In blockchain technology, consensus mechanisms are the bedrock that allows protocol layer nodes to independently agree on the state of a ledger. These mechanisms are crucial for updating the chain’s state and maintaining its operational integrity without descending into chaos. In this post, we will guide you through the essence of consensus mechanisms and the most popular algorithms employed by blockchain networks worldwide. Specific terms will be explained in detail so be confident to dive in even if you’re a novice enthusiast!
What is a Consensus Mechanism?
You must be familiar with blockchain structure. Basically, a blockchain is a distributed ledger with several nodes, or blocks, linked together via cryptography. That’s why they’re called a chain. There is no centralised entity responsible for processing data uploaded to a blockchain. Therefore, when a transaction is ordered, it must receive approvals from all nodes (or, theoretically, at least a majority number of nodes), to be executed. But how do these nodes know when to approve a request? The answer is that they depend on a consensus mechanism.
A consensus mechanism is a protocol that ‘tells’ a blockchain’s nodes in which conditions to approve a request. The consensus mechanism is preprogrammed and is executed automatically when a new transaction is ordered. This way, users trust the technology, rather than an intermediary, for the integrity and security of a blockchain. Consequently, the consensus mechanism’s logic and implementation must be flawless. Otherwise, nodes will malfunction, creating chaos across the whole chain.
Types of Consensus Mechanism
Proof of Work (PoW)
PoW is one of the earliest forms of consensus algorithms. The mechanism was coined in the early 1990s, but not until 2009 was it employed for digital currencies by Satoshi Nakamoto for the Bitcoin network.
This type of consensus works through a process called “mining”, which is based on game theory. Miners must compete against each other in solving high-level puzzles to validate new nodes. Winners will receive the blockchain’s native coin as rewards for their dedication. Here is a simple illustration to explain how Proof of Work works:
In a PoW blockchain network, miners must invest time, resources, and computational effort to find the appropriate nonce value for the target. This is the reason why PoW is typically criticised for not being environmentally friendly as it demands great amounts of energy and financial resources.
Proof of Stake (PoS)
As its name suggests, this popular method of consensus revolves around a process called ‘staking’. In decentralised finance (DeFi), staking means locking up assets to get rewards over time. The PoS mechanism will ask validators to lock up their native assets in a smart contract to participate in the validation process. Basically, Proof of Stake works as follows:
- Token staking: Users who want to be a ‘node’ in the validation process must possess a minimum number of the blockchain’s native tokens. This number varies across different blockchain (e.g., Ethereum requires at least 32 ETH).
- Node selecting: A random number of nodes will be selected to participate in the consensus process. Chosen nodes must meet criteria about the number of tokens owned and must comply with stringent computing and security rules.
- Transaction validating: Chosen nodes verify transactions on the network. Once transactions are verified, nodes add these transactions into the newly created blocks.
- Block creating: After all nodes have reached a consensus about a transaction, they altogether create a new block. Staked tokens are now used to calculate the reward sharing ratio among nodes (you might want to think of dividends in a company)
- Blockchain updating: The new block will be updated on chain, and all nodes in the system will be notified.
- Rewards distributing: Nodes participating in the consensus process receive a portion of the transaction’s fees as their reward.
This procedure can be simplified using this illustration:
Moreover, though validating opportunities are rewarded at random to eligible nodes, the more and the longer tokens staked, the higher a node’s chances are to win the raffle. Please also note that if a node breaks the consensus, a portion, or all their staked tokens will be forfeited.
Prominent PoS platforms include Ethereum (ETH), Cardano (ADA), Solana (SOL), and Tezos (XTZ).
Delegated Proof of Stake (Dpos)
This mechanism can somehow be viewed as a democracy government :). Indeed, Delegated Proof of Stake is a variation of PoS with an electoral process. In DPoS, network participants cast votes via staking pools for their favoured delegate, those who are presumed to be best equipped to protect the network, typically based on their reputation. Validating privileges are then reserved and awarded at random only to an ‘elite’. However, a validator can be replaced at any time by anyone who is more trustworthy.
