Consensus Mechanism: A Key Component of the Blockchain System

Central authorities play a crucial role in protecting traditional financial institutions by facilitating consensus among stakeholders. However, decentralized systems like blockchain operate without such central authorities. So, how do they achieve consensus and ensure the security of transactions?

Unlike centralized establishments, where stakeholders know each other and can easily reach an agreement, blockchain involves systems or nodes that are often strangers scattered across the globe. Consensus is a critical component of blockchain, and ensuring it without conflict is essential. But how can it be achieved without conflict in a decentralized system? What can be done to ensure the security of the blockchain and the integrity of all transaction records?

What is a Consensus Mechanism in Blockchain?

Consensus mechanisms are crucial in blockchains and are achieved through a combination of protocols, incentives, and systems that enable nodes to agree on transactions and the state of the blockchain. In simpler terms, it is a democracy or governance approach that keeps a blockchain secure and functional.

Cryptocurrencies like Bitcoin, Ethereum, and Cardano rely on consensus mechanisms to ensure the security and authenticity of transactions. Independent nodes can verify transactions and update the blockchain ledger based on the consensus system applied to each blockchain. Some nodes update the ledger based on the amount of work done (proof of work), others based on their stakes (proof of stake), and others based on authority (delegated proof of stake).

Types of Consensus Mechanisms

Each consensus mechanism has its own algorithm and mode of operation. This makes its security different or better than others but also exposes it to different types of risks. 

Below are different types of consensus mechanisms and how they work:

Proof of Work (PoW) 

Proof of Work (PoW) is a popular consensus mechanism in which miners compete to add the latest block to the blockchain ledger in exchange for a reward. This consensus mechanism relies on the computational power of many computers, providing a high degree of trust in the process. Bitcoin and Litecoin are among the cryptocurrencies that use this consensus system. However, PoW has some downsides, including its high energy consumption, longer processing time, and the need for high-end computers to mine.

Proof of Stake (PoS) 

Proof of Stake (PoS) is a consensus algorithm widely used in blockchain systems because it is low-cost and energy-efficient. The mechanism allocates transaction authentication responsibilities to those with the largest stake in the blockchain network, incentivizing holding or staking the native cryptocurrency against spending or selling. This approach speeds up and lowers the cost of transactions while rewarding the biggest stakeholders. Some of the cryptocurrencies using PoS include Cardano, Polkadot, and Ethereum 2.0.

Delegated Proof of Stake (DPoS) 

This is an extension of PoS. It operates by introducing a voting structure, where voted delegates are selected randomly by the system to add new blocks to the blockchain. Trusted delegates are voted by network participants using their native coins. The cryptocurrencies Lisk and EOS are examples of blockchains that use DPoS. 

Proof of Capacity (PoC) 

Proof of Capacity (PoC) is a consensus mechanism where the amount of available disk space is considered when delegating block validation responsibilities. The disk space determines which node manages the blockchain ledger or which miner adds the new block to the blockchain at any time. As opposed to other consensus mechanisms, this replaces staking and computational power. Currencies that rely on PoC include SpaceMint, Chia, and Burstcoin.

Proof of Activity (PoA) 

Proof of Stake (PoS) and Proof of Work (PoW) were combined into a hybrid consensus mechanism called Proof of Activity (PoA). In the PoW equation, heavy computations must first be carried out, and an empty block of header information and reward address is submitted. Afterward, one of these empty blocks is selected based on the amount of currency staked by the miner. This staking procedure (i.e., PoS) finalizes who will add the complete transaction block to the blockchain.

Proof of Authority (PoA) 

Proof of Authority (PoA) is a consensus mechanism that is primarily used by private blockchains that want to maintain their blockchain within the company or organization. PoA is unique in that it has a faster transaction speed compared to other consensus mechanisms such as Proof of Stake and Proof of Work. PoA introduces a practical and efficient consensus mechanism for blockchain networks known as a reputation-based consensus algorithm. Rather than using coins, validators stake their reputation or identity. To be considered trustworthy, validators must verify their identities and other personal information. The system selects these validators randomly to verify transactions and add new blocks to the blockchain ledger. Examples of blockchains that use PoA include Xodex, VeChain, Bitgert, and Palm Network

Proof of Importance (PoI) 

Proof of importance (PoI) is a consensus mechanism similar to proof of stake (PoS) in that validators must lock up some cryptocurrency to verify transactions and add new blocks to the blockchain. However, unlike PoS, the choice of the validator or node that adds new blocks is not based on stakes. Instead, PoI assigns consensus importance scores to validators.

To earn a high importance score, validators need to engage in activities that demonstrate their trustworthiness and reputation on the network. The PoI system measures the importance score based on the number and quality of past transactions.

In PoI, staking is a prerequisite, but it does not guarantee a higher chance of being selected as a validator. Instead, the importance score is the primary factor that determines the likelihood of being chosen to verify transactions and add new blocks to the blockchain.

Proof of History (PoH)

This unique consensus mechanism incorporates time into the blockchain to reduce the load on network nodes during block processing. It operates like a cryptographic time stamp. This process eliminates solving for the time of transactions as it is in the proof of work (PoW) algorithm. For example, PoH employs Verifiable Delay Functions (VDFs) instead, which can be solved through a single CPU core by performing some set of consecutive steps.

Proof of Burn (PoB) 

Proof of burn (PoB) is a consensus mechanism where miners increase their chances of being chosen to add transaction blocks to the blockchain by burning or sending coins to an unspendable account. This process permanently removes the coins from circulation, even by the owner, and is known as coin burning.

The more coins a miner burns, the higher their chances of being selected to add new blocks to the blockchain ledger. However, to be chosen as a validator, a miner must spend their own money, as the native coins being burned are the ones they own or have purchased. PoB is used in cryptocurrencies such as Counterparty (XCP), Slimcoin (SLM), and Factom (FCT).

Proof of Elapsed Time (PoET) 

This consensus mechanism prevents high resource utilization and energy consumption by using a time-lottery-based concept or random timer that independently distributes waiting time to miners. In the waiting time, nodes must sleep, and the node with the shortest allocated waiting time can add the new block first. Afterward, network validators verify the results. One example of a blockchain using PoET is the Hyperledger Sawtooth project.

Conclusion

The proof of work (PoW) consensus mechanism has faced criticism for its high energy consumption and impact on climate change, while the proof of stake (PoS) mechanism is often criticized for the required capital investment. Other consensus mechanisms, such as proof of importance (PoI) and proof of capacity (PoC), also have their reservations. However, each consensus mechanism has its strengths and weaknesses, and the best approach depends on the unique requirements of the project or cryptocurrency.

Rather than comparing one mechanism to another, it is crucial to evaluate which consensus mechanism is best suited for a specific project. For example, a public blockchain that requires high levels of security and decentralization may benefit from using PoW, while a private blockchain that emphasizes efficiency and scalability may be better suited for PoA.

In summary, there are various consensus mechanisms, each with its unique characteristics and applications. By understanding the strengths and weaknesses of each mechanism, developers and project teams can make informed decisions on which mechanism to use based on their specific requirements.

Identity.com

Blockchain is the future, and it is impressive to see Identity.com contributing to this desired future through the Solana ecosystem and other Web3 projects. Also, as a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.

The work of Identity.com as a future-oriented company is helping many businesses by giving their customers a hassle-free identity verification process. Identity.com is an open-source ecosystem providing access to on-chain and secure identity verification. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs for more info about how we can help you with identity verification and general KYC processes.