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Consensus Mechanism

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What is a consensus mechanism in crypto?

When it comes to cryptocurrency and decentralization, integrity and security are two of the most important postulates. A consensus mechanism is essentially a method used to achieve trust, and security across a decentralized network. 

The word consensus itself means masses agreeing on something. In crypto terms, these masses are usually nodes or servers that help validate a crypto transaction. But what do these nodes agree on? They agree on a particular ledger or a database by validating it. And what is a ledger? It is simply a record-keeping system that keeps track of crypto transactions.

In layman’s terms, a consensus mechanism in crypto is a way for crypto nodes/servers/computers to ensure that whatever transaction is taking place within a particular blockchain network is accurate. 

How do nodes/servers achieve consensus? 

So, this is where the many different consensus mechanisms come into play. Each consensus mechanism has a set of rules and regulations. A consensus mechanism is not stored on a blockchain but rather implemented using the very rules and processes that it entails. 

What is the end goal of a consensus mechanism?

As mentioned above, each consensus mechanism has a set of rules and processes whose implementation shows what kind of mechanism is being followed by a blockchain’s servers and nodes. 

While the workings and the overall structure of a consensus mechanism may vary from mechanism to mechanism, the final goal of each mechanism is the same – creating a secure and tamper-proof chain of blocks that takes into account the entire transaction history of the network.

A brief history of consensus mechanism in crypto

Consensus mechanisms in crypto are a little over a decade old. In a centralized world, a consensus has been used as a technology for quite some time now.

Let us quickly go back to 3 to 4 decades ago. To the 1980s and 1990s. Distributed databases and file systems are already there and the concept of nodes working in agreement with each other is also not a new phenomenon. 

In fact, some consensus algorithms were quite up-to-date and technologically advanced even 3 decades ago. The earliest of these mechanisms include Two-Phase Commit or Paxos which allowed the nodes to work in agreement even in the face of failures and delays. 

Thus, centralized systems have also used consensus mechanisms in order to increase scalability and security. 

However, what is seen today in the blockchain are much faster and more intelligent forms of consensus mechanisms.

In blockchain, just like pretty much every primary feature, this feature came about in 2008 with the inception of Bitcoin by Satoshi Nakamoto. Nakamoto proposed that Bitcoin use a Proof of Work (PoW) consensus mechanism. PoW essentially used mining and complex mathematical workings to verify and validate a transaction.

A consensus mechanism in a decentralized world is different from a centralized world in the sense that the mechanisms in the former are curated, designed, and implemented in such a way that not much space is left for a third-party intermediary or a central authority. This is the USP of decentralized consensus mechanisms. 

Since PoW, different consensus mechanisms have emerged. While there is no ‘perfect’ consensus mechanism, each has its own strengths and weaknesses. Depending on whose strengths outweigh the weaknesses, one can decide which mechanism is the best.

Different consensus mechanisms explained

There are eight popular consensus mechanisms of which three are the most widely used and they are as follows:

  1. Proof of Work (PoW)
  2. Proof of Stake (PoS)
  3. Delegated Proof of Stake (DPoS)
  4. Proof of Importance (PoI)
  5. Byzantine Fault Tolerance (BFT)
  6. Proof of Activity
  7. Practical Byzantine Fault Tolerance (PBFT)
  8. Proof of Capacity (PoC)

1. Proof of Work (PoW)

In a PoW consensus mechanism, there is an increasing need for high computing effort from a network of devices. This mechanism includes miners that compete against each other to verify a block that contains a number of transactions. Miners use a hashing algorithm to generate a unique identity of a block, a hash value, in order to add the block to the blockchain. According to Forbes, some 63% of cryptocurrencies use PoW as a mechanism. Examples include Bitcoin.

2. Proof of Stake (PoS)

An alternative to PoW that is low on computational power and effort, the PoS algorithm is essentially based on the phenomenon of staking. Contrary to PoW in which miners mine a block in a systematic way, a block in PoS is added by a validator who stakes the most number of crypto coins. Examples include Ethereum 2.0 and Ethereum.

3. Delegated Proof of Stake (DPoS)

As the name suggests, DPoS is related to PoS. However, there is an added feature in DPoS and that is the voting criterion that is involved. In DPoS, a number of delegates are elected through the process of voting and then they are responsible for validating the next block. Examples include TRON.

4. Proof of Importance (PoI)

Proof of Importance (PoI) is a consensus algorithm used by the NEM blockchain network. It is a variation of Proof of Stake (PoS) that takes into account both the number of tokens staked by a user and the user’s overall activity on the network. Examples include NEM blockchain.

5. Byzantine Fault Tolerance (BFT)

In simpler terms, BFT is basically used by blockchains keeping in account the advantages that it has. One of the most significant advantages of the consensus mechanism is that BFT comes in handy to ensure that this large number works smoothly despite delays and disturbances. Examples include Ripple and Stellar.

6. Practical Byzantine Fault Tolerance (PBFT)

PBFT is a much more sophisticated and advanced form of BFT. In PBFT, a client sends a request to a primary replica, which forwards the request to the other replicas in the network. The replicas then process the request and send back a response to the client, which collects the responses and sends a reply back to the primary replica. The primary replica then collects the responses and sends a final response to the client. 

7. Proof of Activity (PoA)

PoA is a combination of PoW and PoS. In the beginning, there is PoW in which the miners mine a block. Once the block is mined, the blockchain switches to PoS in which there are validators who, based on their stake, validate the block and add it to the blockchain. Examples include the Ethereum-based POA Network.

8. Proof of Capacity (PoC)

PoC is like an elder brother to PoW. In PoC, there is no hardcore computational effort involved. Instead, hard disk space is used to validate transactions and create new blocks. It is also referred to as Proof of Space. Examples include Burstcoin and Chia.

Conferences regarding consensus mechanisms

There have been numerous conferences and events regarding consensus mechanisms in blockchain technology. Such international events and conferences generally include network opportunities, keynote events, panel discussions, technical workshops, etc.

Here is a list of conferences that have taken place:

Coindesk annual conference: Coindesk organizes an annual event namely Consensus. This event is great for networking and for listening to the experts, developers, policymakers, and investors about what they think of blockchain technology, how it could be improved, etc. with respect to consensus mechanisms.

Blockchain consensus summit: This is a really interesting event that focuses on the recent advancements and future plans of different consensus systems. Developers and researchers come together to also talk about the applications of consensus mechanisms in different industries.

Then there are some events that are majorly focused on a specific type and they are:

PoScon: As the name suggests, PoScon is specifically focused on the PoS consensus mechanism and its aim is to explore and talk about new use cases of PoS.

DPoS: Similarly, DPoS is aimed at understanding the functions of the mechanism in more detail, discussing its overall throughput and applications in various industries.

In conclusion, a consensus mechanism is like oxygen to a well-functioning blockchain. There would be practically no way for blockchain servers and nodes to not act maliciously and jeopardize users’ safety by tampering with the transactions without a consensus mechanism.