What Are Consensus Algorithms in Blockchain? | OWNRWallet

The ultimate guide to blockchain consensus algorithms: what they are, how they prevent fraud and unauthorized transactions, and what are the most widely used mechanisms.

Consensus Algorithms in Blockchain

Since blockchain networks are intended to process numerous transactions in a short period of time, implementing a consensus protocol is a pivotal cornerstone for the stability and security of the infrastructure. These varied approaches to achieving agreement within a blockchain ecosystem play a fundamental role in verifying transactions and shaping the decentralized landscape. This article delves into the peculiarities of different consensus mechanisms, explaining how they were created, how different types of algorithms work, and why they are so important for maintaining the integrity of a decentralized network.

What Is a Consensus Mechanism?

In blockchain systems, consensus algorithms are software that facilitates overall agreement over the ledger's current state. They are often applied in a network with many users and operations. Using consensus mechanisms benefits distributed ledgers, blockchains, and cryptocurrencies, since they can take the place of human auditors and verifiers, who act significantly slower.

For instance, the Proof-of-Work (PoW) blockchain consensus used by the Bitcoin blockchain demands computing power to solve an encrypted riddle known as the hash. The Bitcoin Proof-of-Work protocol demands that when the hash is cracked by a single miner (or a group of miners working together), each node on the network validates the data that has been modified by checking:

• The data framework
• The Block header
• The timestamp of the block
• The block size
• The first transaction

The transaction verification checklist is then finished. This kind of checking takes much less time than manual work would, and is significantly faster than mining, which is the act of solving the hash.

History of Consensus Algorithms

Shared databases were developed in the 1980s and 1990s as computers and networks started gaining traction, allowing several users to access the data they hosted. The majority featured a central database with permissions that users could access from various devices. As a result of this configuration, centralized networks with administrators who assigned user privileges and upheld the confidentiality of the data were created.

Due to the fact that they stored data and were networked so that several people in various places could access them, these shared databases came to be known as distributed ledger technology. Preventing data manipulation and illegal access, whether intentional or not, was among the most pressing problems that needed to be solved. 

Because of this requirement, distributed autonomous consensus was developed. It leveraged programs on a network that used cryptographic methods to agree on the state of a database. A hash — a lengthy string of alphanumeric numbers — was created using encryption techniques to obtain agreement, and this hash was then validated by programs operating on the network. The programs were made to compare hashes to make sure they matched, since a hash only changes if the data entered into the hashing process is altered.

How Do Consensus Algorithms Work?

When a request is compared against its records, nodes input data from an ongoing transaction and then report back with an approval or disapproval state. For example, an immutable ledger may reject a transaction by a person who wants to spend coins that have already been accounted for. Users that do not adhere to the consensus algorithm are frequently banned from the network.

A node would have to ask for a network-wide recall if it wanted to contest the record. If a transaction is approved by more than two thirds of the peer nodes, it is confirmed and added to the blockchain permanently.

Due to the above-mentioned function, a consensus mechanism is a perfect fit for decentralized finance. Most institutions, including banks, have a basic centralized architecture that relies on a decision-making authority to accept or deny transactions between two parties. Since cryptocurrencies often run on decentralized networks, they do not have this option. Instead, they feature blockchain consensus processes to validate live copies of transaction history across the entire network. This maintains clarity on whether a transaction should be accepted or rejected throughout the blockchain.

Types of Consensus Algorithms

Consensus mechanisms differ by the way parties in the network reach agreement. To be more precise, they specify what nodes need to do in exchange for crypto rewards. Some require users to provide computational power, while others need to keep a certain amount of native coins. Let’s figure out the difference.

Proof of Work

The core concept behind PoW blockchain consensus is to use nodes to quickly make many guesses and solve challenging mathematical puzzles. Miners or validators, also known as participant nodes, are required to demonstrate that the work they have completed and submitted gives them the ability to add new transactions to cryptocurrency blockchains based on the PoW consensus algorithm. They need to locate a certain block's cryptographic hash in order to solve a challenging mathematical puzzle.

This is accomplished by continually processing data from a block header through a cryptographic hash function. Each time this is done, the input data is slightly altered by adding an arbitrary number called a nonce. 

Delayed Proof of Work

DPoW is a modification of the PoW consensus algorithm. The blockchain network periodically captures pictures of itself, which are then notarized and recorded into a block on the network. This procedure aids in building a blockchain backup of the entire system.

Since blockchain consensus is not reached on new blocks using DPoW, it is technically not a consensus algorithm. Instead, it's a security feature that prevents blockchains from being vulnerable to a 51% assault, in which a single party might control the majority of the network's hash rate and seriously disrupt operations. 

Proof of Stake

One of the major alternatives to PoW blockchain consensus is called Proof of Stake (PoS). In contrast to PoW, it requires less specialized hardware or software resources because it doesn't necessitate solving challenging computational problems to mine cryptocurrency. Instead, cryptocurrency validators stake or lock away a portion of their currencies in wallets. If they come upon a block that can be put to the blockchain, they validate it afterwards.

