As decentralized networks without a central authority at the helm, blockchains need a way to allow the community to own, operate (process and validate transactions), and secure the network. This is where the innovation of a decentralized consensus mechanism comes into play.
Consensus mechanisms are one of the key innovations that enable decentralized currencies and applications and are an essential part of keeping blockchains secure and operational. They’re also evolving quickly, as blockchains grow in scope and adoption, and the needs of the users become clearer.
In this lesson, we’re going to provide a basic introduction to consensus mechanisms and take a look at some of today’s most prevalent types.
Consensus mechanisms ensure that network participants remain in agreement about the state of the blockchain and the transactions it includes. They ensure that the blockchain represents a single source of truth that is free of conflicting information and states while ensuring that transactions are processed in a timely and irreversible manner.
In general, blockchains use a large network of nodes that take on the role of processing transactions into blocks and committing them to the blockchain. This process is usually taken on by a single node for each block which is then witnessed by additional nodes. Once the transactions contained in a block have a certain number of confirmations, they are then generally considered irreversible.
Blockchain consensus mechanisms are designed to be fault-tolerant, which essentially means that the network can still achieve consensus even if a fraction of the total network is acting dishonestly or is reporting inaccurate data. In most cases, participating in blockchain consensus entails either operating a cryptocurrency miner or running a node with the client software installed. The actual block production and verification processes are then automatic.
Consensus mechanisms are designed to resist bad actors and attacks aimed at subverting the permanence of the blockchain. This includes 51% attacks, which can occur if a single entity manages to secure more than half of all miner output, and can lead to a chain split or double-spend attack.
As blockchain technology continues to evolve, developers have continually sought to create new, improved consensus mechanisms that can efficiently achieve consensus in a decentralized system, while still remaining secure, accessible, and scalable.
There are now well over a dozen different consensus mechanisms available, some of the most common are highlighted below:
Proof-of-Work (POW): The original blockchain consensus mechanism, Proof-of-Work uses a large network of miners (specialized computers) that put in computational work to secure the blockchain. Each miner competes to discover a block, which they can then fill with pending transactions (typically based on the size of their transaction fee), before adding it to the blockchain. The miner that discovers a block posts cryptographic proof that this is the case, which is then validated by other nodes on the network.
Used by: Bitcoin, Ethereum
Pros: Highly secure, highly decentralized
Cons: High energy consumption, high barrier to entry
Proof-of-Stake (POS): Proof-of-Stake uses a network of nodes to participate in the block allocation and transaction verification process. Each node must stake a certain number of coins as collateral (varies by blockchain) which determines their odds of being allocated the next block. Such that a node staking ~20% of the supply has an ~20% chance of being assigned the next block, which they can then fill with transactions and commit to the blockchain. Nodes that act honestly are rewarded, whereas those that act dishonestly can have their stake slashed.
Used by: Avalanche, Tezos
Pros: Highly scalable, low barrier to entry, more environmentally friendly
Cons: Less secure, less proven
Delegated-Proof-of-Stake (DPoS): This is a modified variant of Proof-of-Stake, which adds another type of stakeholder to the transaction verification and blockchain security process — delegators. In this case, regular users can delegate their tokens to a validator node of their choice to increase the size of their stake. In return, they receive a fraction of the rewards that their chosen validator earns as part of their role in maintaining consensus.
Used by: Cardano, EOS
Pros: Highly scalable, more inclusive, more environmentally friendly
Cons: Less proven
Proof-of-Authority (POA): Proof-of-Authority is different from other consensus mechanisms in that rather than putting up computational work or staking assets to participate in network maintenance, the consensus process is only available to reputable individuals and companies that maintain validators. With Proof-of-Authority, validators put their identity and reputation on the line and must meet minimum hardware requirements to participate. Beyond this, it functions very similarly to Proof-of-Stake.
Used by: VeChain
Pros: Highly scalable, more environmentally friendly
Cons: Less secure, more centralized, less accessible
Proof-of-History (POH): Proof-of-History helps to overcome the issue of scalability in blockchain systems by using a secure organizational structure that includes a timestamp of all on-chain events as submitted and verified by a decentralized network of validators. By using a permissionless source of time to establish a clock in its consensus system, POH can easily help nodes order transactions and allows the network to better accommodate delays.
Used by: Solana, Velas
Pros: Highly scalable, highly efficient, more environmentally friendly
Cons: Less proven