DPoS is used by Lisk (LSK), EOS.IO (EOS), Steem (STEEM), BitShares (BTS), and Ark (ARK).
Practical Byzantine Fault Tolerance (pBFT)
The Byzantine Generals Problem highlights the difficulty of achieving consensus in a network with potentially disloyal participants. The practical Byzantine Fault Tolerance (pBFT) consensus mechanism addresses this by ensuring security and reaching consensus when at least two-thirds of the nodes are honest. Prominent blockchains like Hyperledger Fabric utilise pBFT for its robust security features.
However, pBFT’s security is compromised if more than one-third of the nodes are dishonest. In pBFT, nodes are categorised into primary and secondary nodes. Primary nodes act as leaders, while secondary nodes serve as backups. The primary node rotates with each consensus round to maintain integrity and fairness in the network.
Proof of Weight
Six MIT researchers developed a consensus for the Algorand blockchain with the prime motivation of discovering an algorithm model that solves the Byzantine Generals’ Problem. They discovered a consensus algorithm based on weight fraction and named it Proof of Weight.
Each user in this mechanism carries a weight determined by how much they have in their accounts. Committee members are randomly selected among the users based on their weight. Of course, the probability of having one or many dishonest users is inevitable. Therefore, honest users must have at least 2/3 of the total money in the network to take control.
PoW might seem similar to PoS, but users in PoW only have to have tokens and do not need to stake them.
Algorand, Filecoin, and Chia are typical examples of blockchains that employ PoW.
Proof of Capacity/ Proof of Space (PoC/PoSpace)
In the Proof of Capacity or Proof of Space consensus mechanism, miners will ‘plot’ their hard drives to take part in transaction verification. In essence, miners will compute and store the solutions to the mining puzzles before the mining has even begun. There will be some solutions that run faster than others, and these will be the ones that are chosen in the consensus round. The more plots you produce, the more likely you are to win block rewards.
Proof of Authority (PoA)
Proof of Authority is a consensus algorithm most suitable for private or permissioned blockchain which relies on a number of pre-chosen validators. It is somewhat a reversed Delegated Proof of Stake.
In this system, a group of validators are pre-approved in a vetting process including a real-life identity check. After all validators are ascertained, they need to stake a certain amount of assets as a sign of commitment.
When a transaction is ordered, validators will vote to decide whether that transaction is eligible or not. If most of the committee agrees on the verification, the transaction is approved, and a new block is added to the chain. In PoA, validators wil bet their reputation and coins in the verification process. If they play foul, they will be disqualified forever.
PoA-based projects include VeChain (VET) and Ethereum Kovan testnet.
Proof of Importance (PoI)
PoI was introduced by NEM blockchain as an improvement for the Proof of Stake consensus mechanism. PoS choose validators based merely on their stakings. Proof of Importance goes beyond this. The algorithm rates a node based on 3 factors:
- How much is in an account?
- How often does the account transact with others within the protocol?
- What was the volume of each transaction?
These three questions answer how important a node will be in the blockchain. If a node is more important than others, it has more chances to be chosen as a validator.
Proof of Burn (PoB)
Another more sustainable alternative to PoW is the Proof of Burn (PoB), in which miners gain power to mine a block by ‘burning’ a predetermined number of tokens in a verifiable manner. The more coins a miner burns, the greater their chances of being selected.
The word ‘burn’ simply means destroy. When you ‘burn’ coins, you send them to an ‘eater address’ where they cannot be recovered. Unlike staking, coins in the burning process are irretrievable. Users must sacrifice short-term wealth to gain the lifetime privilege of being a validator.
Proof of History (PoH)
Proof of History is a major factor in Solana’s outstanding throughput. The mechanism integrates time elements into a blockchain’s protocol. During the verification process timestamps are embedded into the hash of each generated block, creating a continuous and chronological record of a network’s transaction history. It is noteworthy that this method is not a standalone protocol but is used in conjunction with another consensus mechanism. Typically, PoH operates alongside a Proof of Work or Proof of Stake system as part of a hybrid consensus algorithm.
