Whether you are just entering the cryptocurrency universe for the first time, or if you are a seasoned professional in the business, there are always new terms, phrases, and concepts budding from this ever-changing and evolving space. One such concept is that of the consensus blockchain/consensus mechanisms that work.
Understanding this concept is key to understanding just how blockchains work. Let’s break down what these mechanisms are and how they help to form the systems that make crypto possible.
What Is a Blockchain?
To understand how a consensus mechanism within a blockchain operates, it is ideal to first understand a blockchain. This technology is what the crypto space is based on entirely.
A blockchain, in its simplest terms, is a distributed, public ledger. It is like a virtual list of the comings and goings of all the transactions on the platform. A blockchain is a series of blocks of data, chain-linked together.
The system has a few key features, which make the space work.
Firstly, the blockchain offers the platform transparency. Because the ledger is distributed, it is able to be viewed by all. Any user can view the transactions, legitimizing and making clear who was involved and what amount or service was transferred.
Unlike a typical database of information held by a corporation on a centralized server, this access allows all users the ability to keep tabs on the chain and ensure the information.
Another key component of the blockchain is its security. For one, the blocks in the chain are immutable. Once they are created, no user can change the information stored inside. Transactions are kept secure because no one can alter this information.
Partially, there is the security offered in the structure of a blockchain itself. By having a peer-to-peer network operating the protocol of the operations, there is by nature a built-in checks and balances style of security. Peers check up on one another and can see all recorded transactions, making it more secure simply by design.
Additionally, the security of the blockchain’s immutability ensures that the data is locked in place. It cannot be changed. No single authority has the ability to do so (nor does any group of users). Instead, a block is unchangeable.
The decentralization of the blockchain can be viewed in two main ways. Firstly, the blockchain is decentralized by design, allowing there not to be one, centralized server or location, but instead, a series of devices spread all over the globe.
With a peer-to-peer network, another benefit is built-in allowing the system to be decentralized in location. There is no server behind closed doors, controlled by “powers-that-be.” Instead, the information is secured across users.
Secondly, the decentralization of the blockchain is also viewed as a concept. There is a value in the industry to evade “the man,” and take the power back (power to the people, right?).
The design of the blockchain supports this concept. It allows others to create, buy, sell, trade, and converse in a space not regulated by a central authority or power. This tech creates the opportunity to solve a societal issue: access.
In its simplest terms, the chain can create the ability for peers to allow transactions amongst one another, with the regulation of a government or corporation.
The blockchain, as previously noted, is made up of blocks of data “chained” together. This database of information is a wonderful way to provide many of the key features listed above. But, how does it work from a technical standpoint?
The blocks are virtual “containers” of information. They are filled with data, and once full, are locked into place. The locked block takes its place in the chain, linked to all previous blocks of data that came before it.
These blocks are chained in chronological order but are linked together via cryptography. The way in which this cryptography occurs will get us to our main point of consensus mechanisms.
Cryptography, itself, is the study and practice of sending secure, encrypted messages between two or more parties. It is needed in the blockchain by nature of its peer-to-peer sharing and record keeping.
In terms of cryptocurrency, cryptography allows such digital currency transactions to be pseudonymous, and secure, without a “trust,” meaning with no bank or other intermediary power required.
In other words, cryptography makes the blockchain possible. But how is it secured? How is it encrypted? And how do these processes come into play with crypto and the blockchain?
It is clear that, in order for a blockchain to operate, especially in terms of cryptocurrency, there must be a level of trust established. No one wants to trade, willy-nilly, without some security, backing, or trust in the process.
A consensus mechanism refers to any number of methods used to achieve that. For an agreement, trust, and/or security across a decentralized computer network to be established, a mechanism must be put into place to make it happen.
