- One of the most important components of a decentralized system is the consensus mechanism that the blockchain network uses to validate transactions
- We will explore the different types of consensus mechanisms used in cryptocurrencies and their unique features
- The most popular consensus mechanism in crypto is currently Proof of Stake (PoS), followed closely by Proof of Work (PoW)
Cryptocurrencies have been on the rise for quite some time. Their popularity continues to grow with every passing day. One of the main reasons for this is the decentralized nature of cryptocurrencies. Decentralization makes them more secure, transparent, and less prone to censorship or control by any central authority.
One of the most important components of this decentralized system is the consensus mechanism that the blockchain network uses to validate transactions. This maintains the integrity of the ledger between nodes. We will explore the different types of consensus mechanisms used in cryptocurrencies and their unique features. Even though some of these consensus mechanisms are little known, you will be surprised to find that popular blockchains use them.
Proof of Work (PoW)
Proof of Work is the most well-known and widely used consensus mechanism in the blockchain world. PoW was first introduced by Satoshi Nakamoto, the creator of Bitcoin. Litecoin and Bitcoin Cash are among the popular cryptocurrency blockchains that use Proof of Work.
PoW works by requiring miners to solve complex mathematical problems using computational power. The first miner to solve the problem gets to add a new block to the chain and receives a reward in the form of cryptocurrency. The process of solving these mathematical problems requires a lot of energy and computing power, which makes it more difficult for malicious actors to take control of the network.
However, PoW has some significant drawbacks. Firstly, it is energy-intensive, which can result in high transaction fees and increased carbon emissions. Secondly, it can be vulnerable to 51% attacks, where an attacker gains control of the majority of the network’s computational power, allowing them to double-spend and manipulate the ledger.
Proof of Stake (PoS)
Proof of Stake is a newer consensus mechanism that aims to address the energy consumption and scalability issues of PoW. PoS system validators, also known as stakers, are selected to validate new blocks based on the amount of cryptocurrency they own and have “staked” on the network. Validators receive transaction fees in the form of cryptocurrency.
PoS requires much less energy than PoW because it does not rely on miners solving complex mathematical problems. Proof of Stake is also much faster, processing transactions in less time. However, PoS is more susceptible to centralization because it rewards those who already own large amounts of cryptocurrency and can discourage new users from joining the network. Cardano, Binance Smart Chain and Ethereum are examples of PoS blockchains.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake is similar to PoS, but it adds an additional layer of governance. In a DPoS system, stakeholders vote to elect a small group of delegates who are responsible for validating transactions and adding new blocks to the chain.
DPoS is even faster than PoS since there are fewer validators, and it allows for more scalability as the number of transactions per second increases. However, like PoS, DPoS can be vulnerable to centralization since the delegates are responsible for most of the validation and decision-making on the network. Tron is the most popular blockchain that uses DPoS.
Proof of Authority (PoA)
Proof of Authority is a consensus mechanism that relies on trusted validators to add new blocks to the chain. In a PoA system, validators are trusted nodes that have been pre-approved by the network and whose identity is known to all participants. Validators maintain network integrity. They ensure that new transactions are added to the chain.
PoA is much faster and less energy-intensive than PoW, making it more scalable and cost-effective for smaller networks. However, it is also more centralized, as the validators have significant power and control over the network. VeChain uses the PoA consensus mechanism.
Proof of Elapsed Time (PoET)
Proof of Elapsed Time is a consensus mechanism that uses a trusted execution environment to randomly select a validator. In a PoET system, each node on the network waits a random amount of time in the trusted environment, and the node that waits the shortest amount of time is selected to validate the next
Proof of Elapsed Time (PoET) is a consensus mechanism that randomly selects a validator using a trusted execution environment where each node on the network waits a random amount of time. Once selected, a node adds the new block to the chain and receives a reward for its work. PoET is faster and more energy-efficient than PoW, more scalable than PoS, and suitable for private blockchain networks. PoET can, however, be limited by the availability of the trusted execution environment and is vulnerable to attacks from malicious nodes. Hyperledger Sawtooth is a blockchain platform developed by the Linux Foundation’s Hyperledger project. It uses PoET as its consensus mechanism.
Byzantine Fault Tolerance (BFT)
Byzantine Fault Tolerance (BFT) is a consensus mechanism that enables nodes on a network to reach an agreement on the state of the blockchain, even in the presence of malicious or faulty nodes. BFT requires a supermajority or a threshold of validators to agree on each decision, which ensures that consensus can still be reached even if some validators are malicious or faulty. BFT is highly resilient and fast, making it suitable for mission-critical applications that require reliability. However, BFT can be complex and resource-intensive, and may not be suitable for all blockchain applications that require high levels of decentralization. Tendermint, Corda and Meta’s failed Libra are examples of blockchains that use BFT consensus mechanism.
Practical Byzantine Fault Tolerance (pBFT)
Practical Byzantine Fault Tolerance (pBFT) is an enhanced version of the BFT consensus mechanism, designed to improve the efficiency of consensus in large-scale networks. pBFT requires a two-thirds majority of validators to reach an agreement. pBFT uses a rotating leadership model to prevent the concentration of power in a single validator. pBFT is fast, efficient and commonly used in enterprise blockchain networks that require high levels of security and reliability. However, pBFT may be less suitable for public blockchain networks that require a high degree of decentralization. Hyperledger Fabric blockchain network uses the pBFT mechanism. Quorum is a blockchain developed by J.P. Morgan that uses Istanbul BFT (IBFT). IBFT is a pBFT variant.
Federated Byzantine Agreement (FBA)
Federated Byzantine Agreement (FBA) is a consensus mechanism that allows a group of trusted nodes to reach a consensus on the state of a blockchain. FBA system nodes are organized into groups or “quorums” that have their own consensus process. Each quorum chooses a set of “validators” that are responsible for maintaining the blockchain. To reach a consensus, validators exchange messages with each other and with other quorums. FBA uses a voting system that requires a supermajority of validators to agree on a transaction. Only then is added to the blockchain.
Permissioned blockchain networks commonly use FBA consensus. Participants in permissioned networks are known and trusted. It provides a fast and efficient way to reach a consensus while ensuring a high degree of security and reliability. FBA may be less suitable for public blockchain networks that require a high degree of decentralization. It may also have difficulty achieving consensus with a limited number of validators. Ripple and Stellar are two very popular blockchains that use the FBA consensus mechanism.
Directed Acyclic Graph (DAG)
A Directed Acyclic Graph (DAG) consensus mechanism differs from traditional blockchain structures by using a directed graph to organize and validate transactions. In a DAG system, each transaction is verified by previous transactions. New transactions can be added to the graph without the need for a centralized entity to verify them.
DAG confirms faster than traditional blockchain systems. Multiple nodes in the network simultaneously validate transactions. However, DAG may face scalability issues as the number of transactions in the graph grows. Security can also be a concern since DAG does not use a single blockchain to validate transactions. IOTA, Nano and Hedera Hashgraph blockchains used DAG-based consensus.
The most popular consensus mechanism in cryptocurrencies is currently Proof of Stake (PoS), followed closely by Proof of Work (PoW). PoS is gaining popularity due to its energy efficiency compared to PoW, which requires large amounts of computational power. Many new cryptocurrencies are implementing PoS. One of the largest cryptocurrencies, Ethereum transitioned from PoW to PoS. However, PoW remains popular among established. Bitcoin has a long history of using PoW and has a large network of miners invested in the system.