Blockchain Technology is a revolutionary idea that has completely changed the way we think about handling important data. In essence, blockchain technology is an advanced database mechanism that allows transparent sharing of information within a network.
Many multinational companies, tech giants, and financial institutions have devised strategies that revolve around using blockchain technology to carry out sensitive tasks that involve transferring and storing information regarding their vital day-to-day operations.
Blockchain technology is also a very integral part of the cryptocurrency world because the whole concept of the formation of cryptocurrency and how it is based on a decentralized network revolves around blockchain technology.
While the salient features of blockchain technology include transparency and security, we will look at how these results are achieved by looking at one of the essential components that we will see associated with blockchain technology, and that is the consensus mechanism.
Consensus mechanism is an activity where a selected number of people, or sometimes all participants, depending upon what protocol the network is following, agree on the state of the ledger. If they are in agreement with the new entry inside the blockchain and ensure that the data is in line with the rest of the data already stored inside the said blockchain, then they will agree with the new changes being made to the blockchain.
Without consensus, a blockchain would just be a ledger that has a collection of unverified or unreliable records. Several different consensus mechanisms are being employed in the modern-day world of blockchain technology, and we will look into what these mechanisms are and how they differ from each other. Also, understanding the role of consensus in blockchain technology is essential to understanding how cryptocurrencies work.
Proof of Work (PoW) in Cryptocurrency Mining
The Proof of Work mechanism, also called PoW, is the first consensus mechanism to be implemented in blockchain technology. While many experts believe that the consensus mechanisms that came after PoW are more efficient, this method is still being widely used in the world of cryptocurrency. The very prime example that comes to the top of the mind of any crypto enthusiast is Bitcoin, and Bitcoin is using the PoW mechanism. There are also several other examples of cryptocurrencies that still use this consensus method.
PoW involves miners competing against each other to solve a complex mathematical problem. The first person who finds the solution to the problem is rewarded with a coin. How much cash he is awarded depends on the reward system of the concerned blockchain.
In the case of Bitcoin, the reward for mining one block was 50 BTC. The bonus was halved after a halving event occurred once every four years. In the present day, after three more halving events, the Bitcoin block prize is reduced to 6.25 BTC. In 2024, the reward will be reduced to 3.125 BTC. Proof of work is also called mining, in reference to receiving compensation for work done.
PoW mining begins with miners receiving a list of pending transactions from the network. The miner then combines this list with a Nonce to create a new block. Nonce, which is short for numbers once used, is a series of randomly generated numbers that are used for matching the hash value when the process of mining is started.
The Hash is an encrypted number that is used for verification before a new block is added to the blockchain. The miners aim to figure out this hash after completing a complex set of problems to solve this hash. The miner who successfully solves it will get the reward in terms of coins for his efforts. Along with the miner getting the prize, a new block is added to the blockchain as well.
PoW is considered one of the most secure consensus mechanisms as it is very challenging to disrupt the workings of the network without having majority control of it first. The task of getting possession of the blockchain is extremely difficult because to change a blockchain, you need at least more than 50% of the network’s mining power, and this would mean investing in a significant number of resources to generate that much mining power so that an attacker can gain control of the system.
Not to mention, the attackers would also have to change records of the entire blockchain if they want to alter even one record, and that in itself is a very challenging task. Hence, this makes altering a record that runs on a PoW mechanism highly improbable.
However, the property that gives PoW its feature of being a highly secured distributed ledger is also the reason for it being very demanding in terms of the energy required to run the network. PoW is considered very energy-intensive as a lot of computational power is needed to run the process of mining. This quality of a blockchain running PoW has been labeled to be very environmentally unfriendly.
Many activists, and in some cases, even the government, have lamented the fact that the crypto mining rigs have caused great harm to the environment, and they are not a fan of these setups where hundreds and thousands of computers are being run to mine new crypto tokens.
Despite this, the PoW mechanism is still widely used in the crypto world and will likely remain for a long time. The security and decentralization offered by PoW are some of the most essential qualities that admirers of a blockchain require. While we have indeed mentioned some of the environmental liabilities it holds, work is being done to make it more environmentally friendly. Alternate concepts like Proof of Capacity and Proof of Space are being researched that will minimize the effect of environmental liabilities to resolve the high energy consumption dispute.
Proof of Stake (PoS) and its impact on Cryptocurrency Security
Proof of Stake, or PoS, is another famous mechanism that is becoming increasingly popular in the cryptocurrency environment. The most notable case of the PoS mechanism being utilized is the Ethereum 2.0 upgrade, which was aimed at improving the scalability of the Ethereum blockchain network while also reducing transaction times. So, let’s see how the PoS mechanism differs from the PoW and why it is becoming more popular day by day.
Unlike Proof of Work (PoW), which relies on miners solving complex mathematical puzzles to validate transactions, PoS relies on coin holders staking their coins to validate transactions. Staking involves putting your crypto, which you would normally keep, into your crypto wallet to be locked inside a network to help the transaction verification process and keep the network secure.
In PoS, coin holders who decide to stake their crypto are essentially validating transactions and creating new blocks. They are chosen based on the number of coins they hold. The more cash a user holds, the more likely they will be selected as a validator.
The coins that they have submitted for staking purposes are technically held as collateral, which means that if they have any intention of misusing their privileges, like invalidating a valid transaction or trying to cause some other harm to the blockchain functionality, then they will be at risk of losing their staked coins, so this consensus mechanism ensures that users always work for the benefit of a blockchain and not against it.
The most positive feature of the PoS is that it is very energy-efficient compared to PoW, which makes it more environmentally friendly. The result of being less harmful to the environment is due to the less computing power involved for PoS systems, as there is no need for expensive mining equipment due to a limited number of people being chosen for staking purposes.