Types of Consensus Mechanisms
To achieve the same goal, to build trust and security in the blockchain, there are many ways to create cryptography through consensus mechanisms. Some of the styles currently being operated include:
- Proof of Work
- Proof of Stake
- Delegated Proof of Stake
- Proof of Capacity
- Proof of Elapsed Time
- Proof of Identity
- Proof of Authority
- Proof of Activity
Generally speaking, the consensus mechanism is a way in which users can prove their value or worth to the platform. It is the backing they have to show they are willing, able, and qualified to become a peer on the blockchain.
You could look at the consensus mechanism as collateral of sorts. If you want to get a loan, you may put your house up as collateral. By showing you have an asset, your home, you may be granted a loan of other monies from a bank because you have proven that you are worth trusting.
In terms of a blockchain, that “proof” can come about in many ways. Users on a blockchain need to know that other users should be permitted. Without a central authority, the peers must “screen” one another, so to speak, via other methods. Enter the consensus mechanism.
Clearly the blockchain, as a distributed decentralized network, provides strong features that make the crypto world go round: immutability, privacy, security, transparency.
However, with no central authority present to validate and verify the transactions on the platform, there is a need to verify them. If every transaction on the blockchain is to be completely secured and verified, there must be some “test” in place to confirm it.
This “confirmation” is made possible only because of the presence of the consensus mechanism. So, how does it work?
A consensus algorithm is a process during which all members of the blockchain come to an agreement. All users must join with peers in the blockchain to decide how this distributed ledger will operate.
Consensus algorithms give blockchain reliability and establish trust between unknown peers, which can be hard to do in a distributed computing environment.
Essentially, the consensus protocol makes sure that every new block that is added to the blockchain is the one and only version of the truth, which is agreed by all the nodes in a distributed and decentralized computing network.
A consensus algorithm is a mechanism used to establish an agreement on a single data value across distributed processes or systems. In other words, it is the agreed-upon method of how the blockchain will operate.
Additionally, the consensus algorithm allows for an efficient, fair, real-time, functional, reliable, and secure mechanism to ensure that all the transactions occurring on the network are genuine.
Without such algorithms in place, someone could double-transact, for example, use Dollar A1 over and over “paying” for goods or services, but without losing funds. To prevent this, steps in tech must take over to be sure data in the blockchain is correct.
Blockchain Consensus Mechanisms in Crypto
The two most popular types of consensus mechanisms used today in cryptocurrency include the Proof of Work (PoW) and Proof of Stake (PoS). These are used by the most popular forms of crypto and currently dominate the blockchain space.
Proof of Work (PoW)
Proof of work (PoW) is a common consensus algorithm used by some of the most popular cryptocurrency networks out there. Crypto such as bitcoin and litecoin operate on a PoW system.
PoW requires a participant node to “prove” that the work done and submitted by them qualifies them to receive the right to add new transactions to the blockchain. In other words, typically by solving complicated computations and contributing massive amounts of computational power, a user can be included in a blockchain network by doing “labor.” (We can’t per se call it manual labor, because, let’s face it, your computer is probably doing the hard parts, right?)
However, this whole mining mechanism of bitcoin requires high energy consumption and a longer processing time. Solving those complex computations is not easy, and thusly the PoW method often is criticized for its massive amounts of energy consumption.
Not only is the proof of work system not very good for the Earth, but it is also costly for the user. Actual power is required, not just from the humans operating the systems, but the computers themselves to be plugged in. This computational power is a price some users find too high to pay, both financially, manually, and environmentally.
For many, it is too high a cost. However, there are alternatives, of course.
Proof of Stake (PoS)
The Proof of Stake (PoS) is another common consensus algorithm method used in cryptocurrency blockchains. Ironically, it is one that evolved as a low-cost, low-energy consuming alternative to the proof of work algorithm.
The proof of stake system requires users to put aside coins in order to be considered for a chance at mining. Users post a “bet” of sorts to have a chance at being chosen at random. Those that stake coins have a shot at becoming the validator.
The system is not without flaws itself, though, and some consider the trade-off not worth the potential savings. The proof of stake consensus mechanism comes with the drawback, for some, in that it incentivizes crypto coin hoarding instead of spending.