Based on the new blocks that are uploaded to the blockchain, validators receive rewards or see an increase in their stake. This consensus algorithm uses less processing power than PoW since it is incentive-based.

Delegated Proof of Stake

One type of PoS that is considered to be more effective and democratic is Delegated Proof of Stake (DPoS). Unline other consensus algorithms, this consensus method relies on delegates or witnesses casting votes for their preferred validators in order to reach agreement, and produce and validate blocks. Delegates support the blockchain network's integrity, dependability, and transparency in addition to verifying transactions.

Each delegate has a number of votes corresponding to the amount of coins they possess. Transaction fees, which are distributed to their respective electorates, are their compensation for their labor.

The reputation of the delegates affects the voting process and, consequently, the consensus mechanism of the DPoS algorithm. Its ability to handle more transactions per second and offer quicker confirmation periods makes it a more scalable method.

Proof of Authority

The power-hungry and less scalable Proof of Work (PoW) consensus protocol can be replaced by the more effective and scalable Proof of Authority (PoA) consensus mechanism. Additionally, the PoA method is more secure than PoS, since block validators stake their names and reputations rather than money.

In essence, a small number of validating nodes safeguard a PoA-based blockchain network. To validate blocks and transactions, these nodes — trusted parties that have been pre-approved and randomly selected — are leveraged. These players serve as system moderators and aid in the development of a PoW substitute that is more scalable.

Proof of Burn

The PoB algorithm is currently being evaluated as a feasible and long-lasting replacement for PoW and PoS. PoB is similar to PoW, however it uses considerably less processing power. This is due to the fact that the blockchain's block validation procedure doesn't need any hardware or processing power. Instead, to achieve consensus, miners "burn" or place currency in the network.

Coins are sent to a location from where they cannot be picked up, making them ineligible and worthless. This proves the miners' dedication to the network and grants them the authority to create new currencies and approve brand-new network transactions. Burning more coins improves a miner's mining power, which raises the likelihood that they will be the next block validator.

Hybrid PoW/PoS consensus

The drawbacks of PoW and PoS consensus algorithms are balanced out by a hybrid PoW/PoS technique. To begin, new blocks are added to the blockchain by PoW miners. The PoS miners decide to accept or reject the blocks when they are formed. They stake some of their tokens as is done in the PoS algorithm during the procedure.

But unlike PoS, this hybrid algorithm doesn't look at the overall number of votes. Instead, five votes are picked at random to assess if the new block is effective. A blockchain consensus is obtained and the block is uploaded to the blockchain if three out of five votes are in favor. 60% of the block reward scheme goes to PoW miners and 30% to PoS miners, with the remaining 10% going toward system improvement.

Why Are Consensus Mechanisms Important in Blockchain?

Consensus mechanisms act as reward systems for right conduct in addition to their technical use as a failsafe for blockchains or globally dispersed networks and systems. They not only act as a decentralized fail-safe to keep a system operational, but they also foster trust in chaotic systems.

A consensus protocol limits double spending when a digital token is attempted to be used more than once — either on purpose, as in fraud, or accidentally, maybe as a result of a system flaw. Without such an agreement, users would be able to spend money elsewhere, then use it again before the original transaction is settled. 

Future of Consensus Mechanisms

Consensus methods are essential in distributed ledger networks used by businesses and are employed by all cryptocurrencies.

Although the future of cryptocurrency is uncertain and unstable, consensus methods are still a crucial component of new technologies. They protect network security and the integrity of data, and prevent individuals with malicious intentions from accessing distributed ledgers.

FAQ

What algorithms does blockchain use?

Bitcoin uses Proof of Work, and the Ethereum blockchain now leverages Proof of Stake after the Merge. Proof of Authority is used by Kovan (Ethereum testnet), VeChainThor, and the XinFin Network. The Proof of Burn consensus mechanism is not as widely adopted — it is used by the Slimcoin network.

Which Consensus Mechanism Is Best?

It depends on the specific use case and requirements. PoW is widely adopted because Bitcoin was the first cryptocurrency, but alternatives like PoS and PoA offer scalability and energy efficiency advantages.

What Is an Example of a Consensus Mechanism?

Proof of Work is one of the most widely used mechanisms. It requires network participants to solve computational puzzles — the first node to do that gets rewarded for mining a block. PoS is another mechanism that operates in a different way: validators need to stake a certain amount of coins. 

What Are the Types of Consensus Mechanisms?

There are several types of consensus mechanisms used in blockchain networks, including Proof of Work (PoW), Proof of Stake (PoS), Delegated Proof of Stake (DPoS), Practical Byzantine Fault Tolerance (PBFT), and many others. Each mechanism has its own unique way to validate transactions.

DISCLAIMER: None of the authors, contributors, administrators, or editors connected to OWNR Wallet encourage readers to invest in Litecoin or Ethereum without doing proper research on their own. This article is purely for educational purposes only.