What is a Consensus Mechanism in Blockchain and What are the Types of Consensus Mechanisms?

Blockchains are distributed systems that store records of digital transactions that are publicly verifiable and immutable. When a new transaction occurs, it is added to a block along with other recent transactions, and the block is then added to a chain of other blocks, forming a blockchain. For a blockchain to function properly, all nodes or participants must agree on the validity of new blocks. There are different variations of consensus protocols that blockchains can use to determine which nodes are eligible to produce blocks.

To maintain the integrity of a blockchain, all block producers must agree on a specific transaction history. This agreement is reached through a consensus mechanism that ensures all participants have the same view of events, thereby establishing trust in the entire blockchain without relying on specific individuals. This allows entities that do not trust each other to participate in the blockchain, knowing that their actions will be arbitrated and verified. There are several consensus mechanisms available, each varying in terms of security, scalability, and decentralization. Two of the most well-known mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).

Proof of Work (PoW)

Proof of Work (PoW) was the first consensus mechanism used in blockchain, implemented by Satoshi Nakamoto on the Bitcoin network in 2009. PoW relies on competition between miners, who use specialized hardware to solve moderately difficult puzzles. The miner who solves a puzzle first gets to mine a new block on the blockchain.

Advantages: It is difficult and expensive for hackers to attack a PoW chain since it requires controlling 51% of the network’s computing power.

Disadvantages: PoW consumes a lot of energy due to active competition between miners, making it environmentally unsustainable. Becoming a miner requires expensive and specialized hardware. PoW also has scalability limitations due to its network design, which limits block size and creation time.

Proof of Stake (PoS)

Proof of Stake (PoS) is a less energy-intensive consensus mechanism, making it more sustainable. With PoS, holders of a blockchain asset can participate in securing and validating on-chain transactions by delegating their stake to a validator. Peercoin was the first PoS project launched in 2012, and Ethereum recently transitioned from PoW to PoS after a successful “Merge.”

Advantages: Validators do not require expensive specialized hardware to set up nodes, making it more accessible and encouraging decentralization. PoS protocols are highly energy-efficient and sustainable because validators do not need to solve resource-intensive puzzles.

Disadvantages: Some PoS consensus mechanisms require validators to lock up a small portion of their assets for a specific duration. Validators with the largest amounts of staked assets or those who control multiple pools hold significant power in validating transactions, which could create potential security risks.

Some chains have a mechanism called “Slashing,” where delegators and validators risk losing part of their staked funds if validators validate inaccurate transactions, go offline along with other validators, or attack the network.

Delegated Proof of Stake (DPoS)

Delegated Proof of Stake (DPoS) is a modified version of the proof of stake (PoS) consensus mechanism that involves delegates and voters. On a DPoS network, voters stake their assets and elect delegates to validate transactions. A delegate’s reputation is essential to becoming and remaining a validator. DPoS networks may be more susceptible to a 51% attack, and DPoS blockchains tend to be more centralized due to the limited number of validators.

Proof of Authority (PoA)

Proof of Authority (PoA) is a consensus model that may be better suited for private networks. Instead of staking digital assets, a committee is responsible for validating transactions. PoA blockchains are energy-efficient and do not require expensive hardware or high computational power. The blockchain is not fully decentralized since only a small group of approved validators maintain it. Becoming a validator is expensive, making it difficult for most individuals to participate.

Proof of Capacity (PoC)

Proof of Capacity (PoC), also known as Proof of Space, requires miners to have available disk space to validate transactions. PoC assigns the rights to produce a new block proportionally to the space a miner dedicates to the system. They also do not require specialized hardware, and the drive can be used for other data storage purposes after mining data has been removed.

Proof of Importance (PoI)

Proof of Importance (PoI) is a consensus mechanism that selects the block harvester based on their importance score instead of the amount of staked assets in PoS. This mechanism aims to eliminate bias towards wealthy stakeholders by considering the quality of transactions and reputation within the network to calculate the importance score.

Proof of Elapsed Time (PoET)

Proof of Elapsed Time (PoET) uses time-lottery-based concepts to select the miner node. Each miner is assigned a random waiting time and must wait until the waiting time is over. The first node to wake up (or have a short waiting time) gets the chance to add its block to the network. Afterward, the block is verified by network validators before being added to the blockchain.

Proof of Activity (PoA)

Proof of Activity (PoA) combines PoW and PoS mechanisms. Miners must first perform the heavy computation to add an empty block with header information and reward address. One empty block is then chosen based on the number of coins held in their respective accounts. The miner of that empty block gets the chance to add its transactions to the block, which are then verified by network validators.

Blockchains and their consensus mechanisms have the potential to revolutionize various industries by providing secure, transparent, and decentralized systems for data management and transactions. The consensus mechanism used by a blockchain plays a crucial role in ensuring its security, scalability, and decentralization. As blockchain technology advances, new consensus mechanisms may emerge, offering improved security, scalability, and energy efficiency to meet the diverse needs of different industries.