Consensus Mechanism in Blockchain
Businesses are leveraging blockchain to improve security, traceability, and data storage, which is reflected in transparency and an increase in revenue generated. Decentralization Improves security and transparency.
The consensus mechanism eliminates the need for intermediaries, thereby reducing costs.
Smart contracts perform certain actions if a prevailing condition is met.
Tracking of assets, products, or transactions is easier because of the open nature of the blockchain, enhancing supply chain efficiency.
Faster transactions across borders with low fees and time streamline global business operations.
Consensus mechanism uses a distributed agreement to validate and verify the state of the blockchain. It maintains security and integrity in the network through decentralization.
The function of consensus mechanism in Blockchain
Security: Consensus mechanism prevents manipulation of transactions that are recorded in the network.
Say a malicious actor tries to change the transaction data in a node, the other nodes in the network will check the transaction against the information they have, if it is different, that node Is flagged.
Distributed agreement: for a transaction to be validated, the nodes in the network have to reach an agreement.
For instance, if Haruna wants to transfer 2 Bitcoins to James, the nodes have to check and agree that Haruna has at least 2 Bitcoins in his account before the transaction is validated.
- Reduces time and cost: The consensus mechanism eliminates the time and cost a human validator requires. When a transaction is initiated, a human actor is not needed, since the nodes can perform it automatically through distributed agreement.
Factors to look into before choosing a consensus mechanism
Businesses choose a consensus mechanism to adopt based on what they aim to achieve. The consensus mechanism comes with a tradeoff between the core properties of Blockchain: security, transparency, and decentralization, and some are energy efficient, environmentally friendly, or more scalable in the long run.
Carefully looking into all the consensus mechanisms will aid in choosing one that is more compatible with our business.
Types of consensus mechanism.
The most prevalent consensus mechanisms are Proof of Work(PoW) and Proof of Stake(PoS), but over time, more mechanisms have been adopted to improve the limitations of the existing mechanisms.
- Proof of Work(PoW)
Nodes in the network(known as miners) compete to solve complex Mathematical puzzles through cryptographic methods. The first miner to solve the puzzle is allowed to add the block to the blockchain, which is broadcast for other nodes to verify and update their copy.
The system rewards the winning miner with newly minted crypto and transaction fees.
It is highly decentralized and secure but less scalable.
PoW consumes a lot of energy, which has raised environmental concerns.
Bitcoin uses the PoW mechanism, it rewards miners with newly minted Bitcoin. The reward is halved every four years. It is estimated to consume 200 terawatt-hours of electricity per annum.
- Proof of Stake(PoS)
Participants stake cryptocurrencies or tokens to become validators. Validators are chosen to add a block based on the staked amount through a random mechanism.
Validators are rewarded with newly minted cryptocurrency or transaction fees.
It's more energy efficient than pow but less secure.
It's susceptible to centralization if the minimum staking amount is too high.
Ethereum uses PoS after its migration from PoW because of energy efficiency.
- Delegated Proof of Stake(DPoS)
DPoS is a democratized consensus mechanism. Token holders vote for delegates they trust to create and validate blocks. The voting power of users depends on the token they are holding.
Both validators and users are rewarded in this case.
There is a limited amount of validators, which limits decentralization, though it's fast and energy efficient.
DPoS is implemented by the Tron network with 27 max validators.
- Proof of Capacity(PoC)
Miners are chosen based on the availability of storage. Miners store answers to cryptographic puzzles in their devices, they compete to solve the puzzle. The First to solve the puzzle creates and validates the Block.
They are rewarded with newly minted cryptocurrency and transaction fees according to dedicated storage.
It is very energy efficient and fast But susceptible to centralization by miners with higher storage.
- Proof of Elapsed Time(PoET)
Participants in the network generate a random sleep time; the first node to wake up creates and validates the next block. This gives all the nodes an equal chance of creating a block.
The winning node is rewarded with transaction fees.
It is highly energy efficient but has limited decentralization.
It is mostly implemented in permissioned blockchains.
- Proof of Identity (PoI)
Transactions and actions are attributed to verified identities. Participants provide government-issued IDs, biometric data, or social media profiles, which are verified.
Rewards are distributed based on users identity.
It consumes less energy but risks exposure to personal information.
- Proof of Authority (PoAu)
Only authorities create and validate blocks. Authorities are preselected nodes picked based on trustworthiness, reputation, and sometimes stake.
Rewards are given based on the level of the authorities' reputation.
It limits decentralization since authorities are preselected and the security relies heavily on the participant's reputation.
PoAu is majorly used in private or permissioned blockchains
- Proof of Burn(PoB)
Miners destroy (burn) cryptocurrencies to receive access to creating blocks, which is proportional to the crypto destroyed.
Miners receive block rewards and transaction fees.
PoB is energy efficient and does not require a dedicated device, but it has refused to be adopted.
- Proof of Activity(PoA)
Proof of activity combines the features of PoW and PoS. Miners propose blocks without transactions, containing only the previous block's header, public address, nounce, and block height. Validators are randomly selected to validate the block based on their stakes, the activity is completed when the last validator adds the transaction.
Miners receive block rewards, while validators are rewarded with transaction fees.
PoA reduces the energy consumption of pow and adopts the speed of pos. It consumes more energy than pos and has security issues.
In conclusion, The importance and role of consensus mechanism can not be undermined, it won't be wrong to say that consensus mechanism is the mind of Blockchain. It is also very necessary to know the strengths and weaknesses of a consensus mechanism and evaluate its compatibility with the solution you're proffering before choosing it.
Share your insights on which consensus mechanism your organization is using and why