PoW) to PoS consensus in September 2022. So, rather than having to solve complex math problems (as is the case with PoW), all that is required to become an independent validator is to stake up to 32 ETH tokens on the Ethereum network. Cardano is another public blockchain that uses the PoS consensus mechanism.
Let’s imagine a scenario to make it clearer. Say Alice wants to be a validator on the Ethereum network. She needs to stake 32 ETH tokens, worth about $56,000 at the moment. If Alice does a good job validating blocks and plays fair, she can earn rewards like transaction fees and newly created ETH tokens. But if Alice tries to pull off some funny business, like double-spending or messing with the network, she risks losing her staked tokens.
PoW vs PoS
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the two most common consensus mechanisms in public blockchain networks. The debate on which is better is ongoing and has been extensively discussed by blockchain developers and users.
Understanding the differences between these two mechanisms is essential in deciding which one to use for a particular blockchain project. Here are some of the major talking points.
- In both PoW and PoS, securing the network is incentivized. Miners compete for block rewards in PoW, while validators lock (stake) tokens in PoS.
- PoW networks consume significant energy due to continuous mining operations; conversely, PoS can reduce energy costs by up to 99%.
- The resource requirements for these two mechanisms differ. PoW requires expensive ASIC miners, while PoS can be validated using affordable computers.
- The PoW and PoS consensus mechanisms take varying approaches to decentralization. Critics argue that PoS may centralize power by favouring validators with the highest stakes, potentially allowing individuals with the most tokens to manipulate the network.
- However, PoW offers stronger security and decentralization. It’s more difficult to take over control of a PoW network as the resources needed to cover a 51% attack do not provide enough incentives to override the network.
You can check out this separate article for a more detailed exploration of these similarities and differences.
Delegated Proof-of-Stake (DPoS)
Delegated Proof-of-Stake (DPoS) is an improved version of the Proof-of-Stake (PoS) consensus mechanism. In a blockchain network that uses DPoS, token holders can appoint other validators to maintain network security.
DPoS-based blockchains operate similarly to modern-day democracies, where everyone has the opportunity to vote for the network validators by delegating their tokens. The delegates, in turn, act in the best interest of the entire network.
Delegates are randomly selected to add new blocks to the network and earn rewards for their contributions. These rewards are distributed pro-rata to those who delegated their tokens to the selected delegates.
Compared to PoW and PoS, DPoS offers faster transaction processing and can handle a higher volume of transactions. Examples of blockchain networks that use the DPoS consensus mechanism include Tron DAO and EOS.
Proof-of-Activity (PoA)
The Proof-of-Activity (PoA) consensus mechanism takes a robust approach to maintaining a blockchain network’s data integrity and security. A PoA network combines elements of both PoW and PoS. The process of verifying data and adding new blocks in a PoA network occurs in two stages.
The first stage is the block selection, where miners use PoW to solve complex mathematical problems and create an empty block. In the second stage, transactions are added to the empty blocks. At this point, the network switches to a PoS model, allowing validators to add transactions to a block. The selection of a validator follows a random selection process, similar to PoS consensus.
The PoA consensus mechanism provides a highly secure network. However, the energy consumption during the PoW stage is similar to that of regular PoW networks. Decred is an example of a blockchain network that uses the PoA consensus mechanism.
Proof-of-Authority (PoA)
The Proof-of-Authority (PoA) consensus mechanism offers a cost-effective method of securing a network, requiring fewer resources compared to PoW and PoS. Verifying data on a PoA network is based on a reputation system. Validators are pre-selected based on their reputation and are expected to engage in honest activities on the network.
Proof-of-Authority consensus is commonly used in private blockchains with fewer participants. Adding new blocks to a Proof-of-Authority network is fast since the validators are pre-selected. As the name implies, it is primarily used in permissioned and centralized blockchain networks.
Vechain is a blockchain network that uses the Proof-of-Authority consensus mechanism.
Proof-of-History (PoH)
The Proof-of-History (PoH) consensus mechanism is based on the principle that the order of activities on a blockchain is as important as the activities themselves. Consensus is achieved through a cryptographic Verifiable Delay Function (VDF) that records the time of each activity on the blockchain.
PoH only takes into account the order of events, making it highly scalable for processing large amounts of data and completing transactions quickly. PoH is, however, resource-intensive as it requires high-end computers capable of processing transactions rapidly. Transactions are ultimately processed faster on a PoH network compared to PoW.
The Proof-of-History (PoH) consensus mechanism is relatively new and was popularized by the Solana blockchain. Solana boasts a transaction processing speed of up to 70,000 transactions per second (tps) compared to Ethereum’s 30 tps.
Proof-of-Burn (PoB)
The Proof-of-Burn (PoB) consensus mechanism operates similarly to a PoW network, as it requires the participation of miners to secure a blockchain network. However, unlike PoW networks that rely on sophisticated computers, PoB networks employ a token burn mechanism.
