- 1 Consensus mechanisms decide how the blockchains work and create new tokens.
- 2 With the knowledge of these algorithms, investors can be better prepared for new challenges and possibilities.
Every device or technology has a mechanism that determines its functionality. The terminology may change but the essence remains the same. In the 21st century, quite a few technologies have emerged and amazed people because of their innovative structure. Cryptocurrency is one of those technologies that have introduced a pioneering system to the world.
Cryptocurrency works on blockchain, but that’s not the end of it. The technology is profound and offers so much to learn. The core aspect of cryptocurrency is its consensus algorithm. This mechanism ensures how a crypto is generated and how it works. There’s a lot that one can explore about the blockchain consensus mechanism.
Blockchain is essentially a digital space where information can be stored, and it is run by multiple individuals. Moreover, it was created to establish an egalitarian system where everyone has equal ownership over information. So, it needed a structure that could rule out any chances of conflict.
With that, the consensus mechanisms came to the fore. A consensus algorithm is an autonomous protocol that determines the whole working of the blockchain. In the context of crypto creation, this mechanism decides how new blocks are created. Eventually, these blocks would become cryptocurrencies.
It would be easy to understand if one takes it from the top. The concept of blockchain consensus was introduced through the first crypto, Bitcoin. To generate a BTC, the miners or nodes had to solve mathematical equations. When they do it successfully, they get rewarded with some portion of Bitcoin.
However, Bitcoin was just the beginning and the consensus mechanism started evolving. Today, there are many types of them that keen learners need to know.
Types of Blockchain Consensus Mechanisms
The following are the blockchain consensus algorithms that have become popular among developers.
Proof-of-work had to go through a long journey before becoming a leading decentralized solution. It was originally introduced in 1993 for internet security purposes. However, in 2008, Satoshi Nakamoto used it to make Bitcoin. As mentioned above, the mechanism focused on solving mathematical equations.
A number of miners join the network to do the hard work and get rewarded.
This is an altered version of the proof-of-work algorithm. It diverges a little from the PoW and involves periodic snapshots of the blockchain. The process follows writing blocks on the network creating a backup too. According to many experts, DPoW is more of a security mechanism than an algorithm.
Its primary job is to keep the security threats at bay.
PoS is chronologically the second consensus mechanism to be introduced in this space. Furthermore, it is also the second-most dominant mechanism for creating coins. Notably, it was introduced as a better alternative to PoW which consumed massive computing resources and electricity.
In this environment, the community members stake their tokens in the blockchain instead of solving equations. It gives them the right to validate transactions and win rewards.
Again, this is an altered and more efficient version of PoS. A basic difference here is that the validators are chosen based on a voting system. The people casting the votes are called delegates, and this is where the name is derived from. Apart from running the validating transactions, delegates also maintain the integrity of the protocol.
Although the voting works on the principles of staking, people with more tokens get more rights.
In a PoA-based system, block validators stake their reputation instead of coins. This makes the system safer than PoS because there’s no asset involved. It works with the involvement of validating nodes that are picked arbitrarily. These trusted parties are pre-approved to verify the transactions.
In addition, they work like system moderators and are usually more scalable.
This algorithm is currently going through assessments. Its developers have introduced it as a more sustainable option compared to PoW and PoS. By design, it works like PoW but it consumes much less energy. It achieves this by making a fundamental change in the process of validation.
Instead of solving equations, miners “burn” their tokens to attain consensus.
Hybrid PoW/PoS Consensus
As the name suggests, this combines the two major consensus algorithms. First, miners create new blocks to add blocks to the network in the PoW pattern. Then, they follow the PoS voting style to accept or reject them. On top of that, they stake a portion of their tokens as well.
One does not need all the knowledge to make profits with crypto trade. However, it helps to understand how the technology works and what its limitations are. With that knowledge, one could be certain about the potential of crypto and blockchain. So in the long run, learning about consensus mechanisms is prudent for investors.
Amanda Shinoy is one of the few women in the space invested knee-deep in crypto. An advocate for increasing the presence of women in crypto, she is known for her accurate technical analysis and price prediction of cryptocurrencies. Readers are often waiting for her opinion about the next rally. She is a finance expert with an MBA in finance. Quitting a corporate job at a leading financial institution, she now engages herself full-time into financial education for the general public.