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Welcome to our guide on consensus mechanisms! As blockchain technology continues to evolve, understanding how consensus is reached on the distributed ledger is crucial.
In this article, we will explore what consensus mechanisms are, how they work, examples of different types, and which may be best suited for different applications. By the end, you'll have a firm grasp of this fundamental blockchain concept.
Let's begin with a simple explanation. A consensus mechanism is a process or algorithm that allows decentralized networks to agree on one shared reality amid competing views of what that reality should be.
On a blockchain, this enables all types of nodes in the blockchain in the network to agree on the order and validity of transactions without a central authority. As we'll see, various mechanisms have been developed to facilitate this consensus in different ways.
The consensus process in a blockchain works by having nodes provide information about upcoming transactions, which are subsequently verified with the records of the blockchain.
At their core, all consensus mechanisms aim to ensure that nodes agree on:
For consensus to function properly, blockchains require >50% of processing power or stake to agree on any changes. This prevents a party from altering history unilaterally. The specific rules of what constitutes consensus may differ between mechanisms, but the general principle remains the same.
It is common practice to ban users from the network if they do not adhere to consensus. Confirmation, distribution, and permanent recording of the transaction into the blockchain occur when approval from more than two-thirds of their peer nodes is received.
Since the central authority in decentralized finance is responsible for approving or rejecting transactions, consensus mechanisms play a key role in this system.
An agreement prevents manipulation of the ledger or double spending.
It prevents single points of failure by allowing for group decision-making rather than centralized authority.
Any node on the network can view publicly validated transactions.
Mechanisms continue evolving to enable new capabilities or types of blockchains.
Mechanisms like proof-of-stake allow for much faster finality than early Bitcoin PoW blocks.
There are over a dozen types of consensus mechanisms currently in use across various blockchains. Let's examine a few of the most prominent ones!
The original mechanism of Bitcoin is known as Proof of Work, where miners compete to add blocks by solving cryptographic puzzles. Whoever solves a puzzle first is rewarded with new coins. This requires intensive computing power but provides high security through network hashing power investment.
An alternative is Proof of Stake, where the creator of the next block is chosen via various algorithms based on the number of crypto units held. Validators must bet a portion of their holdings to validate transactions, getting it back if they behave honestly. This is far less energy-intensive than PoW.
One type of proof-of-stake model is delegated proof-of-stake, where token holders vote on witnesses or delegates who forge blocks on behalf of others. This can enable hundreds, or thousands, of transactions per second.
As mentioned earlier, PoW requires enormous computing power that consumes vast energy, while PoS shifts security reliance from costs to stake ownership.
Both have received criticism, but they have shown that the potential of cryptocurrencies is only beginning to be tapped. For further comparison, you can check “PoW vs. PoS."
Used in NEM, PoI calculates importance based on factors like the number of transactions performed, the number of tokens owned, and the number of tokens in your crypto wallet over time. This rewards sustainable contributions rather than the vacant stakes of others.
Burstcoin uses Proof of Capacity, where miners are rated based on the disk storage space allocated rather than computational resources. Miners gradually "plot" their capacity over time through intensive disk reads and writes to prove storage without consuming large amounts of energy.
Intel's Sawtooth Lake consensus algorithm uses Proof of Elapsed Time to randomly select a validator in constant time, regardless of machine processing power. This uses Intel Software Guard Extensions to provide a fair election compared to the energy expenditure of PoW's brute force approach.
Another relatively new model, pioneered in the NULS blockchain, selects the miner based on Proof of Activity proportional to the number of transactions validated. This incentivizes active participation in maintaining ledger data integrity as well as coin ownership.
A permissioned form gaining interest relies on identified validators or authorities holding unique digital signatures to validate blocks without significant waste. EURK uses Proof of Authority, where signatures authenticate transaction validity.
Blockchain technology powers EURK, a euro stablecoin that is ERC20 compatible. As they are 1:1 pegged to the euro, EURK offers secure, simple, and quick transactions in the crypto ecosystem with their stable value.
PoB motivates participation by destroying coins as "mining fees," aiming to curb inflation. This unique approach saw initial adoption in Peercoin before losing favor.
With so many options, you may wonder which one is the best consensus mechanism. The answer depends highly on the specific priorities and constraints of each project. In general:
For the most up-to-date and secure stablecoin transactions, a structure like EURK that uses PoA is advantageous. It offers transparent, fast, and secure transactions backed by real reserves and regulated oversight.
Overall, the right model of consensus mechanism depends on how decentralization, scale, and sustainability priorities balance for each use case for your own specific needs.
To summarize the key points on consensus mechanisms:
Distributed consensus among peers on transparent digital ledgers offers a revolutionary solution to extend modern banking to communities worldwide previously excluded from these systems.
With responsible innovation around an inclusive euro stablecoin platform like EURK, we can empower billions through new opportunities previously unattainable.
The tools now exist to realize universal digital financial access; with cooperation and creativity, we can build a more just and prosperous economic system for people of every background. To benefit from secure transactions without dealing with fluctuations, EURK is here for you. Become a partner today!
