For the fifth time, the words “consensus mechanism” are recycled. It’s time to shift gears because we will focus on the many types of consensus mechanisms available. With that being said, let’s move forward and see how best we can achieve our objective.
Why is consensus important at all?
In the case of a large group that is passionate about a topic, consensus works like this; You are at a pizza party with some of your friends and you need to pick which toppings to order. Some people advocate for the addition of pineapple, others would like to add pepperoni, and others wish to add mushrooms. Now how do you reach a decision? You take a vote, correct? There is consensus at work – that is, groups need to agree about a situation without eliminating each other with a food fight.
Most people in the blockchain arena must know that in terms of two or more parties reaching an agreement, there are consensus mechanisms. This means that there is a voting process responsible for determining the validity and authenticity of a certain transaction and how about a fake one. Blockchains without them are like a pizza party where everyone creates individual orders for two or more items and general disarray follows. Hence, let’s take a look into the astounding and amusing realm of consensus mechanisms in a blockchain that aims to resolve issues in the cryptocurrency domain.
The Problem Blockchain Solves: The Need for Trust in a Trustless World
Previously, sending money required the validation of a middleman like a bank. But you may not trust the bank. What if the bank also happens to take a hefty sum from you as a fee for using their services?
Blockchain technology eliminates the middleman’s role by forming a decentralized network that allows everyone to verify transactions. The primary issue, however, is how to create multiple strangers on the internet to agree on what is true. These rules are called consensus mechanisms; they are the set of rules that facilitate fair play among all users.
Types of Consensus Mechanisms: The Blockchain Buffet
Proof of Work (PoW): The OG of Blockchain
Imagine a group of miners, who are software operators and not guys with pickaxes, battling each other to crack the code of a complicated puzzle. The winner of the battle is awarded some crypto for being the one to solve the puzzle and gets to add a block of transactions to the blockchain. This method is called Proof of Work, while the cornerstone consensus mechanism behind Bitcoin.
Imagine a Sudoku competition and everyone is racing to complete the puzzle as fast as possible. But, it is the fastest solver who receives the prize at the end. The only issue here is that it is very energy-consuming. It is the kind of energy that could power a small country, or in other words, it is the industry standard. Due to this problematic issue, PoW has its critics, but PoW undoubtedly remains the most secure option available.
Used by: Bitcoin, Ethereum (before ETH 2.0), Litecoin
Proof of Stake (PoS): The More Environmentally Friendly Version
If a Sudoku competition serves as an example of PoW, a lottery is a perfect match for Proof of Stake. Validators, or the PoS version of miners, are randomly selected to solve the puzzles instead of randomly generating winners. Instead, there is the option to stake a specific amount of their coins as collateral to increase the chances of being selected. When the validators stake additional coins, they are more likely to get selected when validating a block.
It is similar to buying champion raffle tickets. The greater the number of tickets purchased, the better the odds of winning. That is why it is no surprise that PoS is a more preferred option: Ethereum made the switch in 2022. It is also a good way to dominate the market and retain wealth.
Used by: Ethereum (after ETH 2.0), Cardano, Solana
Delegated Proof of Stake (DPoS): Think About Democracy but For Blockchains
It’s like a combination of a voting system and PoS. When you stake your crypto, instead of doing it individually, you elect delegates who perform this function for you. These delegates compete with others on your behalf, like a student president in blockchains.
Think of a potluck dinner, you could simply elect a few other guests to prepare goodies for the entire crowd. It’s more convenient, but you cross your fingers that the people selected to cook know their way around the kitchen.
Used by: EOS, TRON, Steem
Proof of Authority (PoA): Trust Me, I’m in Charge
Pre-approved validators and users can verify transactions without having to mine or stake. This means only trustworthy people can verify them, which makes it a little quicker and more certain.
PoA operates with eminent domain similar to the bouncer at a club. Only a select few, who are considered to be trustworthy validators, may place blocks on the blockchain. It runs smoothly and quickly, but it is also centralized. PoA is fundamentally “I trust these guys to make sure things work out.”
