What Is Consensus In Blockchain?: Understanding Differences between Proof-of-Work vs. Proof-of-Stake

In blockchain technology, one really important thing is to understand how a group of computers agrees on stuff and perform a action. This is called a “consensus mechanism.” Two important examples of consensus mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS) but don’t worry as we will talk about it later.

This article is all about checking out these agreement ways, figuring out what they’re good at, what they’re not so good at, and why people keep talking about them. So let’s explore this together.

What is consensus mechanism in blockchain technology

In the blockchain, a consensus mechanism is like a security system that confirms a transaction as real. It keeps a record of all the legitimate transactions for a digital coin in a blockchain, building trust among traders. Many currencies, like Bitcoin and Ethereum, use this system to make sure everything is secure.

Consensus is crucial for establishing trust among global crypto coin traders. Given the decentralized nature of the crypto market, maintaining full transparency during the trade of a specific coin is vital to reduce the risk of buyers falling prey to fraud.

Types Of Consensus Mechanisms.

There are several types of consensus mechanisms used in blockchain networks. Here are some of the most common ones:

  • Proof of Work (PoW)

Participants (miners) solve complex mathematical problems to validate transactions and create new blocks. The first to solve it gets the right to add the next block and is rewarded.

Used in cryptocurrencies such as: Bitcoin (BTC), Ethereum (ETH) (although Ethereum is transitioning to Ethereum 2.0, which will use Proof of Stake).

  • Proof of Stake (PoS)

Validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral. It’s less resource-intensive compared to PoW.

Used in cryptocurrencies such as: Cardano (ADA), Polkadot (DOT), Tezos (XTZ).

  • Delegated Proof of Stake (DPoS)

Similar to PoS, but users vote for a limited number of delegates who have the authority to create new blocks. Enhances scalability and efficiency.

Used in cryptocurrencies such as: EOS, Tron (TRX), Lisk (LSK).

  • Directed Acyclic Graph (DAG) / Tangle

Instead of a linear chain, transactions are interlinked. Users validate previous transactions as they make new ones.

Used in cryptocurrencies like IOTA (MIOTA).

How Does The Consensus Mechanism Work?

For blockchain trust, the consensus mechanism ensures that once a transaction is verified, it quickly appears on the blockchain. Various methods are employed to guarantee security, trust, and agreement within the blockchain network. Consensus mechanisms also make sure that all transactions for a specific coin are accurately recorded in the blockchain.

1. Transaction Initiation

Users initiate transactions by sending information to the network, indicating the transfer of assets or data.

2. Transaction Verification

1Nodes on the network verify the validity of the transaction, checking if the sender has sufficient funds and if the transaction adheres to the network’s rules.

3. Creation of a Block

Verified transactions are grouped into a block by a node, forming a chronological chain of transactions.

4. Mining (Proof of Work)

Miners compete to solve a complex mathematical problem related to the block’s data. The first miner to solve it broadcasts the solution to the network.

5. Consensus Verification

Other nodes verify the solution and the validity of the block. If accepted, the block is added to the blockchain, and the miner is rewarded.

6. Blockchain Update

The updated blockchain is distributed to all nodes in the network. Each node maintains its copy of the blockchain.

7. Continuation of the Process

The process repeats for new transactions, with miners competing to add the next block to the blockchain.

This is a basic overview, and different consensus mechanisms may have variations in their processes. For example, Proof of Stake (PoS) replaces mining with the concept of staking, where participants lock up a certain amount of cryptocurrency as collateral to validate transactions and create new blocks.

Discussing The Types of Consensus mechanisms.

1. Proof-of-Work ( PoW)

Proof of Work is a consensus mechanism used in blockchain networks to validate and add new transactions to the blockchain. It involves solving complex mathematical puzzles to secure the network and create new blocks.

How PoW Works:

Step 1: Transaction is  Validated

Users on the network initiate transactions. These transactions are collected and need to be verified for accuracy.

Step 2: Mining takes place

Miners (participants in the network with powerful computers) compete to solve a challenging mathematical problem related to the transactions and available in the blockchain network of s currency such as Bitcoin.

This problem requires a lot of computational power and is hard to solve but easy to verify.

Step 3: Solving the Puzzle:

The first miner to solve the problem broadcasts ( tells other miners) the solution to the network. This solution is called a “proof of work.”

Step 4: Consensus Verification

Other nodes ( miners) on the network verify that the solution is correct and that the transactions are valid. If everything checks out, the new block is added to the blockchain.

Miners are rewarded with newly created cryptocurrency (like Bitcoin) and transaction fees for their efforts in solving the mathematical puzzles.

The most well-known example of PoW is the Bitcoin blockchain. Here, miners use specialized hardware to solve cryptographic puzzles and validate transactions.

Read also: Essential Blockchain, Cryptocurrency and Web3 Terms You Should Know

Advantages of Proof of Work (PoW)

1. Security:

PoW provides a high level of security. The computational work required to solve puzzles makes it extremely difficult and resource-intensive for malicious actors to alter past transactions or commit fraudulent activities.

2. Decentralization

PoW aims to distribute the authority to add new blocks across many participants, preventing any single entity from controlling the entire blockchain. This decentralization is seen as a key feature in maintaining trust and resilience.