Others view the system as a “pay to play,” which limits access. In other words, you have to have money to make money in this style of blockchain. Users may have a harder time starting up in this type of blockchain network without the funds to stake upfront.
Delegated Proof of Stake
Alternatively, to the common proof of stake system, a Delegated Proof of Stake blockchain consensus protocol may be chosen by some. This mechanism allows for users to “vote” in a sense for particular delegates. Those delegates would then be the parties to create new blocks.
In a virtual sense, this is a blockchain network operational protocol that has users picking “representatives” much like a democratic election. These consensus protocols are preferred by those with money, but not the bandwidth, devices, energy, or interest in doing the leg work. It may work best on those that simply want to “invest” and have others do the work behind the scenes, so to speak.
Other Consensus Mechanisms
As blockchain networks consider unique consensus protocols, there are plenty of options on the table. And, as the crypto space is always changing, more may come into play in the future.
Some of the options that take the consensus mechanism beyond proof of work or proof of stake include:
- Proof of Capacity
This consensus mechanism stores solutions to complex mathematical puzzles stored in hard disks. These disks are used to create new blocks of data. This type of blockchain network allows for the sharing of memory space of the contributing nodes on the blockchain network.
The more memory, or hard disk space a node has, the more rights it is granted for maintaining the public ledger. In other words, the stronger your systems, the more “power” you have in the blockchain to create new blocks.
- Proof of Elapsed Time
This type of consensus mechanism is rather like the real-life version of waiting in line. The blockchain operating in this style takes into consideration the length of time a user has been online. Those waiting longest have the opportunity to create new blocks.
This mechanism, in a way, is also a way of rather rewarding “seniority” or giving the most opportunity to those on the longest. Sometimes also called a Proof of History (which was developed by the Solana Project) aims to create a consensus mechanism that does not consume so many resources.
- Proof of Identity
In the long list of selecting consensus mechanisms, another option is the Proof of Identity. This style differs from other consensus algorithms as it requires cryptographic evidence of a user’s private key. That key is cryptographically is then attached to each specific transaction.
In other words, this style relies more on the identification of a user and thusly is often not among the most common consensus mechanisms. Efforts to keep users anonymous and unidentified are typically far preferred. And, while a cryptographically stored key or name may keep a level of anonymity, it is not a consensus process often chosen.
- Proof of Activity
This method combines proof of work with proof of stake values, creating a hybrid of the two. The Decred blockchain, for example, operates in this way.
In a Proof of Activity, the blockchain technology relies on features of both PoW and PoS, as the mining process begins like a PoW system, but after a new block has been successfully mined, the system switches to resemble more of a PoS system.
- Proof of Authority
In another step “up” from the Proof of Identity, the consensus mechanism puts up identities of the validator’s stake. This blockchain consensus mechanism is one that delivers comparatively fast transactions through a consensus mechanism based on identity as the stake. The most notable platform using the method is called VeChain.
- Proof of Burn
This is another that requires those making transactions to send small amounts of cryptocurrency to inaccessible wallet addresses, in effect “burning” them out of existence. By burning the coins of potential miners, the miner earns the right to do so.
The Use of Consensus Mechanisms
Clearly, consensus mechanisms are required in order for blockchains to operate. Which method a blockchain selects is up to its users. A group of peers much achieve consensus in order to put the method into place. (Go figure, this is how the naming is created!)
The entire network does not need to agree, but in order to participate, one must be selected. Blocks created must abide by these rules.
Once a blockchain consensus is decided, it cannot be changed on that blockchain. A new block must be created in the format designated by the blockchain consensus mechanisms. The entire system relies on this general agreement among users and is necessary for the tech to operate.
Choices for Blockchain Developers
Clearly, the world of blockchain developers has a plethora of choices to make when creating a system. Ironically, in the end, by the design of the tech itself, the choice will ultimately be left to its users.
Developers can create a concept, and attempt to find the consensus number of users to put it into action. Alternatively, token holders can come together and decide upon consensus mechanisms as a group.