A consensus mechanism is essential to the function of Blockchain technology. It is responsible for building a secure and trustworthy blockchain network. But what exactly is a consensus mechanism and how does it work? This article seeks to shed more light on how the procedure works. Let’s get right into it!
Let’s start by defining what consensus means with an example. A family of six unanimously decides to order pizza for dinner. Reaching this decision is referred to as a consensus, with everyone agreeing to the same idea without any objections. In the context of blockchain technology, a consensus is a procedure in which all peers of a blockchain network agree about the present state of the data in the network.
However, this may not always be realistic. What if, as is common in homes, someone would prefer to eat something else? How do you realistically manage a consensus in the blockchain network? Enter consensus mechanism. A consensus mechanism is used by the Blockchain network to establish the backbone of transactions, allowing for secure and verified coordination. It helps coordinate and avoid centralization among users.
There are different types of consensus mechanisms but before we get into that, let’s understand how the procedure works in clearer detail.
To best understand consensus mechanisms, let’s take a cue from typical centralized systems. A bank, for example, is responsible for keeping records, dispensing and updating funds as they’re received or requested. The bank is the sole authority permitted to take responsibility and maintain records that can be trusted.
On the other hand, a blockchain is a decentralized network that provides privacy, security and immutability. There’s no sole authority responsible for managing transactions here therefore all participants (nodes) must agree about the state of the distributed ledger at any time. This is made possible by the consensus mechanism. It holds a functional record of every transaction and helps to establish trust between a blockchain network’s nodes.
There are many types of consensus mechanisms and they all work on varying principles. This includes proof of work (PoW), proof of stake (PoS), proof of capacity (PoC), proof of activity (PoA), proof of burn (PoB), and proof of history (PoH) etc.
However, let’s consider the two most popular consensus mechanisms, proof of work (PoW) and proof of stake (PoS).
PoW is a high-energy consuming consensus mechanism used by popular cryptocurrencies such as Bitcoin and Ethereum so far and other public blockchains.
PoW requires that a participant node (miner) prove that they did certain work and are qualified to validate new transaction blocks as well as earn a reward.
It was the first consensus mechanism developed and is currently widely regarded as secure and reliable. Nevertheless, PoW consumes more energy and an extended processing time. There are also some scalability concerns.
The PoS system, not unlike a lottery system, requires the participation node (miner) to stake tokens for continued participation in the network. It then rewards miners with mining power depending on the total amount of stake. This is a low-cost and low-energy-consuming consensus mechanism, the most popular nowadays. Crypto projects using PoS include Solana, Cardano Avalanche and many others. They are fast, scalable and low gas fees based.
New to trading? Try crypto trading bots or copy trading