In a centralized system, keeping accurate records, such as a database containing real estate transactions, lies with a single administrator. This administrator has all the power to add, delete, or modify the names of those involved in the transactions, like a benevolent dictator of the real estate world.
A decentralized system, on the other hand, is self-governing. It’s like a global village of people who don’t know each other, all working together to keep the system running smoothly. No centralized authority is needed to keep it running. Instead, it’s powered by the collective effort of all the participants around the world. They verify and validate all the transactions that take place.
It’s a fascinating way to keep the system secure and efficient. But to do that, a consensus mechanism is needed.
What’s a Consensus Mechanism?
Put your hands up in the air if you don’t know what consensus means. Okay, we see a few hands at the back. Let’s define consensus.
Say a group of five people decided to go to the movies together. All five members must agree on the same film before they can actually watch the movie. That’s consensus. It’s when a group of people (or entities) agree on a single outcome.
As for blockchains, given their ever-evolving status, they need an effective, instantaneous, dependable, and secure system to guarantee that all transactions taking place on the network are valid and all participants concur on the ledger’s state. Blockchain consensus mechanisms are used to ensure all nodes are in sync, and transactions are legit.
A consensus mechanism is a standardized process by which the nodes of a blockchain network come to a mutual agreement on the validity of a transaction, ensuring that the blockchain is accurate and up-to-date. The goal is to keep bad actors from cheating.
There are different types of consensus mechanisms, and each operates based on distinct principles.
The Infamous Proof of Work
Anybody who knows anything about blockchains heard about Bitcoin first. Okay, not all, but most. After all, it is the most popular blockchain in existence.
Bitcoin verifies transactions and adds them to the blockchain through a consensus mechanism called Proof of Work (PoW). In this method, sophisticated hardwares around the world compete to solve a complex math problem, and the first one to crack the code gets the chance to write the next block. In return for their service, they are rewarded with Bitcoins. This process is called mining — and unfortunately, it’s very energy intensive.
As good citizens of planet Earth, we are in a constant loop of anxiety about the state of the environment. NFTs and cryptocurrencies emerged as a target of major criticism in the last few years. There has been a growing focus on energy efficiency among newer blockchains, and development communities are also actively seeking ways to reduce their energy consumption.
The Greener Alternative: Proof of Stake
Many of you may have heard of “The Merge”. The Ethereum Merge in 2022 was an exciting software upgrade that switched the platform’s consensus mechanism from a Proof of Work (PoW) protocol to a Proof of Stake (PoS) system. The move has slashed Ethereum’s energy demands, making it 99.95% more energy-efficient.
PoS is a consensus mechanism where participants must lock up (or stake) a certain amount of their digital currency to be randomly chosen as a validator. This process is similar to a lottery, where the more coins you stake, the higher your chances of being selected.
Other Consensus Mechanisms
Blockchains are dominated by PoW and PoS algorithms, but many other consensus algorithms also exist.
Proof of Activity (PoA) — In a Proof of Activity system, mining begins with the same process as Proof of Work, where miners compete to solve a complex mathematical problem with powerful computing power. After the block is mined, the protocol shifts to resemble Proof of Stake, with the generated block header broadcasting to the network. Validators are then randomly chosen to sign off on the hash, verifying the new block.
As with PoS, the more cryptocurrency a validator holds, the better their chances of being selected. After all of the chosen validators have signed the block, it is added to the blockchain and can start to record transactions. The block rewards are then divided between the miner and the validators.
Proof of Authority (PoA) — Proof of Authority is distinct from Proof of Activity, even though they’re both known as PoA. Validators are chosen based on their reputation instead of staking coins. PoA requires participants to reveal their identities to validate blocks, unlike many blockchain protocols.
This mechanism is much less resource-intensive than some of its predecessors. It is also one of the more cost-effective options.
Proof of Capacity — In Proof of Capacity, validators store solutions to complex mathematical puzzles on digital storages such as hard disks. This process is known as plotting. Once the storage device is full of solutions for the puzzles, users can use it to generate blocks. Those who are quickest to find the solutions are given the opportunity to create a new block. Therefore, users with the most storage capacity will have the highest chance of producing a new block.
Final Thoughts
There are more consensus mechanisms we didn’t cover here. Each consensus algorithm has its own advantages and disadvantages. Nevertheless, despite the imperfections, all mechanisms we’ve looked at have provided the basis for many successful applications.
The consensus algorithm enables blockchains to validate and authenticate transactions without needing a third party. A key principle of blockchain is decentralization by eliminating central authorities, and consensus mechanisms allow this to happen.
