How Blockchain Networks Make Decisions: Consensus Mechanisms Explained
One of the primary selling points of blockchain networks is decentralization, which means that they can function even in the absence of a central authority. However, since decisions about future development and maintenance of the project still have to be made, a consensus algorithm allows network participants to arrive at a common decision. In the context of a cryptocurrency blockchain, nodes use consensus mechanisms to ensure that newly added transactions are legitimate and follow the rules of the network.
While Bitcoin uses the Proof of Work consensus mechanism, dozens of other algorithms have cropped up in recent years. This proliferation of consensus algorithms can be attributed to the blockchain scalability trilemma, a term that refers to the technology’s various bottlenecks. While an ideal distributed network would excel at security, decentralization, and throughput, most digital currencies today have only managed to obtain one or two of those characteristics. As a result, developers are constantly working on new consensus algorithms to build a close-to-perfect blockchain network.
The best way to quantify this progress is to take a look at some of the most popular consensus algorithms and how they differ from each other.
Proof of Work (PoW)
Proof of Work was introduced alongside Bitcoin by its creator, Satoshi Nakamoto, in 2009, making it the oldest consensus mechanism on this list. As its name suggests, the algorithm requires participants to complete a time-consuming process with the help of computational resources. The process essentially involves finding the solution to a complex cryptography problem, which involves a lot of trial and error to solve. Participants with more resources at their disposal have an advantage as they can perform more transactions per second. Since the entire process is a race to completion for a reward, it is often referred to as cryptocurrency ‘mining’.
In a cryptocurrency such as Bitcoin, miners solve these problems to come up with a valid hash for the next block. Once the hash has been calculated by a particular miner, the Proof of Work consensus algorithm verifies the hash with nodes on the network. If accepted, the transaction is added to the blockchain and the miner receives a ‘block reward’ as compensation, in addition to any transaction fees within the block.
The PoW algorithm ensures that rewards are distributed fairly and over a significant span of time. As more miners enter the network, the network automatically adjusts the mining difficulty to ensure that new blocks are mined roughly ten minutes apart. Since transactions can only be added to the blockchain once the hash has been computed, attacking the network would require an impractical amount of computational power.
Proof of Stake (PoS)
The first Proof of Stake (PoS) implementation was released two years after Bitcoin’s release, in 2011. Instead of using computational resources to validate new blocks, this mechanism allows users to stake their assets to participate in the verification process. Staked tokens are locked as collateral, allowing users to vote on legitimate blocks. Participants that have a higher number of staked tokens are given more weight than those with a smaller stake.
PoS networks essentially operate on the logic that users with higher stakes will always be incentivized to safeguard the network from attacks and fraudulent transactions. For a successful attack to transpire, over half of all users with a stake would have to collude. Another advantage is that transactions can be verified much quicker since miners do not have to compete with each other to find a block hash. Ethereum is expected to migrate to a PoS-based implementation in the near future.
Proof of Authority (PoA)
Unlike the previous two consensus algorithms, Proof of Authority relies on knowing the identity of block validators. As a result, transactions can only be added by a set of pre-approved trusted participants. Since these few users are able to dictate transaction authenticity, they are treated as the de facto authority.
Proof of Authority is based entirely on the concept of reputation. However, PoA cannot be utilized for a decentralized blockchain or cryptocurrency as there is no aspect of equality or centralization. However, the consensus mechanism has proved to be particularly performant for private blockchains such as Microsoft’s Azure platform, where decentralization is unnecessary.
Proof of Ratings Placement (PoRP)
Like PoW, the Proof of Ratings Placement consensus mechanism has been specifically developed to gradually release tokens into circulation. Used by the Alluva blockchain platform, PoRP allows contributors to receive tokens in exchange for ratings and cryptocurrency price predictions. Network participants are rewarded based on two factors: their participation and the accuracy of their predictions.
In PoRP, contributors are rewarded with Alluva tokens for correctly predicting the price of a particular cryptocurrency over a week, month, six months, and a year. A user stands to receive more tokens if their prediction was made over a longer time-frame, like a year. This way, users are directly incentivized for their market study efforts and encouraged to make accurate predictions on the Alluva platform.
No Consensus Mechanism to Rule Them All
While the above list is not comprehensive by any means, it stands testament to the fact that there cannot be a single consensus algorithm that can be used for everything. Each and every unique project requires a different mechanism, depending on its final goals of decentralization, distribution, and token allocation. While developers will continue to find new ways for communities to arrive at a unanimous decision, the industry will continuously evolve and adapt, as it relentlessly has for the past ten years.
To learn more about Alluva’s decentralized price prediction platform, visit our website here. If you have any further questions, feel free to reach out to us on our Telegram Group here. We routinely respond to community feedback and queries. For more articles like these, don’t forget to follow our Medium profile by clicking here.
