Consensus Mechanism (Cryptocurrency)

What Is a Consensus Mechanism?

A consensus mechanism is a fault-tolerant mechanism that is used in computer and blockchain systems to achieve the necessary agreement on a single data value or a single state of the network among distributed processes or multi-agent systems, such as with cryptocurrencies. It is useful in record-keeping, among other things.

On the Bitcoin blockchain, for instance, the consensus mechanism is known as Proof-of-Work (PoW), which requires the exertion of computational power in order to solve a difficult but arbitrary puzzle in order to keep all nodes in the network honest.

Key Takeaways

  • A consensus mechanism refers to any number of methodologies used to achieve agreement, trust, and security across a decentralized computer network.
  • In the context of blockchains and cryptocurrencies, proof-of-work (PoW) and proof-of-stake (PoS) are two of the most prevalent consensus mechanisms.
  • Critics of Bitcoin miners have argued that PoW is overly energy-intensive, which has sparked the creation of new and more efficient mechanisms.

Consensus Mechanism Explained

In any centralized system, like a database holding key information about driving licenses in a country, a central administrator has the authority to maintain and update the database. The task of making any updates—like adding/deleting/updating names of people who qualified for certain licenses—is performed by a central authority who remains the sole in-charge of maintaining genuine records.

Public blockchains that operate as decentralized, self-regulating systems work on a global scale without any single authority. They involve contributions from hundreds of thousands of participants who work on verification and authentication of transactions occurring on the blockchain, and on the block mining activities.

In such a dynamically changing status of the blockchain, these publicly shared ledgers need an efficient, fair, real-time, functional, reliable, and secure mechanism to ensure that all the transactions occurring on the network are genuine and all participants agree on a consensus on the status of the ledger. This all-important task is performed by the consensus mechanism, which is a set of rules that decides on the legitimacy of contributions made by the various participants (i.e., nodes or transactors) of the blockchain.

Blockchain Consensus Mechanisms

There are different kinds of consensus mechanism algorithms, each of which works on different principles.

The proof of work (PoW) is a common consensus algorithm used by the most popular cryptocurrency networks like bitcoin and litecoin. It requires a participant node to prove that the work done and submitted by them qualifies them to receive the right to add new transactions to the blockchain. However, this whole mining mechanism of bitcoin needs high energy consumption and a longer processing time.

The proof of stake (PoS) is another common consensus algorithm that evolved as a low-cost, low-energy consuming alternative to the PoW algorithm. It involves the allocation of responsibility in maintaining the public ledger to a participant node in proportion to the number of virtual currency tokens held by it. However, this comes with the drawback that it incentivizes cryptocoin hoarding instead of spending.

While PoW and PoS are by far the most prevalent in the blockchain space, there are other consensus algorithms like Proof of Capacity (PoC) which allow sharing of memory space of the contributing nodes on the blockchain network. The more memory or hard disk space a node has, the more rights it is granted for maintaining the public ledger. Proof of Activity (PoA), used on the Decred blockchain, is a hybrid that makes use of aspects of both PoW and PoS. Proof of Burn (PoB) is another that requires transactors to send small amounts of cryptocurrency to inaccessible wallet addresses, in effect "burning" them out of existence.

Another, called Proof of History (PoH), developed by the Solana Project and similar to Proof of Elapsed Time (PoET), encodes the passage of time itself cryptographically to achieve consensus without expending many resources.