Understanding Consensus Mechanisms

What is a Consensus?

Consensus in blockchain technology refers to the general agreement of stakeholders on particular matters. Consensus is essential in blockchains as it is unlike traditional databases or systems where there is a central authority that decides and ratifies matters. In a public blockchain, every stakeholder has contributed and there has to be a general agreement for progress on the chain.

For example, the Ethereum blockchain reaches consensus when at least 2/3 or 66% of nodes agree on the state of the network.

What is a Consensus Mechanism?

A Consensus Mechanism is a process by which a blockchain arrives at an agreement on the present state of the blockchain. The present state of the blockchain would entail which node’s submitted block will be added to the chain, which leads to the collection of rewards and the minting of new coins or tokens in that process. It also helps maintain the security of the blockchain.

Consensus Mechanisms are usually in form of protocols, algorithms, and methodologies that facilitate consensus on the chain. These systems help determine the authenticity of transactions submitted by parties on the chain.

Why Consensus Mechanisms

Consensus Mechanisms are extremely important to blockchain technology. It determines how transactions are confirmed and stored, network fees, transaction speed and other features of the blockchain.

Consensus mechanisms are also essential as they serve as a set of rules that help to protect the network from the activities of bad actors — the double-spending problem.

Consensus mechanisms solve this problem by making it hard and unprofitable for parties to propose new blocks of confirmed transactions. At the same time, it incentivises honest parties to propose to block genuine blocks which will be confirmed to receive the block rewards.

Types of Consensus Mechanisms

There are various types of consensus mechanisms, they differ based on the blockchain and their application. They also vary on the basis of their energy usage, security and speed. Here is an overview compiled by Crypto.com on some of the most common types of consensus mechanisms.

1. Proof-of-Work (PoW): Proof-of-work is the consensus mechanism designed for Bitcoin by its creator, Satoshi Nakamoto. It is the first consensus mechanism created.
   In the PoW model, miners compete to verify transactions. They use computing equipment (usually GPUs and ASICs) that is specifically designed for solving mathematics equations to quickly verify crypto transactions and keep a record of the previously confirmed transactions on the blockchain. The equations are random and miners work using the computing power of their equipment to potentially earn the block reward. The process made it difficult to prevent potential attacks (51% of attacks) on the networks. However, this means more powerful computers are required to stand a chance to earn rewards. This acts as a barrier of entry for new miners which could potentially lead to centralisation and limit scalability.
   PoW is generally considered the most reliable and secure of all the consensus mechanisms. Blockchains currently using PoW include Bitcoin (BTC), Bitcoin Cash (BCH), Dogecoin (DOGE), Litecoin (LTC), Monero (XMR), Ethereum Classic (ETC), etc.
2. Proof-of-Stake (PoS): Proof-of-Stake is a consensus mechanism where mining and security are determined by the participants with the highest stake on the network. This concept was created by Sunny King and Scott Nadal in a 2012 whitepaper for PPCoin. In the PoS model, computers determine which party validates the next block and receives the reward — using the transaction fees.
   Participants are required to stake a particular amount of tokens to stand a chance to be randomly selected to create a new block and validate new transitions. Parties with a larger stake — holding a larger amount of tokens — have greater chances of being selected to validate the block. The idea behind this is that parties with a higher stake are more likely to act for the benefit of the entire chain, as they tend to lose the most if the chain is manipulated and collapses. However, this concept tends to create a pay-to-play model, whereby nodes with higher stakes are more likely to get picked to validate transactions than nodes with lower stakes.
   PoS has become increasingly popular recently as it has major benefits over the PoW model such as faster transactions, lower barrier to entry and lower energy use. Blockchains that adopt the PoS model include Cardano (ADA), Algorand (ALGO), Cosmos (ATOM)and Binance Coin (BNB), Ethereum (ETH), Solana (SOL), etc.
3. Delegated Proof-of-Stake (DPoS): Delegated Proof-of-Stake (DPoS) is a variation of the Proof-of-Stake (PoS) consensus mechanism. DPoS was introduced by Dan Larimer in 2013 and utilised in his project BitShares. This model uses a reputation-based voting system to achieve consensus. In this model, holders of the tokens vote to choose block producers or witnesses to secure the network on their behalf.
   Users are to add their tokens to a staking pool to vote. Votes are then weighted based on the size of each voter’s stake. Elected block producers or witnesses who successfully validate a block and receive the reward will then share this reward with everyone who voted for them. This process is continuous, witnesses are required to maintain a good reputation or else they can be replaced by another witness who is voted by the users. This helps to ensure witnesses remain honest at all times which in turn maintains the integrity of the blockchain. df
   Examples of blockchains using DPoS include EOS, BitShares (BTS), TRON, etc.
4. Proof-of-Activity (PoA): Proof-of-Activity (PoA) is a hybrid of the PoW and PoS consensus mechanisms. In this model, there are miners and validators. Like in PoW, miners compete to solve random mathematical problems with a lot of computing power. Once the block is mined, the system switches to a PoS model. The successfully generated block is published across the network. Then a group of validators is randomly chosen to ratify the hash which thus validates the new block. Like in PoS, the higher the number of tokens held by a validator, the higher their chances of being chosen. The block rewards are usually shared among the miner and validators.
   PoA seeks to combine the best of both worlds — PoW and PoS — and avoid their flaws. Decred (DCR) and Espers (ESP) blockchains are examples of blockchains using PoA.
5. Proof-of-Authority (PoA): Proof-of-Authority (PoA) is a consensus mechanism mostly used by private blockchains. It also uses a reputation-based consensus mechanism whereby validators stake their reputation to validate blocks. This usually involves revealing the identity of the validators which does not occur in public blockchains. T
   This consensus mechanism does not require any computing power to operate which makes it less costly compared to PoW and PoS models. A major concern about this mechanism is that it compromises decentralization as only a few parties can participate in securing the blockchain. VeChain (VET) and Hyperledger Fabric are examples of a blockchain that uses PoA.
6. Proof-of-Burn (PoB): Proof-of-Burn (PoB) is a consensus mechanism whereby miners received the right to mine a block by burning a predetermined portion of their tokens. This involves sending these tokens to an ‘eater address’ where they are irrecoverable. The more tokens burned by the miner, the greater the chances of being arbitrarily selected to mine the block.
   Once the tokens have been burned, they are irretrievable. This means miners are required to lose wealth in the short run to gain the lifetime right to create new blocks, this thus incentivises miners to commit to securing the chain in the long term. The act of burning tokens reduces the circulating supply of the tokens, which reduces inflation and boosts demand.
   Cryptocurrencies that use the Proof-of-Burn (PoB) consensus mechanism include Slimcoin (SLM), Counterparty (XCP), and Factom (FCT).
7. Proof-of-Capacity (PoC) / Proof-of-Space (PoS): Proof-of-Capacity (PoC) or Proof-of-Space (PoS) is a consensus mechanism that gives mining or validating privileges based on the amount of space or capacity in the miner’s hard drive storage space. The concept was formulated in 2013 by Dziembowski et al.
   In PoC, miners are required to where miners are allowed to pre-calculate (“plot”) PoW functions and store them on a hard drive. The more storage space a miner has the more possible solutions. The miner with higher solutions has a higher chance of possessing the correct combination of hashes and winning the rewards. The miner will then be required to store the data on their hard drive space.
   PoC does not require heavy specialized equipment, this lowers the barrier to entry for the individuals to participate in the network. Proof-of-Spacetime and Proof-of-Replication are variations of PoC
   This mechanism is mostly used by cryptocurrency projects that offer decentralized storage services. Such blockchains include Signum (SIGNA) — formerly Burstcoin (BURST), Storj (STORJ), Chia (XCH), Filecoin (FIL), Arweave (AR), etc.
8. Proof-of-Elapsed Time (PoET): Proof-of-Elapsed Time (PoET) is a consensus mechanism that uses a time-lottery-based consensus algorithm. This model randomly assigns differing wait times t every node in the network. During the waiting period, every node is inactive till it is its turn to be awarded mining rights. This method ensures all nodes are equally likely to be chosen to receive mining rights which promotes fairness in the network.
   PoET is considered to be highly efficient, requires fewer resources and is highly scalable. An example of a blockchain that uses PoET is Hyperledger’s Sawtooth.
9. Proof-of-History (PoH): Proof-of-History (PoH) is a consensus mechanism that provides proof of historical events. PoH uses timestamps to build the blockchain, verifying the passage of time between transactions without needing to rely on other nodes. js
   This method is enabled by the SHA-256 sequential-hashing verifiable delay function (VDF). It takes the output of a transaction and uses it as input for the next hash, this helps all parties to see the order transactions occur.As
   VDFs require just a single CPU core to be executed, this reduces the processing power required for the blockchain. This in turn significantly boosts scalability and promotes energy efficiency. PoH is currently only used by Solana, it has yet to be tested on a large scale.
10. Proof-of-Importance (PoI): Proof-of-Importance (PoI) is a consensus mechanism that is originally launched by NEM. This mechanism chooses nodes eligibility to add blocks to the blockchain based on a certain criteria in a process called ‘harvesting’. This process considers the overall importance of the node to the blockchain. Factors such as the factors include the number and size of transactions in the last 30 days, the amount of vested currency, and network activity are used to determine the importance of the node. The higher the score, the higher the chances of a node being chosen to harvet the next block and receive the transaction fee. The NEM blockchain is currently the only one adopting PoI.

