Keep in mind that Blockchain is a decentralized peer-to-peer system without a central authority figure. Although this creates a centralized system there are still problems.
So how does this consensus or agreement mechanism work and why do we need it? What are the consensus mechanisms used in cryptocurrency?
We will answer these questions in this guide.
What is a consensus mechanism?
In simpler terms, consensus is a dynamic way of reaching an agreement within a group. While voting only agrees with majority rule without thinking about the feelings and welfare of the minority, on the other hand, consensus ensures that an agreement is reached that can benefit the whole group.
From a more idealistic point of view, Consensus can be used by a group of people scattered around the world to create a more equal and just society.
The method by which consensus decision-making is reached is called the “consensus mechanism”. So now that we have defined what consensus is, let’s look at what the purpose of a consensus mechanism is.
- Seeking Consensus: The consensus mechanism should generate as much agreement from the group as possible.
- Collaborative: All participants should aim to work together to achieve an outcome that puts the interests of the group first.
- Cooperative: All participants should not put their own interests first and work as a team more than individuals.
- Equal: Groups trying to reach consensus must be equal. This means that each vote has the same weight.
- Inclusive: As many people as possible should be involved in the consensus process
- Participatory: The consensus mechanism should be such that everyone must actively participate in the whole process.
We have now defined what consensus mechanisms are and what they should aim for. Then, which consensus mechanism should be used for entities like blockchain.
Two Blockchain Consensus
In this article, we will explain two consensuses of the blockchain.
Proof of Work
Satoshi Nakamoto, the creator of Bitcoin, was able to solve the Byzantine general’s problem with problems by finding proof of work protocols or proof of work.
On the Blockchain, this algorithm is used to confirm transactions and generate new blocks into the chain. With PoW, miners compete with each other to complete transactions on the network and get prizes.
In a network, users send digital tokens to each other. The decentralized ledger collects all transactions into blocks. However, care must be taken to confirm transactions and manage blocks. This responsibility bears special nodes called miners, and the process is called mining.
This process requires a large amount of energy and computational use. The puzzles have been designed in such a way as to complicate and overwhelm the system. When a miner solves a puzzle, they present their block to the network for verification. However, there are some problems with the first proof-of-work
proof of work is a very inefficient process because of the enormous amount of energy and energy it consumes. Second, the people and organizations that can afford a faster, more powerful ASIC usually have a better chance of mining than others.
Proof of Stake
In a PoS system, there is no concept of miners, special hardware or massive energy consumption.
In PoS, you put forward not external resources (like electricity or hardware), but internal resources — cryptocurrency. The rules differ from protocol to protocol, but generally, there is a minimum amount of funds you must hold to be eligible to wager.
From there, you lock the funds in your wallet. You will usually agree with other validators about what transactions will go into the next block. In a sense, you are betting on which block to choose, and the protocol will pick one.
If your block is selected, you will receive a portion of the transaction fee, depending on your bet. The more funds are locked, the greater the profit you can get. But if you try to cheat by submitting an invalid transaction, you will lose some (or all) of your assets. Therefore, this mechanism similar to PoW acting honestly is more beneficial than acting dishonestly.
Generally, no newly created coins are part of the prize for validators. The blockchain’s native currency must be issued another way. This can be done either through an initial distribution (e.g., ICO or IEO) or by launching a protocol with PoW before switching to PoS.
PoS alternative to Pow
Until recently, pure Proof of Stake was only really used in smaller cryptocurrencies. Therefore, it is unclear whether it can serve as a viable alternative to PoW. While it looks healthy in theory, it will be very different in practice.
Once PoS was launched on the network with a large number of values, the system became the field of game theory play and financial incentives. Anyone with the knowledge to “hack” a PoS system will likely only do so if they can benefit from it. Therefore, the only way to know if it is feasible is to practice directly on the network.
We will soon see PoS tested on a large scale Casper will be implemented as part of a series of upgrades to the Ethereum network (collectively known as Ethereum 2.0).