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Blockchain technology with a network of nodes on which cryptocurrencies are built wouldn’t thrive without consensus mechanisms. These refer to methodologies used in the blockchain network to achieve agreement (consensus) and trust across a decentralized network of computers. Blockchain consensus mechanisms play a vital role in ensuring that the security and performance of the network aren’t compromised.
The first consensus protocol was Proof of Work or PoW, characterized by its energy intensiveness and high computational power to solve difficult puzzles to keep the network nodes in line and mint new bitcoins. In addition, it takes a longer time to process transactions. The first blockchain network, Bitcoin, still uses the PoW protocol.
The demand for a low-energy intensive mechanism led to Proof of Stake or PoS. Unlike the PoW consensus algorithm, PoS involves staking the required amount of the crypto native to the network to maintain the public ledger. The Ethereum network popularized the PoS. While it has the edge over PoW, it encourages hoarding. In addition, major token holders have a higher chance of signing new blocks.
Consensus Mechanisms Explained
Consensus algorithms in a decentralized network like Bitcoin are similar to the central authority in a centralized system responsible for running a company’s database. The difference here is that blockchain operates without a single entity. Blockchains are built to store, transact, and communicate information without a centralized authority. Since the decentralized network is publicly shared, it needs a secure, just, and reliable mechanism to validate and authenticate all the transactions on the chain. This is what a consensus mechanism does.
A consensus mechanism ensures that all the nodes in the network are synchronized and are in agreement. It constitutes rules that validate contributions from participants or nodes in the blockchain. All participants must concur to the agreement on the ledger. Consensus protocols keep the blockchain running smoothly, and that makes them indispensable.
The dynamically evolving blockchain technology has brought several mechanisms to the limelight. From Proof of Work in Bitcoin to Proof of Stake in Ethereum 2.0, several noteworthy consensus protocols have been developed over the years to maximize the efficiency of blockchain transactions and information recording amongst distributed computers.
Here, we analyze the different types of protocols beyond PoW and PoS and their benefits.
Other major types of blockchain consensus mechanisms
According to Ethereum co-founder Vitalik Buterin, blockchain is based on three fundamental concepts, also known as the Trilemma – scalability, security, and decentralization. Developers must incorporate these three attributes into the network’s DNA to maximize efficiency and performance. In the quest to balance these attributes, network developers developed different protocols. Let’s look at them below.
Proof of Capacity
Proof of Capacity is one of the new protocols created by network developers. PoC uses the space in a hard drive to authenticate transactions instead of energy. It enables the sharing of memory space of the participant’s device on the network. The larger the memory capacity on the miner’s device, the more rights the node has in the network.
Proof of Capacity is also known as Proof of Space crypto. SpaceMint and Permacoin use the consensus protocol.
Proof of Activity (PoA)
Proof of Activity is one the most efficient algorithms because it combines PoW and PoS. This hybrid consensus mechanism allows network miners and validators who are token holders to mine and stake tokens to authenticate blocks. In PoA, network miners contend with mining new blocks for a token reward, but the blocks have no transactions. Instead, they are blank templates with the title of the transaction and reward address.
The transaction title selects a node at random to confirm the block in the ledger. The network fee is then split between the network participants. This consensus mechanism lowers cyberattack risks by more than 50%, making it impossible to predict the node sign or confirm the next block in the ledger.
However, the mechanism still requires substantial energy to mine since it uses PoW. Plus, holders with a significant amount of tokens have a higher chance of signing blocks and claiming rewards. Decred blockchain uses PoA.
Proof of Authority
Proof of Authority uses a reputation-based structure to validate transactions and add new blocks. Other network participants select these validators to maintain the system. Typically, these validators are institutional investors with long-term interest and investments in the network and have accepted disclosing their social identities.
The biggest criticism of this mechanism is that it’s semi-centralized since it favors a specific set of people. Because of this, many public decentralized networks find it incompatible. VeChain uses PoA.
Proof of History (PoH)
Solana uses Proof of History. PoH algorithms function via an inbuilt record that shows all the transactions on-chain. Unlike other consensus mechanisms requiring collective agreement to verify transactions, each validator on the blockchain maintains its clock by recording message time in SHA-256 verifiable delay function VDF. This way, network delays are bypassed. This is how Solana can achieve its remarkable transaction speed.
Other consensus mechanisms emerged from mixing two algorithms: Proof of Importance from PoS, Proof of Storage (data reliant) from PoC, and Proof of Contribution from PoS.
The road ahead
The evolution of blockchain technology has birthed a plethora of consensus mechanisms. As the technology expands and matures, the crypto space will witness more remarkable iterations in consensus protocols.
Blockchain consensus mechanisms operate efficiently with smart contracts. Smart contracts are executable programs that run on blockchains. This program defines rules and agreements and enforces them via a written code. While they can be erased by default, they can be exploited if not properly audited.
We have seen cases where crypto platforms were hacked. These DeFi hacks have become common due to an identifiable bug in the smart contracts. Hackers capitalize on the loophole to steal funds. The most common victims are blockchains that use PoS and PoA (Proof of Activity).
DeFi projects built on these networks can be hack-proof if extensively audited by accomplished security firms like QuillAudits. This firm deploys an efficient approach to check the security level of a smart contract. Once a vulnerability is detected, QuillAudits recommends the best way to secure the project and monitors it too.
You can reach out to QuillAudits here if you need assistance in the security audit of your project.
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