3. Proven Track Record

PoW has been in use since the creation of Bitcoin in 2009 and has demonstrated its effectiveness in securing the longest-running and most valuable blockchain network.

4. Incentives for Participants:

Miners are rewarded with newly created cryptocurrency and transaction fees. This incentivizes participants to contribute computational power to secure the network and validate transactions.

Disadvantages of Proof of Work (PoW):

  • Energy Consumption: PoW is criticized for its high energy consumption. The process of solving complex mathematical problems requires powerful hardware and consumes a significant amount of electricity, leading to environmental concerns.
  • Centralization Risk: Over time, mining has become concentrated in large mining pools. This concentration raises concerns about the centralization of mining power, as a few major players could potentially control a significant portion of the network.
  • Scalability Challenges: As the network grows, the computational power required for PoW increases, leading to scalability challenges. This can result in longer transaction confirmation times and higher fees during periods of network congestion.
  • Potential for 51% Attacks: If a single entity or a coalition controls more than 50% of the total computational power in the network, it could potentially carry out a 51% attack, compromising the integrity of the blockchain.
  • Limited Environmental Sustainability: The environmental impact of PoW has sparked discussions about the need for more sustainable consensus mechanisms. The energy-intensive nature of mining has led to exploration of alternative, eco-friendly options.

In conclusion, while PoW has proven effective in securing blockchain networks, it comes with notable drawbacks, particularly in terms of energy consumption and potential centralization. These challenges have led to ongoing discussions and the exploration of alternative consensus mechanisms with lower environmental impact and improved scalability.

2. Proof of stake ( PoS ).

Proof of Stake is a consensus mechanism used in blockchain networks to validate and add new transactions to the blockchain. Instead of relying on computational work (as in Proof of Work), PoS selects validators to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.

It quite similar to betting.

How PoS works

Step 1: Miners Stake ( Staking ).

Participants (validators) lock up a certain amount of cryptocurrency as collateral. This is known as “staking.” The more cryptocurrency staked, the higher the chance a validator has to be chosen to create a new block.

Step 2: Block Creation

Validators take turns proposing and validating new blocks. The chances of being chosen are often proportional to the amount of cryptocurrency staked.

Step 3: Consensus Verification

Other nodes on the network verify the validity of the proposed block. If it’s accepted, the new block is added to the blockchain. And he wins the coins.

Unlike PoW, PoS doesn’t involve traditional mining. Validators are chosen based on their stake and the willingness to lock up their cryptocurrency.

Validators are rewarded with transaction fees and, in some cases, newly created cryptocurrency. The rewards serve as an incentive for participants to act honestly.

Examples of coins that uses PoS are:

  • Cardano (ADA):

Cardano is a blockchain that uses a Proof of Stake consensus mechanism. Participants can stake ADA (Cardano’s native cryptocurrency) to become validators.

  • Polkadot (DOT):

Polkadot employs a variation of PoS called Nominated Proof-of-Stake (NPoS), where token holders can nominate validators.

Advantages of Proof of Stake (PoS)

  • Energy Efficiency: PoS doesn’t require the massive computational power seen in Proof of Work (PoW), making it more environmentally friendly and energy-efficient.
  • Decentralization Incentives: PoS encourages decentralization by giving more influence to participants with a higher stake in the network. This is seen as a positive feature for maintaining a distributed and resilient system.
  • No Mining Hardware Needed: Unlike PoW, PoS doesn’t involve traditional mining with specialized hardware. Participants can become validators by staking cryptocurrency, making it more accessible.
  • Reduced Risk of 51% Attacks: PoS reduces the risk of a 51% attack (where a single entity or coalition controls more than 50% of the network’s computational power), as it would require acquiring a significant portion of the cryptocurrency in circulation.

Disadvantages of Proof of Stake (PoS)

  • Wealth Concentration: PoS introduces the risk of wealth concentration, where participants with more cryptocurrency have more influence. This can potentially lead to centralization and reduce the democratic nature of the network.
  • Nothing-at-Stake Problem: Validators might be tempted to validate multiple conflicting blocks, known as the “nothing-at-stake” problem. This undermines the security of the network, as there’s no cost associated with validating multiple versions of the truth.
  • Challenges in Bootstrapping: Starting a PoS network can be challenging, as the initial distribution of cryptocurrency is critical. If a small number of entities control a large portion of the total supply, it can lead to centralization.
  • Dependency on Token Value: The influence of participants in PoS is directly tied to the amount of cryptocurrency they hold. This means the wealth and influence of participants can be highly sensitive to market fluctuations.

Proof of Stake offers energy efficiency, reduced hardware dependence, and incentives for decentralization. However, challenges like wealth concentration and the “nothing-at-stake” problem need careful consideration. Examples like Cardano and Polkadot showcase the application of PoS in real-world blockchain networks.

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In Conclusion, As blockchain technology continues to advance, the choice between PoW and PoS remains a critical decision for developers and stakeholders. Each consensus mechanism comes with its own set of trade-offs, and the optimal choice depends on the specific goals and priorities of a given blockchain project. The ongoing exploration and development of alternative consensus mechanisms highlight the dynamic nature of the blockchain space, where innovation and adaptability are key to success.

NEXT READING: Types of Blockchains Compared: Public vs. Private Blockchains – Understanding the Differences

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