A consensus mechanism (or protocol) is a system that enables computers (nodes) on a peer-to-peer (P2P) network to update a shared transaction ledger or smart contract states in concurrence.
All nodes on a P2P network cannot update a ledger or a smart contract state simultaneously. Instead, the protocol randomly picks one node at intervals to perform this task on behalf of the network. This node is rewarded with newly minted coins and fees that network participants pay.
On some blockchains, several nodes can be picked to work at the same time. However, they often are assigned different parts of the ledger or smart contract. This is known as sharding and is used as a layer one scaling mechanism.
There are many types of consensus mechanisms in use today. However, most blockchains are designed with either proof-of-work (POW) or proof-of-stake (POS).
The Proof-of-work blockchain consensus mechanism selects a node that updates the shared ledger or smart contract based on its performance in solving a complex mathematical problem.
The first blockchain ever, Bitcoin, was designed to use the POW. Other blockchains that use PoW include Ethereum , Ethereum Classic, Dogecoin, Litecoin, Bitcoin Cash, Bitcoin SV, Monero, and Dash.
The process is known as mining. It needs a large amount of computational power, and as a result, it requires special hardware and consumes a significant amount of electricity. In return, the nodes receive newly minted coins and fees.
In POS, the protocol chooses the node to update the ledger or the smart contract state based on the number of coins (stakes).
The first blockchain to use POS was Peercoin, launched in 2012. Today, close to 60% of blockchains use POS. The list includes Cardano, Solana, Algorand, Polkadot, Kusama, and Tezos. EOS, Lisk, Steem, and BitShares use delegated proof of stake (DPOS).
The nodes on a POS blockchain use their stakes like lottery tickets. The protocol uses them to randomly pick one to update the ledger or smart contract. The higher the stake, the higher the chances of the node being picked and earning the reward.
In the delegated-proof-of-stake, a node owner can have others contribute to the stake. When the node is picked and earns a reward, they share it with those who contributed.
Using your tokens to be picked to maintain a ledger or smart contract for a reward is known as staking.
The primary difference between proof-of-work and proof-of-stake is that while the former uses computation capacity to pick the node that updates the shared ledger or smart contract, the latter uses locked funds (stakes).
Proof of work has the following benefits:
The POW consensus mechanism is considered more secure for several reasons.
First, the nodes must incur high costs through special hardware and electricity. This incentivizes them to act appropriately. For this same reason, it is difficult for someone to attack the network.
An attacker also has to contend that the rest of the network can ignore their activity through hard forks. Indeed, it is not beneficial for an attacker to do a 51% attack. They have to invest a lot of coins, which end up being worthless once their hack is detected and the rest of the network turns its backs on that branch of blockchain.
The POW network might encourage the exploitation of renewable energy and benefit communities around the sources.
For example, El Salvador plans to mine Bitcoin using never before tapped geothermal energy from volcanic activity under Mt. Conchagua. This will earn the central American country mining rewards and fees.
The following are the most common problems many have with POWs:
The POW protocol consumes a significant amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, the annualized energy consumption of the Bitcoin network is about 200 terawatt-hours (TWh). This is almost equal to the amount a country like Sweden consumes.
This huge amount of energy requirement can easily contribute to the destruction of the environment, especially when the energy comes from fossil fuels. Meanwhile, using green energy might take away from other sectors of the economy.
It is hard for many to join a POW network as miners. That is because of the need for expensive equipment and cheap sources of electricity. This has left mining to a few well-funded companies. This threatens the decentralization of the network.
It costs a lot to process transactions because miners have to meet their energy costs. For example, as the mining reward is depleted with the halving of the block reward every four years, it will be upon the users of Bitcoin to shoulder the mining cost. This might drive transaction fees up.
There are attempts to keep the cost of Bitcoin transactions low through solutions like Lightning Network.
The following are some of the advantages of the POS protocol:
The POS blockchain networks do not need to spend high amounts of energy. The nodes are picked to maintain the ledger or smart contract states based on the number of native coins they hold (stake).
To join a POS network, one does not need to have a special kind of hardware or a cheap source of electricity. In fact, on some networks, one does need to have a node to earn a staking reward as they can delegate to those who have.
The Proof of stake consensus mechanism is not perfect. The following are some of the weaknesses it has:
The technology behind POS is still very new, and some aspects are still being figured out. For example, the nothing at stake problem is still of concern to many developers.
Since the incentive to protect the network often does not come from outside resources such as electricity, POS networks are often considered to have lower security. In particular, the nothing at stake attacks are also possible
Even though you don't need specialized or high computer capacity hardware to join a POS network, some blockchains require a high minimum staking amount. For example, to stake on the Ethereum POS network, one needs at least 32 ETH, easily translating to over $100k (depending on the current exchange rate).
This might become a barrier to entry that leads to the centralization of the network.
For most users of blockchain technology, including small and medium-scale businesses, the decision they need to make is what blockchain to use from the many available.
The capacity to execute relevant transactions to their businesses might be more important. For example, they might need a blockchain that supports highly upgradable and dynamic smart contracts.
In regard to what consensus mechanism to implement, that is a decision the core developers of a particular blockchain make.
Nevertheless, from the point of consensus mechanism, the following are the factors to consider:
Security — Generally, POW blockchains are considered more secure than POS ones.
Carbon print — If you or the people you work with are sensitive to greenhouse emissions, you might consider using a POS and not a POW.
It is becoming increasingly important to consider the consensus mechanism of the blockchain you choose. Among other reasons, it might impact your carbon footprint.
The team behind Casper Network has built the capacity to help you make critical decisions around the technical aspects of blockchain.
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