Consensus algorithms are the foundation of cryptocurrencies and blockchain in general. They allow transactions to be secured and verified without the use of a central authority. Simply put, a consensus algorithm/protocol is a procedure where all the users involved in a specific blockchain network reach an agreement.
A blockchain network is a decentralized network which means that it’s not controlled by one central authority, everyone participates. This is great but how do you achieve true consensus on the network? You can’t just ask participants. There needs to be a system where participants have to work in some way in order to reach an agreement.
Proof of Work
This is the most common consensus protocol and was the first to be used in cryptocurrencies. Bitcoin uses the ‘Hashcash’ proof of work system. In this system, participants (miners) have to complete very difficult calculations and share the results with the rest of the network. The solution of the calculation is not known until it’s solved and everyone has the ability to check if the solution is actually correct.
In order to incentivize users to carry out these difficult calculations, the PoW consensus system rewards them with the cryptocurrency itself, Bitcoin, for instance, asks for transaction fees that are destined towards miners.
If someone wants to send a fake transaction, he can’t unless the network agrees, the real only way to ‘hack’ Proof of Work is by somehow owning more than 50% of the network, also known as a 51% attack. Satoshi himself, the creator of Bitcoin, explains that even if someone wanted and had the means to own more than 50% of the network, it would cost him a lot more money than simply mining Bitcoin regularly.
Proof of Stake
PoS is an alternative consensus algorithm created to solve the energy problems that the traditional PoW created. In essence, in a PoS protocol, participants can validate blocks simply by holding coins, they do not need to perform complicated calculations like in the PoW protocol.
The PoS protocol basically gives mining power to participants in proportion to the number of coins they are holding. This basically means that any participant can theoretically mine exactly the percentage of the coins they own. If you own 2% of the supply of a coin, you could theoretically mine 2% of the blocks.
A 51% attack is possible with this protocol too, however, it is even more disadvantageous for the attacker than the previous version. In the PoS protocol, an attacker would need to literally own 51% of the supply of the coin. An attacker would not want to attack the network in which he holds the majority of the shares.
Other types of Blockchain protocols
There have been a lot of variations of the original PoW and PoS. One of the most commonly used variations is the DPoS (Delegated Proof of Stake). It’s fairly similar to the original PoS but uses a more democratic system that allows holders to cast votes more proportional to their stake.
Proof of Authority is another close version of the PoS and DPoS. In this consensus protocol, only a group of validators can produce new blocks and secure the blockchain. The validators are public and their identities can be verified by anyone.
Supernode Proof of Stake (SPoS) is a less known consensus protocol but quite important because it was created by Sunny King, the inventor of the original PoS. The new SPoS is basically an upgraded version of the original. SPoS is not randomized and the rewards are distributed to participants that are basically waiting in line.
There are a lot of consensus algorithms out there and they are all trying to solve different problems. Perhaps one day the ultimate consensus algorithm will be created, for now, one of the biggest issues with the original algorithm was the waste of electricity and energy, something that the newer algorithms are solving.
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