Miners in a PoB network commit their tokens to the network and burn them to ensure network security. Miners that burn more tokens are more likely to be selected to add new blocks to the blockchain.
Compared to PoW, the PoB consensus mechanism consumes less energy. Also, the token burn system can enhance the token’s value and increase its scarcity as more tokens are burned.
The downside to this mechanism is, miners may incur losses before being chosen to secure the network, and only those who successfully add a new block to the blockchain receive rewards.
Slimcoin is an example of a blockchain that implements the PoB consensus mechanism.
Byzantine Fault Tolerance (BFT)
Byzantine Fault Tolerance (BFT) is a consensus mechanism specifically designed to address the presence of malicious actors in a decentralized system. Its purpose is to enable a blockchain network to function as intended, even when some computers on the network behave differently.
In a BFT network, to add a new block, the participating computers verify their records with other computers in the network. If the majority of the network agrees on a particular record, it can be added to the network, and the process of mining a new block can proceed. This way, the network can continue processing transactions and ensuring security, even if some computers exhibit incorrect behaviour.
Hyperledger Fabric is a blockchain platform that uses a modified version of the BFT consensus mechanism.
Which Consensus Mechanism is the Best for Blockchain Networks?
After learning about the different types of consensus mechanisms used in blockchain networks, you might be curious to know which one takes the crown as the ultimate blockchain consensus mechanism. The truth is there is none.
In the world of blockchain consensus mechanisms, there is no one-size-fits-all solution that renders all others obsolete. Each consensus mechanism comes with its own set of tradeoffs, and selecting the most suitable one depends on the specific needs of the network being built.
While there isn’t a single consensus mechanism that dominates public blockchains, Proof-of-Work (PoW) and Proof-of-Stake (PoS) have undergone rigorous testing and have been successfully employed by the two largest cryptocurrency networks in terms of market capitalization (Bitcoin and Ethereum, respectively). Therefore, choosing either of these mechanisms for a new network would be prudent.
For blockchain networks that prioritize stringent security measures, opting for a PoW consensus may be the preferred route. On the other hand, networks aiming for scalability might lean towards implementing a PoS consensus.
In summary, selecting the best consensus mechanism depends on the individual requirements and goals of the blockchain network being developed. It is essential for developers to carefully consider the tradeoffs and characteristics of each consensus mechanism to make an informed decision that aligns with their network’s specific needs.
The Challenges of Blockchain Consensus Mechanisms
As mentioned earlier, there is no one-size-fits-all consensus mechanism for blockchain networks. Each chosen consensus mechanism comes with its own inherent problems in securing the network effectively.
For example, in a Proof-of-Work (PoW) network like Bitcoin, mining is expensive and often less rewarding for individual miners. This has led to mining becoming dominated by large corporations that can afford the necessary resources. When the network’s security relies solely on these corporations, the decentralized nature of Bitcoin is compromised.
Similarly, a Proof-of-Authority (PoA) consensus, with pre-selected validators, may pose risks to the overall health of a network. Since the validators are known entities, bad actors can directly target and manipulate them, undermining the integrity of the consensus.
The Proof-of-Stake (PoS) consensus, although less energy-intensive, has also faced criticism for potential centralization. Those with a greater amount of network tokens have more influence over the network, potentially consolidating power and reducing decentralization.
As you can see, each consensus mechanism presents unique challenges that need to be addressed. It is crucial for blockchain networks to carefully consider the implications of their chosen consensus mechanism and actively work towards mitigating its associated problems.
What Does the Future Hold for Blockchain Consensus Mechanisms?
The future of blockchain consensus mechanisms looks promising. We can expect new and flexible mechanisms that combine different approaches to overcome security limitations and improve scalability. The Proof-of-Activity consensus already includes hybrid features, and we can expect even more scalable mechanisms in the future.
Another important development will be the focus on eco-friendly consensus mechanisms. Concerns about the environmental impact of energy-intensive cryptocurrencies like Bitcoin will drive efforts to reduce energy consumption and promote sustainability.
In Conclusion,
- A blockchain network relies on a consensus mechanism to govern its operations effectively. Without a clearly defined consensus, the network cannot securely add new blocks or maintain a single decentralized source of truth.
- However, the existing consensus mechanisms, while functional, do not provide a perfect solution in terms of decentralization, scalability, and security. This problem is what is referred to as the blockchain trilemma.
- In the ever-evolving blockchain industry, developers and users are eager to know whether there will ever be consensus mechanisms that meet all the requirements without compromise. Addressing this question is the crucial next step in the evolution of consensus mechanisms.
- As blockchain technology continues to advance, it is expected that further research and innovation will lead to the development of more sophisticated consensus mechanisms that better cater to the needs of blockchain networks.
- The ultimate goal for the future of blockchain consensus mechanisms is to achieve a consensus mechanism that combines decentralization, scalability, and security without any tradeoffs.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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