Another advantage of PoS is that it is more decentralized than PoW. In PoW, only a small number of miners control most of the network’s mining power. This means that these miners have a significant influence over the network. In contrast, in PoS, validators are chosen from a larger pool of coin holders, making it more difficult for any one group to control the network.
PoS, however, holds some disadvantages as well. There is a very high probability that the people who have the major shares of coins in a blockchain can also save the most power in terms of authority given to control the network. So, if a small group of people has the most amount of charge, then they can essentially become a centralized group and can hold control over the network.
Another Proof of Stake disadvantage is the lack of transparency. PoS systems may not be as transparent as PoW systems, as it can be difficult to verify the validity of the selection process for validators. Also, being a validator in this mechanism involves holding a certain amount of native tokens of the blockchain. While people will jump at the chance to participate in this activity for well-known projects like Ethereum, less famous, less reliable, or mostly unknown blockchains will see users hesitating to participate in the same activity.
Despite this, PoS is becoming increasingly popular in the cryptocurrency world. Many new projects are moving from PoW to PoS, and we will likely see more projects doing the same in the future. Its characteristics of being environmentally friendly and reduced transaction time are certainly pushing it to be a better contender compared to PoW, and it is worth keeping an eye on this mechanism as it has a very high chance to become standard in the cryptocurrency world in the future.
Proof of Authority (PoA) in Cryptocurrency Consensus
Proof of Authority (PoA) is a consensus mechanism that is a modified version of the Proof of Stake (PoS) mechanism, where validators are chosen based on their reputation and identity. This means that more focus is given to the importance of the validator instead of his monetary position.
Validators who are selected in the PoA mechanism are called authorities, and they hold the responsibility of verifying transactions, validating them, and creating new blocks inside the network. The main idea behind this consensus mechanism is that if someone is selected based on their reputation, then they will work hard to uphold that trust and also keep their reputation intact.
It also means that they will work in favor of the blockchain when carrying out the task of validating transactions and will keep malicious thoughts in their mind so that they don’t tarnish their image in the network and crypto community in general. All these prerequisites will also make sure that the security of the blockchain is kept intact and that it has fewer vulnerabilities.
PoA also allows for faster transaction speeds, as there are fewer validators in the network than in other consensus mechanisms. Another advantage of PoA is its ability to provide a more efficient and cost-effective way of maintaining a private blockchain network. Compared to different consensus mechanisms, PoA requires less computational power, making it more cost-effective.
The PoA consensus method, however, does have one major disadvantage associated with it. Like the PoS, the PoA can be criticized for being more centralized because a limited number of people can hold the most amount of power. If their integrity is compromised in any way, then they won’t care to uphold their reputation and can work against the interest of the network.
The security of the network depends entirely on the security of the authority, so the network would have to very carefully consider who they want to give the power to in the PoA method. Also, if the authorities don’t find the incentives they are offered for their role to be sufficient, then they won’t actively participate in validating transactions.
Despite this, PoA is gaining popularity in private blockchain networks. Many projects, such as Quorum, use PoA as their consensus mechanism, and we will likely see more projects doing the same in the future.
Byzantine Fault Tolerance (BFT)
Byzantine Fault Tolerance (BFT) refers to a property in distributed systems that ensures the system continues to operate and reach consensus despite the presence of faulty or malicious nodes. It addresses the Byzantine Generals’ Problem, enabling a network of nodes to agree on the state of the system even when some nodes might behave incorrectly or transmit conflicting information. BFT mechanisms are crucial in achieving trust and reliability in decentralized networks.
Practical Byzantine Fault Tolerance (PBFT)
Practical Byzantine Fault Tolerance (PBFT) is a consensus algorithm designed for distributed systems. Introduced by Castro and Liskov in 1999, PBFT ensures consensus in a network where up to one-third of the nodes could be faulty or act maliciously. It operates through a three-phase process that involves a leader and other nodes reaching an agreement on the order of transactions. PBFT is known for its high efficiency and ability to maintain consistency despite potential node failures or malicious behaviors.
Federated Byzantine Agreement (FBA)
Federated Byzantine Agreement (FBA) is a consensus mechanism used in systems where trust among nodes is predefined. Unlike traditional BFT protocols, FBA doesn’t require all nodes to agree on every transaction. Instead, it divides nodes into quorums, with each Quorum independently reaching a consensus. Stellar, a blockchain platform, employs FBA to achieve agreement among its nodes. FBA enables fast transaction finality while allowing different sets of nodes to agree independently, contributing to scalability and flexibility in the network.
The advantage of using the PBFT consensus mechanism is that since it only requires a fraction of the nodes to be valid and can tolerate up to one-third of the nodes acting maliciously, it can still validate the transactions, which means it is working efficiently. Also, the three-phase process of reaching an agreement on the order of the transactions makes it concrete in terms of being safe from any reorganizations or forks. The disadvantage this system holds is that it requires a fixed number of known nodes to function effectively, which might limit its scalability in larger and more open networks.
The FBA method addresses this scalability issue and is more flexible as it allows different groups to carry out transactions independently. The downside of this system is that FBA can lead to centralization risks if certain nodes hold significant power, depending on the initial setup.
Conclusion
There are other consensus methods also available that you can read about apart from those mentioned in these articles. Each mechanism holds its distinctive use case and, with it, a unique set of advantages and disadvantages. It all comes down to what your requirement from a blockchain is and how much you trust the blockchain to perform tasks that are specific to your needs. Also, it comes down to the level of trust you have in the functionalities of a particular blockchain, and this decision is dependent on the consensus mechanism they follow as well. As always, you must conduct your research, plan your moves according to your requirements, and familiarize yourself with the risks involved in the cryptocurrency industry before you undertake this endeavor.
