Blog

Popular Blockchain Consensus Mechanisms Used By Cryptocurrencies Explained

(Source: KPMG)

 

Blockchain consensus mechanisms are one of the core concepts that enable the technology to add value to its users. It’s what allows networks to depend on a decentralized network of validators for transaction confirmation and processing, rather than a centralized authority.

To understand what a consensus mechanism is, it is important to keep in mind that a Blockchain is essentially a distributed ledger (or database) of information.  There’s no central management making the decisions on what, where, when or how information gets stored on the network.

This is by design and the only way new information (i.e. payments, data, records, etc.) can be added to the chain is if the decentralized nodes (computers or servers) on the network agree to the validity of specific transactions.

How this agreement is reached will depend on the consensus mechanism employed by a particular Blockchain.

Proof of Work (PoW)

Example of use: Bitcoin (BTC)

As it’s the original consensus protocol is also the most familiar to people. With PoW, miners or nodes compete to add the next block of information to the network by solving complicated cryptographic algorithms.

In order to do this, participants need to use highly-powerful, specialized computer hardware known as ASICs (Application-specific integrated circuit chips).

Once the puzzle is solved and the consensus reached, the miner receives newly minted Bitcoins as compensation. Although revolutionary, there are a couple of problems with the process.

The first is that it’s an incredibly energy intensive process. One Bitcoin transaction can power 10 average American homes for an entire day and the whole network consumes almost the same amount of electricity as Morocco.

 

 The second is that the Bitcoin Blockchain doesn’t scale very well and it takes about 10 minutes for transactions to be confirmed.

Proof of Stake (PoS)

Example of use: Dash (DASH)

PoS was born out of the need to cut down on the high mining costs that the PoW consensus mechanism requires.

With PoS, a node (network participant) has a higher chance of being able to confirm the next block on the chain the more coins they hold (or “stake”) in their digital wallet. For example, a person with 100 coins will be twice as likely to be chosen as someone with 50 coins.

There’s no need for hi-tech computing power do this and therefore the energy consumption is drastically reduced.

This consensus mechanism will often exist on networks where all the tokens exist from day one and no mining is required. Instead of mining, the term “validation” (or validator) is therefore used.

Delegated Proof of Stake (DPoS)

Example of use: Lisk (LSK)

DPos is a variation of Proof of Stake and is basically a reputation and voting system.

Validators (or delegates) responsible for confirming transactions and adding blocks to the network are voted for by other coin holders.

The more coins a user holds, the more their vote will count towards electing the next delegate.

There’s only a limited amount of spaces, so as a network grows, the competition to become elected as a delegate will get stronger. Therefore, candidates try and increase their reputation among voters by adding more value to the network. The process reinforces the integrity of the network as time goes by.

Leased Proof of Stake (LPoS)

Example of use: Waves (WAVES)

The problem with a classic Proof of Stake network is that it favours users with large token balances, which can sometimes be a limited group. This is not good for a network that relies on decentralization for its security.

LPoS enables smaller holders to take part in the consensus of the network by leasing their tokens to staking nodes. The more coins a staking node has, the higher their chance of being able to confirm and add blocks to the chain. The compensation for doing so is then distributed in proportion to the leasers.

A leased token still remains the property of the leasing agent and can be traded at any time, at which point the lease will be cancelled.

Proof of Importance (PoI)

Example of use: NEM (XEM)

As the name suggests, PoI assigns users with an importance score to determine who should be allowed to add the next block of transactions to the chain.

This importance score depends on various factors such as amount of tokens held, network activity, reputation and how many transactions are made to and from the specific account.

This mechanism ensures that people who are more passionate about the network will have a greater say in it, rather than passive investors doing all the talking.

Practical Byzantine Fault Tolerance (PBFT)

Example of use: Ripple (XRP)

This consensus mechanism is bit different and more complicated than the others. Basically, each node publishes a public key through which it receives network “messages”. Each message is signed by the node to verify its format. Once a certain amount of identical responses are received, a consensus is reached and the transaction is validated.

The main advantage of this mechanism is that the process of consensus requires less effort from individual nodes but it does mean that the anonymity of participants is forgone.

Conclusion

There are of course numerous other consensus mechanisms, including Proof of Capacity (PoC), Proof of Burn (PoB), Proof of Elapsed Time, Proof of Activity and a few more.

Every network will choose the most appropriate one depending on the type of Blockchain-based product or service they provide.

What is important to remember is that a Blockchain’s network security can only ever be as strong as the integrity of the consensus mechanism it has adopted.