Used by: VeChain, Binance Smart Chain (BSC for some operations), TomoChain
Proof of Burn (PoB): Sacrificing for the Greater Good
Burning money sounds ridiculous, right? Here is something to ponder: what if one had to destroy some of their crypto in order to prove the worthiness of validating transactions? That’s PoB for you. By burning coins, users get the privilege to mine new blocks; aka validating transactions.
Think of a bidding war where the use of shredded dollar bills as currency determines how serious you are. In this case, the greater the number you burn, the better your chance of winning.
Reducing valuable assets may feel illogical, but it is notable that inflation is kept in check.
Used by: Slimcoin, Counterparty
Proof of Elapsed Time (PoET): Taking Turns, Fair and Square
Imagine a lottery where instead of solving puzzles or making a stake with coins, participants randomly “wait” an allotted amount of time. Picture it as a timer, each node naps for a random duration of time and the node whose timer gets activated first is allowed to add the next block onto the blockchain.
This is how it operates: for each node, a random waiting time is generated. Once it is generated, he goes to sleep for that amount of time. The fastest node wakes up first and gets the chance to add a new block. Once the block is added, they announce it to the rest of the network, and the procedure restarts. It’s like a contest where everyone has an equal opportunity to win, and the fastest sleeper wins!
Used by: Hyperledger Sawtooth
Proof of Capacity (PoC): Hard Drive Hoarders Rejoice
Miners are able to rejoice with this consensus mechanism because it permits them to use their hard drive space rather than their computer’s processing power for mining cryptocurrency.
This is how it operates: a miner gathers a database of possible solutions to the mining puzzle and save them to their hard drives. When it is time to mine, all they need to do is determine whether any of the stored solutions match the hash value. The greater the storage capacity, the more solutions that can be saved increasing the chances of winning the mining reward.
Think of it like a lottery, the more tickets (or solutions) you have the higher your chances are of winning. The cool part? You can reuse your stored solutions over and over. Which means you don’t have to keep recalculating them.
Used by: Signum, Chia, SpaceMint
Proof of SpaceTime (PoST): Hard Drive Real Estate
This consensus mechanism proves that someone has stored data over a specific time. Imagine a storage receipt. Unlike Proof of Capacity which only shows you have space, PoST shows you have actually been using that space. It is no surprise that it is common in systems like Filecoin, where the storage miners get paid for the safekeeping and availability of data.
Here’s how it works. Miners save data and from time to time prove that they are still in possession of that data by responding to checks that are issued randomly. If they succeed, they are compensated. If they do not, then tough luck it is. This system ensures honesty because cheating does not give cash to spenders – they have to store the data over time, not just say that they can.
In summary, PoST is a time-stamped storage contract. Like all contracts, it ensures network security by making sure miners are doing their job over a long time.
Used by: Chia Network, Filecoin
Proof of History (PoH): Timestamping for Speed
This consensus method has an innovative approach to integrating time into the blockchain. Rather than waiting for all nodes to agree on a certain time (which is not an efficient process), PoH uses ‘time stamps,’ fabricated with the aid of Verifiable Delay Functions (VDF). These stamps can be blindly depended upon, creating definite records of actions taken. Picture a stopwatch controlled uniquely by a single individual. No one can deceitfully skip forward; each action follows and is bound by a certain timeframe.
PoH further improves the speed and efficiency of the blockchain, as nodes struggle less with verifying timestamps and rather focus on other vital aspects of the processes.
Used by: Solana
Conclusion
Nearly every technology has its core principles, and for blockchain technology, it’s the consensus mechanisms. The concept of consensus mechanisms is complex, but thinking about them as different ways to agree on facts makes them much simpler. Whether it be solving complex problems, crypto staking, or burning digital assets, these mechanisms keep the blockchains functional.
As previously mentioned, each blockchain has different characteristics which need to be fulfilled. Bitcoin sticks by the PoW system for security while Ethereum shifted to PoS as it proved to be more efficient. No blockchain is limited to a single consensus mechanism. A lot of blockchains employ a hybrid approach to achieve the optimal combination of speed, security, and decentralization.
By understanding how blockchains come to an agreement on transactions, you have become one step closer to mastering the concept of cryptocurrency! 🚀
Would you like me to focus on a specific consensus mechanism? Put it in the discussion and I will make sure to get back to you!
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