The simplest way to think of a consensus mechanism is like a code of conduct, a strict set of pre-defined rules individuals must follow to ensure a harmonious working environment.
The concept of having a blockchain ensures decentralization and permissionless operations without a central authority. Needless to say, it’s challenging to achieve this within a distributed network of thousands of computers worldwide.
So, a consensus mechanism is just a way for everyone involved to agree to the same thing without cheating and ensure each participant receives an identical updated copy of the blockchain as new data is processed.
Having a well-functioning consensus mechanism is significant as it’s the primary element responsible for the security and maintaining the economics of cryptocurrencies.
Most crypto enthusiasts should be familiar with proof-of-work and proof-of-stake as numerous blockchains presently employ either of these. Yet, there are several lesser-known models, such as proof-of-authority and proof-of-capacity, which we’ll cover in this article.
Firstly, what is a consensus mechanism?
A consensus mechanism refers to a distributed computing system designed for participants or computers to agree on a single data value and network state.
In 1982, a group of computer scientists authored the concept of ‘Byzantine generals problem’ or ‘Byzantine fault tolerance’ to describe this phenomenon. The story goes that, when approaching a fortress, Byzantine generals would face confusion on whether to attack or retreat.
Of course, it’s hard to know which person is honest within any group. It’d be challenging for everyone to agree on one coordinated next move in such a situation involving generals.
Without a consensus mechanism, blockchains would face the same problem. So, at its core, participants within a ledger have a predefined set of rules to ‘achieve consensus’ and let the chain continue creating new blocks.
As expected, there are several intriguing methods for achieving this goal. We’ll briefly explore each of them in the next sections.
1. Proof-of-work (PoW)
PoW (or mining) is about creating blocks using intense computational work performed by a group of nodes or computer operators called miners. With PoW, miners use highly advanced computers to decipher extremely complex math equations attached to each block.
While PoW is heralded for achieving incredible security, it’s also tremendously slow, consumes vast amounts of power, and is expensive from a mining perspective. Moreover, it severely lacks scalability, meaning transacting on these blockchains can become costly and cumbersome.
2. Proof-of-stake (PoS)
PoS is the second-most prevalent consensus mechanism, revered for achieving tremendous scalability, low fees, and drastically reduced energy consumption. In PoS, transactions aren’t confirmed by miners but rather autonomously by the blockchain itself through a pseudo-random process.
This system primarily favors users with the most significant stake on the network and considers their staking age. Participants are known as validators or forgers rather than miners.
Examples of cryptocurrencies using this mechanism include Solana, Polkadot, Cardano, and many others. PoS may be the avenue for many projects to consider based on its energy-saving and high-scalability qualities.
A popular variant of PoS is delegated proof-of-stake. Here, the ‘stakers’ effectively outsource much of the work to designated delegates who stake on their behalf.
3. Proof-of-authority (PoA)
PoA is another non-mining consensus algorithm. This mechanism is common in cryptocurrency projects that are somewhat semi-decentralized and mostly private in nature and don’t necessarily require massive external input.
Essentially, proof-of-authority means the blockchain contains only a limited number of pre-selected authorized masternode validators rather than anonymous nodes. Hence, experts refer to PoA as a modified version of PoS as validators stake their identity rather than coins.
Users earn the right to validate blocks through pre-installed software and are incentivized to uphold a favorable reputation by always acting honestly. Like PoS, PoA is also massively scalable since no mining is required.
A prominent cryptocurrency project using PoA is Vechain, but other lesser-known examples include Go Chain, POA Network, Rinkeby, Kovan, etc.
4. Proof-of-importance (PoI)
PoI was introduced by NEM (New Economy Movement), a popular blockchain launched in 2015. Proof-of-importance borrows some elements from proof-of-stake since validators commit a pre-defined monetary amount for participation.
Yet, it aims to address one of the criticisms of PoS, where holders are incentivized to hoard their coins instead of transacting and participating. So, instead, PoI prioritizes how often validators interact with the network, who they interact with, and their reputation.
With PoI, participants are assigned an ‘importance score’ where the blockchain selects the most likely candidate based on their contribution to the platform instead of their wealth.
5. Proof-of-activity (PoA)
PoA is an intriguing hybrid consensus mechanism popularized by Decred, combining the best of both worlds in proof-of-work and proof-of-stake. In literal terms, PoA begins with PoW and ends with PoS.
So, proof-of-activity requires competitive computational mining for block creation. Yet, the miners also need to have a stake in the cryptocurrency. Once a solution exists, it’s then broadcast to the network.
The blockchain autonomously selects miners (who couldn’t find the solution) to vote on the solution based on their stake. It’s at this point where PoA essentially transitions to a PoS system. In the end, the rewards are split proportionally between the miners and ‘voters.’
One of the unique advantages of PoA is its enhanced security. From an attacking perspective, it’s more expensive to own massive computing resources (PoW) and simultaneously have a stake in the network (PoS).
6. Proof-of-capacity (PoC)
Proof-of-capacity is a mining-based consensus mechanism prioritizing the hard drive capacity or space of the nodes participating in the network. With PoC, the mining devices already contain a list of possible solutions beforehand.
Hence, no computational work is required to solve the blocks, making the system far less expensive and energy-consuming. In short, the larger your hard drive, the more solutions you can store and the higher your chances of receiving the mining reward.
SpaceMint, Chia, and Burst are some examples of blockchains using this approach. Filecoin, the file storage protocol, uses a similar concept named proof-of-storage, also focusing on hard drive space.
Blockchains are a fascinating invention in database handling since they are effectively self-regulated and capable of functioning autonomously on a global scale.
With the help of a suitable consensus mechanism, they achieve what most would consider the five key components of digital currencies; security, decentralization, transparency, autonomy, and anonymity.
Although PoW is the first consensus mechanism the world was exposed to thanks to Bitcoin, mining does face an uncertain future because of how much power it consumes and the expensive equipment.
It’s one of the main reasons why Ethereum 2.0 is so widely anticipated. Should Ethereum eventually transition towards a proof-of-stake model, we may see more cryptocurrencies being created through similar non-mining-based systems.