Consensus mechanisms are the backbone of any blockchain network, they play a crucial role in ensuring that the network operates smoothly, securely and efficiently. In simple terms, each mechanism is a different strategy for the same game and different blockchains will use different strategies to win the game. There are several different types of consensus mechanisms, each with its own strengths, weaknesses and use cases. Understanding how these mechanisms work is essential for anyone looking to get involved in the world of blockchain technology.
Here we will go over, what I believe, are the 4 most common types. Their pros/cons and examples of projects that use each one. Let’s dive in!
Proof of Work (PoW): PoW is a consensus mechanism in which nodes(computers) compete to solve a cryptographic puzzle in order to validate, and add new transactions to the blockchain. As the compete, the first computer to solve the puzzle gets a prize.
Examples: Bitcoin(BTC) and Litecoin(LTC)
Pros: PoW provides strong security as it is difficult for a bad guy to control the majority of the network’s hash power and manipulate the ledger. Additionally, PoW is more decentralized. It relies on a large number of nodes to validate transactions and add blocks to the blockchain.
Cons: The main disadvantage of PoW is that it drains crazy amounts of energy since it requires nodes to perform large amounts of computational work to solve those cryptographic puzzles I mentioned earlier. PoW is also vulnerable to 51% attacks, where if a malicious miner can control the majority of the network’s hash power, it can manipulate the ledger.
Proof of Stake (PoS): In PoS, instead of using computational power to solve puzzles like in Proof of Work (PoW), nodes are selected to validate transactions and add blocks to the blockchain based on the amount of stake they hold in the form of tokens on a node. If you are unfamiliar with staking, as a holder of certain tokens, you are able to “stake” coins and earn money. This is the equivalent of collecting dividends in the stock market. PoS also reduces energy consumption compared to PoW, as nodes do not need to perform large amounts of computational work. The more tokens a node holds, the higher its chances of being selected to validate transactions and add blocks to the blockchain. In turn, providing that node with larger amounts of prize money.
Examples: Cardano(ADA) and Ethereum(ETH)
Pros: PoS is more energy-efficient, as it requires nodes to simply hold tokens in order to validate transactions and add blocks to the blockchain. Additionally, PoS provides weaker security guarantees, but is less vulnerable to 51% attacks unlike PoW.
Cons: The main disadvantage of PoS is that it is less decentralized, as it relies how many tokens a node holds. The more it holds, the more likely it is to be selected to validate the next block. Because of this, it makes it vulnerable to stake grinding attacks. Stake grinding attacks occur when the villain acquires a large amount of tokens and uses them to manipulate the selection process and become a validator themselves.
Delegated Proof of Stake (DPoS): DPoS is similar Proof of Stake (PoS) where token holders vote for delegates. The chosen ones are responsible for validating transactions and adding blocks to the blockchain. The delegates are incentivized to act in the best interest of the network, as they are paid fees for their work and have a reputation to uphold if they would like to be selected to validate transactions in future elections.
Examples: EOS and Binance Coin(BNB)
Pros: DPoS is a scalable consensus mechanism and can handle high transaction volumes. It is also more energy-efficient because it requires nodes to simply hold tokens in order to validate transactions and add blocks to the blockchain(You know, similar to PoS).
Cons: With a small number of delegates responsible for validation and block addition, there’s a risk of centralization where bad actors can manipulate the ledger. DPoS is also susceptible to vote manipulation. This is when bad guys can alter the election of delegates and choose individuals who don’t act in the best interest of the network.
Proof of Burn (PoB): PoB is a consensus mechanism where miners need to “burn” a certain amount of tokens in exchange for block rewards. This is done to reduce the number of coins in circulation which in turn, increase the value of those remaining, and prevent spam attacks on the network. PoB is a deflationary mechanism which helps to maintain the value of the network by incentivizing miners to burn a portion of their rewards. To participate in PoB, miners send a designated amount of cryptocurrency to a specific address, which is then burned and can no longer be used. In return, the miner receives a block reward.
Examples: Slimcoin(SLM) and Counterparty(XCP)
Pros: Proof of Burn is an energy-efficient consensus mechanism since it doesn’t require nodes to perform large computational work. Additionally, PoB incentivizes long-term investment in the network, as nodes must “burn” or destroy coins or tokens to demonstrate proof of ownership and receive rewards that can be in the form of new tokens.
Cons: Nodes with large amounts of tokens will have a better chance to participate in the consensus process. This can lead to system that can be “gamed” to have an unequal distribution of rewards and power. Additionally, PoB can reduce the liquidity of the network, as nodes must destroy coins or tokens to participate in the consensus process. This can limit the ability of nodes to sell their tokens and potentially reduce the overall value of the network.
Whether you’re a blockchain beginner or a seasoned expert, I hope that you have enjoyed this rundown of some consensus mechanisms. Each mechanism has its own special set of superpowers, but like many other things in tech, the best one for your project will depend on its needs. And if you’re feeling adventurous, there are plenty of other mechanisms like Proof of Capacity, Proof of Elapsed Time, and Practical Byzantine Fault Tolerance to explore. Protect your data and never stop learning. Give this a clap if you enjoyed and I will see you in another article!
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