In blockchain, all network users (nodes) are equal and can influence the system's work as it ensures decentralization. However, nodes should agree on how to control the network, what transactions are valid and perform their roles honestly.
Consensus in blockchain means an agreement between nodes on the current state and necessary changes in the system. Network users agree on existing and new data on the blockchain.
Such agreement performs automatically based on particular rules and conditions, known as consensus mechanisms. As rules and conditions can be different, there are different types of consensus mechanisms.
Besides the most popular Proof-of-Work (PoW) and Proof-of-Stake (PoS), there are other types of consensus mechanisms that defer in security, scalability, energy efficiency, level of decentralization, throughput, transaction fees and speed.
Why does the consensus mechanism matter? As a crypto user, you should get acquainted with consensus mechanisms and their pros and cons to make proper trading and investing decisions and to understand potential security risks you may bear while interacting with concrete cryptocurrencies and projects.
Types of Consensus Mechanisms
Proof-of-Work (PoW)
PoW is a consensus mechanism in Bitcoin, Dogecoin, Litecoin, and others.
In PoW, nodes (miners) validate transactions and propose new blocks by solving the computational problem. Miners compete to be the first to solve the puzzle as the quickest one receives so-called mining rewards. The more miners appear, the more competition and the more complicated the computational problem. Thus, mining requires a lot of energy and special equipment to win the competition, making it unprofitable for small miners. At the same time, blockchains that adopt the PoW consensus mechanism are highly secured as attackers must spend high costs to attack the network, which can be unprofitable. Thus, Bitcoin network was never hacked.
PoW advantages: highly secured, decentralized structure, and acceptable scalability.
PoW disadvantages: high block creation time, energy inefficiency, and high computational cost.
Proof-of-Stake (PoS)
PoS is a consensus mechanism in Ethereum, Solana, Cardano, Tezos and other blockchains.
In PoS, nodes don't perform computational work but stake native cryptocurrencies. Nodes (validators) are required to purchase a particular amount of cryptocurrency and lock it in a smart contract for some time to get rewards instead. Validators are chosen randomly to validate transactions and add new blocks, and the more locked assets validators have, the more possible they would be chosen. A dishonest validator may lose a part or all locked assets as a punishment. PoS may suffer from centralization as a small number of users can keep the majority of staked assets taking control over the network. Also, a PoS network performs less security than a PoW since attackers can spend bearable costs to manipulate data.
PoS advantages: fast block creation time, high throughput, energy efficiency, and scalability.
PoS disadvantages: centralization may occur.
Delegated Proof of Stake (DPoS)
DPoS is a variation of PoS used by Cosmos and Tron.
In DPoS, users stake native assets as well, but only selected delegates can validate blocks. Such delegates are called witnesses and perform decision-making on other users' behalf. Stackers vote to elect witnesses and can also reselect them if dishonest behaviour occurs. Such democracy structure makes all nodes equal. However, semi-centralization may occur since the number of witnesses is limited. Also, witnesses may control over 51% of a network and make malicious decisions collapsing the network.
DPoS advantages: scalability, energy efficiency, and low-cost transactions.
DPoS disadvantages: semi-centralization, vulnerability to 51% attack.
Proof-of-Weight (PoWeight)
In PoWeight, each user weights the network determined by the amount they have on their accounts. The algorithm randomly selects users based on their weight. To keep the network secured, over 51% of users should be honest. Unlike PoS, in PoWeight, validators should only own assets without staking and don't receive rewards.
PoWeight advantages: customization, scalability, fast transactions, and energy efficiency.
PoWeight disadvantages: semi-centralization, and no incentive.
Proof-of-Capacity (PoC)
Unlike PoW, where miners should solve complicated energy-inefficient problems to validate transactions and get rewards, PoC miners should approve they have enough space on their hardware to mine cryptocurrencies. Miners can store as many nonces and blocks hashed as their space allows. The algorithm chooses miners with the most significant storage capacity as they will likely meet the closest hash requirements to add a new block.
PoC advantages: energy efficiency, high decentralization, and low entry barriers for miners.
PoC disadvantages: the miners' competition may be unfair since it wins the one with the largest space, and miners can trick the network.
Proof-of-Authority (PoA)
PoA requires users to stake their identities or reputation instead of financial capital. Network users select validators who disclose their identities and act as system moderators. The validators are interested in a network's long-term and successful development and usually appear to be institutional investors. So they stake their social capital and bear reputational risks only. As the number of validators is limited, such networks are centralized, but their structure allows high scalability. PoA is more likely a solution for private networks and is used by VeChain.
PoA advantages: scalability, more energy efficiency compared to PoW, high speed, and tight security.
PoA disadvantages: centralization, validators are not anonymous.
Byzantine Fault Tolerance (BFT)
In BFT, ⅔ of nodes should agree the transaction is true to add a new block. It is supposed those nodes are honest and the network can successfully perform so far as most users are genuine. Thus, BFT helps blockchain stay continuously functioning and resist despite some users may be malicious.
BFT advantages: energy efficiency and high throughput.
BFT disadvantages: the system is susceptible to 51% and Sybil attacks, and low scalability.
Bottom Line
The consensus mechanism directly affects security and decentralization, which are essential for crypto users choosing blockchain technology for new financial instruments and opportunities underrepresented in centralized finances.
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