Consensus Mechanisms: The Short and Sweet Guide
Blockchains are distributed databases. You cannot change existing data, but you can add new entries. While you’re reading, there are 10,000s of nodes recording transactions for their own database versions.
But there can only be one chain. Otherwise, it runs into issues like double-spending or payment fraud. Let’s suppose all these versions are valid.
Which one should become the new official blockchain?
There’s no right answer. You can’t solve this dilemma without a consensus mechanism. And because of these methods, trustless finance is possible.
What Is Consensus?
How do you guarantee the general agreement of the network? How much should it cost to reach a consensus? How long should it take?
A consensus mechanism is a system designed to standardize block validation, save time, and prevent fraud. These set the rules to make decisions while managing disagreement. Blockchains use different mechanisms based on their features and scalability.
Cryptocurrency consensus means that +51% of nodes agree on decisions. The next challenge is to make this 51% as decentralized and tamperproof as possible.
What Are the Different Types of Consensus Mechanisms?
Blockchains aren’t black and white. Consensus mechanisms show the different ways users can agree on block validations. Networks can choose one or another, create a hybrid, swap models (like ETH2.0), or even invent their own.
The most common consensus protocol types are:
- Proof of work as the most secure. There are 100,000s of devices competing in processing power to win block rewards. The algorithm chooses whoever validates the transaction first.
- Proof of stake as the most energy-efficient. Validators deposit tokens on the network to increase their chance of winning blocks. Even though the algorithm is random, large validators can affect probability.
- Delegated Proof of Stake as the fastest. It’s an upgraded PoS model that allows nodes to vote on other devices (“delegates”) to validate. Validators with large stakes, 24h availability, and good history will be voted more often.
There are more consensus models you probably didn’t know:
- Proof of history (Solana)
- Proof of capacity (Burstcoin)
- Proof of elapsed time (Hyperledger Sawtooth)
- Proof of activity (Decred)
- Byzantine Fault Tolerance (Hyperledger Fabric)
- Proof of burn (Slimcoin)
- Proof of authority (VeChain)
What Is Proof-Of-Work?
Proof of work is a consensus algorithm that relies on computational power (CPU, GPU). Validators need powerful devices to solve a mathematical puzzle via trial and error. Whoever finds the approximate answer will win block rewards and update the blockchain.
It’s called proof-of-work because it takes more and more work to achieve this. PoW coins have limited supplies, and as there are fewer coins left to “mine,” the puzzle becomes exponentially more complex. It takes, at best, millions of attempts per second to be the first to solve it.
Once there are no coins left, the “miners” who run these devices would get rewards from network fees instead.
What Networks Are Proof-Of-Work?
There are 100s of PoW blockchains if we include all fork coins deriving from Bitcoin (also proof-of-work). Excluding those, there might be only around a dozen independent blockchains:
The most known PoW fork blockchains are:
What Is Proof-Of-Stake?
Proof of stake is a consensus protocol involving chance, time, and collaterals (stakes) to make decisions. To become a block validator, you need to lock a minimum token amount (e.g., 32 ETH) on the blockchain. Validators need to responsibly verify blocks, otherwise, their tokens are at risk.
As a reward, they receive extra tokens (APY) after unstaking. Which is generally ~10% and increases with longer hold periods. Depending on the blockchain, it’s possible to unstake without lock periods and even maintain rewards earned until then.
Validators are often DeFi service providers. They distribute their rewards with users to increase total-value-locked (AKA delegated staking).
Note: Unlike PoW, all PoS coins already exist in a Treasury Wallet used by smart contracts.
What Blockchains Are Proof-Of-Stake?
There are at least 312 coins using some variety of proof-of-stake . The most popular coins that use simple proof of stake include:
The following projects use Delegated Proof of Stake:
- Binance Coin
- Near Protocol
The following projects use Delegated Proof of Stake:
- EOS IO
There are more PoS variations used by major coins such as Polkadot, Harmony One, Waves, Tezos, and Iris Network.
What’s The Best Consensus Model?
The ideal consensus model should be energy-efficient, fast, and generally accepted (+90% agreement). As the best method, this mechanism would soon start getting more nodes and validators. This means it should be scalable to maintain performance for 100,000s of users.
Ethereum and Bitcoin have been upgrading for nearly a decade, and we’re still not close to the perfect consensus model. Proof of stake and its variations seem to be the most effective so far. That’s not going to change anytime soon, which makes staking the best way to hold crypto.
Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Originally published at https://learn.liquidloans.io on September 14, 2022.