Blockchain Consensus Algorithms

What is a consensus algorithm? From Proof of Stake (PoS) to Proof of Burn (PoB), read on to understand this fundamental concept of blockchain technology.  

What is Consensus Algorithm? 

The consensus algorithm is a set of protocols that network participants comply with to prove the authenticity of the transactions. In a blockchain, each node must indicate its approval or disapproval of several blockchain processes. It is known as consensus. Since there are multiple activities in the blockchain, the blockchain implements the consensus via a mechanism, hence the name consensus algorithm. Moreover, the most significant part of the software program in every node is known as the consensus algorithm or consensus algorithm. 

The consensus algorithm is crucial for the blockchain network for ensuring synchronization among all the nodes in a network. Additionally, it influences the verification of the transactions, amount of energy needed, network fees, transaction speed, and other detail for the currency and network applications. Also, each cryptocurrency blockchain may use its unique consensus algorithm or existing blockchain copy.

Also, read: Understanding the Blockchain and Decentralized Consensus  

Applications of Consensus Algorithm 

The consensus algorithm has the following applications in the blockchain: 

1. Selection of miner or validator and incentivization
2. Verification and addition of a new block in the blockchain
3. Punishing the miner or validator for providing false information 
4. Resolving the double spending problem 

Types of Consensus Algorithms 

Many networks use different types of consensus algorithms. The following types of consensus algorithms are some of the most popular ones.  

Proof of Work (PoW) 

Proof of Work is among the oldest consensus algorithm types. Cynthia Dwork and Moni Naor introduced this concept way back in 1993. Moreover, it became popular after its use in the Bitcoin algorithm. In this mechanism, nodes or miners decode a complicated mathematical problem by detecting a cryptographic hash of a particular block. The first miner to come up with the right solution becomes the validator and validates the transactions. Additionally, that miner gains a reward in cryptocurrency (known as a block reward). The benefits of this mechanism are a secure network, deterring spammers, and more. Cryptocurrencies like Bitcoin and Ethereum use a PoW mechanism. 

Furthermore, miners require special hashing hardware to compete in the PoW mechanism. However, these machines are expensive and require a lot of electricity. Consequently, it becomes difficult for the new miners to enter into this consensus algorithm. 

Proof of Stake (PoS)

Proof of Stake is another consensus algorithm that addresses the problem with PoW. In the PoS mechanism, participants do not require expensive machines. Instead, they need digital money. They can stake some digital currency in a wallet to become a validator. This mechanism selects a validator based on the amount they pledge to the network. So, the more the amount you put in, the more chances you have to become a validator. The selected validator will receive a part of the transaction fees as a reward. Cardano and Tezos use PoS as their consensus algorithm. 

Since there is no need for multiple iterations to participate in this consensus algorithm, it becomes easier for everyone to participate. Additionally, it is an environmental-friendly option compared to PoW, which requires electricity.   

Proof of Authority (PoA) 

Proof of Authority is a combination of PoW and PoS. In this mechanism, miners try to decode a complex mathematical problem to submit their blocks. Moreover, this step is similar to that of PoW. After the submission, validators authenticate these blocks. Then, they will sign the block if they find the information right. Nodes select these validators on the bases of their coins in the network. VeChain and Xodex are the two platforms using this mechanism. 

Furthermore, when enough validators sign a block it becomes a valid and complete block. The new transaction will add to this block. The miner and the validators get an equal share of the reward. 

Delegated Proof of Stake (DPoS) 

Delegated Proof of Stake is a variant of PoS wherein voting helps in delegators or validators' selection. In this mechanism, delegates will stake their money on the network. Then, the network participants will vote for them using coins or tokens. These delegates will be responsible for verifying the information of every new block. Also, they can create a new valid block and get a chance to earn a reward. Lisk (LSK), Steem (STEEM), and Ark (ARK) use this mechanism. 

Furthermore, DPoS has a higher transaction volume and lesser transaction time than PoS. 

Proof of Burn (PoB)

In the Proof of Burn mechanism, the participants burn their coins by transferring them to a verified unspendable account. Miners may burn the cryptocurrency of the blockchain network or the alternative currency, e.g., Bitcoin. It depends on the implementation of PoB. The participant demonstrates a commitment to the network by destroying their coins in favor of long-term gain. Validators’ chances of getting chosen to mine the upcoming block increase with the amount of money they burn. Slimcoin (SLM), Factom (FCT), and Counterparty (XCP) are the cryptocurrencies that use this consensus protocol. 

Also, read: Public and Private Blockchain | an Analogy to Help You Choose the Best

Which One should you Choose?

Ultimately, the consensus algorithm helps in reaching a consensus or agreement on the transaction. So, even though all types of consensus algorithms have the same goal, they differ in their approaches to achieving the result. As a result, you need to opt for a consensus algorithm that works best for your business. Moreover, you may consider the following factors before selecting a consensus algorithm for your network. 

• Project scale
• Node behavior 
• Blockchain type
• Application type
• Performance requirement
• Corrupt or out-of-order inputs
• Resiliency against node failure 
• The time requirement for adding the data in a block 
• Number of miners and validators you require for your network  

Conclusion

The consensus algorithm leads to agreements, prevents double-spending, and aligns economic incentives in the public ledger. This mechanism is crucial for the working of a blockchain network. If you plan to use blockchain technology, it is ideal to know the right consensus algorithm that will suit your needs. Our blockchain implementation experts can help you navigate through the process of consensus algorithm implementation.