Consensus in Blockchain: What You Need to Know

In its basic form, a consensus is a general agreement. Consider it in terms of passing new legislation in politics. An idea, whether it be presented through a new law, regulation, bill or act, is put forward, and parties vote on whether or not it should be passed.

Now consider how blockchains work. Blockchains essentially act as distributed ledgers that record information in a public manner. What determines which information is added? In what way is a consensus reached? For these questions to be answered, we must look at the multiple variations of the blockchain consensus mechanisms.

What are Blockchain Consensus Mechanisms?

In relation to blockchain, consensus mechanisms are linked to the people and methods associated with approving transactions on a chain. They function to ensure a blockchain transaction’s validity and authenticity and can fall into one of these three most common blockchain consensus categories.     

Proof of Work

Proof of Work (PoW), as found in the bitcoin blockchain, depends on members of the blockchain to reach a consensus. Transactions are conducted through hash functions, which members of the community, known as miners, then solve in order for new additions to be added to the chain.

The incentive occurs through miners being rewarded with bitcoin for each transaction they confirm. With bitcoin as a reward, a consensus is reached by miners working to authenticate multiple transactions.

The only problem with using PoW in confirming blockchain consensus protocols is that the act of mining requires a significant amount of computing power and electricity. This makes the systems used to mine bitcoin extremely expensive.

As stated earlier, miners are rewarded in bitcoin for solving a blockchain consensus algorithm, but what if the value of bitcoin has dropped? If it costs more to mine bitcoin than bitcoin is actually worth, then the incentive is lost, proving problematic for the PoW mechanism.

Proof of Stake

Due to the high cost of mining, more efficient methods of consensus mechanisms have been sought after. Proof of Stake (PoS) is significantly cheaper than PoW as it doesn’t require powerful computers to achieve success. Instead, the job of achieving consensus is placed in the hands of cryptocurrency holders owning the most assets.

Think of PoS as you would think of shareholders of a company. The rank in authority is based upon how many shares a person holds. Those with the most shares have the most say in how the company operates. The same idea can be applied to blockchains operating through PoS, such as Ethereum.

Those with the most coins in a PoS chain determine which new data is added, because ideally, the person holding the most coins most likely wants to ensure the security of their assets by ensuring the security of the chain itself. Instead of miners, these people are more commonly referred to as validators. Validators, like miners, are also rewarded for their efforts with the currency of the chain operating through PoS.   

Delegated Proof of Stake

Delegated Proof of Stake (DPoS) is a blockchain consensus model built around democracy. Members of a blockchain choose the ones they want to approve transactions. The delegates’ identities are usually known and are often chosen based upon their merits in the chain as well as upon how many coins they hold.

It differs greatly from PoS in that the act of confirming transactions is placed upon a single source in a chain, thereby reducing the power necessary to quickly seek out and solve the blockchain consensus algorithms associated with transactions. Like miners, those delegated through DPoS also receive a form of payment for their work based on the platform they are using. Payment rates, as well as the number of delegates that can be elected, differ depending on the platform. For example, in the BitShares blockchain, the minimum number of delegates is 11.

Proof of Authority & Proof of Importance

The previous three forms of blockchain consensus are currently the most popular and developed. New forms of blockchain consensus are being refined to improve security, reduce power usage, or diversify the verification task that some of the methods listed above lack.

These include Proof of Authority (PoA), which increases security by centralizing the process of transaction verification through tasking to network admins. Another method is Proof of Importance (PoI), which works similarly to PoS in that it takes asset holdings into account, but also considers transfer history as well when determining on whom the task of transaction verification will fall.

Why is Blockchain Consensus Important?

Blockchain consensus is the very process on which blockchain operates, thus without it, blockchains would fail entirely. Understanding blockchain development means knowing the blockchain consensus mechanisms from which these platforms are able to perform.

Each method has its own perks and is therefore incorporated into a suitable platform. PoW may work in relation to the bitcoin blockchain, but might not be suitable for a company’s private blockchain. There is no form of consensus that is suitable for all blockchains at once, so until one is developed, these current methods are the ones being used.