Blockchain technology is all the rage these days and the hype is not without merit. The technology has some amazing use cases and it's here to stay. However, with all of this popularity, it can be hard to keep up with the jargon and technology involved. One of blockchain's most basic concepts is that it uses consensus mechanisms to validate transactions.
Blockchain's underlying technology continues to develop at a rapid pace, with hundreds of new cryptocurrencies appearing each year as developers create unique platforms for different applications using blockchain. In order to maintain a decentralized system and secure information, these new blockchains need to implement effective consensus mechanisms.
Cryptocurrencies are definitely not just for the techie elite anymore. They've been adopted by a wide variety of people, from online gamers to foreign workers to investors in big banks. But there's one problem—the digital currency market is very volatile and could crash at any time.
That's why newer cryptocurrency companies are working on groundbreaking tech called blockchain consensus mechanisms, which will make the crypto prices more stable and secure.
Below are the consensus algorithms you should know about:
Types Of Blockchain Consensus Algorithms
As the blockchain universe expands, new consensus mechanisms are being developed and experimented with.
These are the most common ones in use today:
Proof of Work
The most widely used of these mechanisms is Proof of Work (PoW). PoW works by putting the onus of maintaining the blockchain on miners, who are incentivized to do this work by receiving newly minted bitcoins in exchange.
Proof-of-work (PoW) requires nodes to solve a difficult mathematical problem (the work unit) in order to add new blocks to the chain.
Proof-of-work (PoW) systems use miners to create new blocks. These miners must solve a certain formula in order to add a new block of data to the blockchain. The miners must be paid in cryptocurrency as compensation for their work. It could be through Bitcoin or stablecoins that they can convert to fiat currency such as USDT to USD and others.
Proof Of Stake
Proof-of-stake is another blockchain consensus mechanism. In this model, validators (nodes) are selected based on the size of their stake in the system, which means that those with larger stakes have a greater incentive to keep the system honest.
This is different from proof-of-work, where nodes are selected based on how many compute cycles they can throw at a problem; this distinction has implications for how much power a given stakeholder has over the network and how much they have to lose if they try to cheat.
Delegated Proof Of Stake
In order to participate in delegated proof of stake (DPOS), users must "delegate" or vote for one or multiple "witnesses," who are responsible for validating transactions and adding them to the blockchain.
In this system, it's not necessary for users to set up dedicated computers with expensive processing power just to be able to confirm or validate transactions. Users simply deposit their coins into secure wallets and use their coins as collateral for voting rights in DPOS systems.
Proof Of Capacity
Proof-of-capacity is a method of mining in which you prove that you have consumed a certain amount of data storage as a way to create and verify new transactions. This has the advantage of being much more affordable than proof-of-work, making it possible for average people to use the blockchain directly instead of just working through third parties.
Proof Of Elapsed Time
Proof of elapsed time is a blockchain consensus mechanism that allows for the construction of distributed clocks. It incentivizes miners to participate in a protocol that provides verifiable computational proof of the passage of time. The protocol is similar to proof-of-work, and uses the same cryptographic hash function.
However, instead of requiring miners to perform costly computations, the Proof of elapsed time requires miners to simply perform basic mathematical operations on values stored in the blockchain.
Proof of Identity
The security of your identity information can be ensured through public-key cryptography, which is used to verify users' identities. To do this, you generate a public key that is freely available for anyone to view and use to send you information securely. You also keep a private key that allows you to open messages from others that were encrypted with their public key.
Proof Of Authority
In a proof of authority system, token holders delegate their voting rights to certain nodes (which are very similar to witnesses in DPOS) that they trust to make decisions in their place. The difference between this and other systems is that in all other systems, it is still possible for token holders to have influence if they choose to participate in voting themselves.
In proof of authority, there's no way for ordinary users to vote; only the selected nodes can do so. This system therefore relies on a high degree of trust between the network and its participants, since the selected nodes could potentially collude among themselves.
Proof Of Activity
Blockchain consensus isn't just about proof of work—it can also be about proof of activity. Proof of activity is a type of proof of stake that doesn't require you to store all the data from the blockchain on your computer, but instead, you use the fact that you have some coins as a proxy for how much "activity" you've done in the past.