There are other consensus mechanisms that are being used today, some are still in development while others are variations of existing consensus mechanisms. These include: Byzantine Fault Tolerance (BFT), Practical Byzantine Fault Tolerance (PBFT), Federated Byzantine Agreement (FBA), Delegated Byzantine Fault Tolerance (DBFT), Proof of Believability (PoBLV), Proof of Devotion (PoD), Proof of Reputation (PoR), Proof of Weight (PoWe), etc.

Conclusion

The multiple types and variations of consensus mechanisms show the level of continuous innovation in the blockchain industry to develop consensus mechanisms that are scalable, energy-efficient and promote decentralization.

There probably will not be a universal consensus mechanism as blockchains vary based on the nature of the tokens and the behaviour of the nodes and stakeholders. The decision to choose a consensus mechanism is usually determined by the nodes on the chain, this exemplifies a major difference between a public blockchain and a traditional centralized system. The major drawback in this situation is the time it takes for the stakeholders to reach a consensus in a public blockchain.

Ultimately, we should expect to see more types and variations of consensus mechanisms developed as blockchains seek to continually evolve.

Sources and Further Readings

1. What Is a Consensus Mechanism? — The Balance
2. Consensus Mechanisms in Blockchain: A Beginner’s Guide
3. What Is a Consensus Mechanism? — Coindesk
4. Consensus Mechanisms
5. Crypto Consensus Methods: All You NEED To Know!!
6. Proof of Work vs. Proof of Stake: Beginner’s Guide!!
7. Proof-of-stake vs. proof-of-work: Pros, cons, and differences explained
8. Proof-of-authority vs. proof-of-stake: Key differences explained
9. Consensus Algorithms in Blockchain
10. Towards a Green Blockchain: A Review of Consensus Mechanisms and their Energy Consumption

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