Consensus Algorithms in Blockchain
Ever since blockchain set its step into different industries, it has been unstoppable. We know that blockchain is a digitally distributed, decentralized, immutable, shared ledger that provides privacy, security, and transparency to facilitate processes like tracking assets and recording transactions in a business network. As a distributed ledger, the blockchain doesn’t have a centralized authority to validate and verify transactions.
So why don’t we worry about the complexity of using blockchain without a central authority? What are we using to secure the transactions in this public ledger?
And the answer to these questions is Consensus Algorithm.
What is Consensus Algorithm?
A consensus algorithm is a procedure that allows each peer of the blockchain network to set a shared agreement about the state of the decentralized ledger. In other words, The consensus algorithm is a protocol using which all the nodes in the blockchain network come to a common consensus (agreement) on the current data state in the ledger and can trust unknown peers in the network.
The consensus algorithm or mechanism is designed to acquire reliability in a network that consists of nodes or multiple users. So, consensus algorithms allow blockchain to achieve reliability and trust among nodes while ensuring security in the network environment. It is useful when it comes to record-keeping.
In short, the consensus algorithm acts as the backbone of the blockchain that helps verify transactions from different nodes in the network using cryptographic hashes (generates unique values for unique input).
Some of the common objectives of the consensus mechanism for blockchain are collaboration, equal rights to each node, coming to an agreement, cooperation, and mandatory participation of every node.
Types of Consensus Algorithms
Consensus algorithms have different types working on different principles. So, let’s understand each of these algorithms and how they work.
1. Proof of Work (PoW)
It is one of the oldest consensus algorithms introduced by Cynthia Dwork and Moni Naor in 1993 and reintroduced by Satoshi Nakamoto (founder of Bitcoin) in 2008. PoW aims to solve complex mathematical problems through nodes and make as many predictions as possible in the shortest time.
Used by Etherium, Bitcoin, and other public blockchains, PoW is the most reliable and secure consensus algorithm, but scalability concerns are plentiful.
In the proof of work algorithm, validators, also known as miners or node participants, need to prove that the work they have done and submitted gives them the right to add new transactions to the blockchain network. To achieve this, miners must solve mathematical puzzles on the new block before approving it to the ledger. After that, the solution is forwarded to other validators and verified by them before accepting the copies of the ledger.
Using Proof of Work (PoW) verification for every transaction helps the core network of the blockchain prevent double-spending. In other words, if anyone tries to duplicate a transaction in the blockchain network, it will be seen in the system and will not be accepted. Hence, no one can change the transaction once it has been verified and approved by every node participant.
2. Proof of Authority
In Proof of Authority, the rights to create new blocks are given to participant nodes who have proven their authority. In simple terms, Proof of Authority-based blockchain networks is validated by approved validators who run software that allows them to put transactions in the blockchain system.
The Proof of Authority consensus algorithm uses the value of identities, so the block validators don’t stake coins but their reputations. As this consensus algorithm depends on the limited number of validators, it makes the system highly scalable. It is an effective solution for supply chains because it allows companies to maintain their privacy and attain blockchain benefits simultaneously.
3. Proof of Stake (PoS)
Proof of Stake (PoS) is a greener PoW substitute that requires fewer CPU computations for mining. Although the purpose of PoS is similar to PoW, the process differs. That being said, while a miner has to solve mathematical puzzles and create a new block in PoW; the new block creator is chosen according to its wealth in a deterministic manner, also known as Stake in PoS.
Moreover, PoS saves both energy and time. But, to become a validator, participants need to invest some stake (money). And, the miners also get the opportunity to take their transaction fees as there are no rewards for them in the system.
Read: Use Cases for Blockchain
In simple terms, instead of investing in costly hardware to solve complex puzzles, validators will invest in the system coins and lock some of them as stakes. By doing that, the validators will validate the blocks by placing a bet on them if they find a block that can be added to the network.
There are two popular types of PoS: DPoS and LPoS.
Delegated Proof of Stake (DPoS)
In DPoS, the miners stake their coin and vote for a particular amount of delegates, in a way that, the more they invest, the more precedence they receive. They get rewards in terms of coins or transaction fees.
In DPoS, there are 21-100 delegates charged periodically and assigned to deliver their blocks. Having fewer delegates allows for an efficient organization to design time slots for publishing blocks in the network. In case of, insufficient, invalid, or missing block publishing, the miners vote them out to be replaced with other selected delegates.
As DPoS works on the stake-weighted voting system, it has become one of the fastest growing and adapted blockchain consensus models.
Leased Proof of Stake (LPoS)
LPoS operates on Waves' blockchain platform and is an advanced version of PoS.
In LPoS, users lease crypto tokens to the node that wants to act as a block producer for the network. A node with the maximum number of staked tokens is more likely to be selected for the next block generation as well as receive rewards.
It also helps users with smaller tokens who might not have been eligible for participating as the blockchain creator in the traditional proof of Stake process in pooling their assets while enhancing their chances of receiving network transaction fees’ share.
The leased proof of stake (LPoS) consensus algorithm is best for networks with high high-technical requirements for operating full nodes capable of verifying and validating transactions.
Proof of Importance (PoI)
Proof of Importance (PoI) is also an advanced version of Proof of Stake (PoS) that considers other factors than just weighing the level of influence of every node on the network. It aims to take a comprehensive approach to evaluate contributions from users rather than focusing on capital needs.
It resolves PoS limitations by prioritizing miners based on the transaction numbers corresponding to cryptocurrency. In the case of PoI, the more transactions made to and from the user’s crypto wallet, the merrier the chances of these users getting blockchain mining projects.
4. Direct Acyclic Graph (DAG)
DAG is a data structuring or modeling consensus model often used in cryptocurrencies. Unlike a typical blockchain network consisting of blocks, DAG has edges and vertices, where transactions are recorded over each other.
As the name suggests, DAG looks like a graph rather than a set of chains and is being seen as the possible alternative for blockchain due to its effective storage and processing of transactions. They are directed because they move in one direction and acyclic because the vertices do not loop.
In the DAG consensus mechanism, each node prepares to be the miner and reduces the associated costs as the transactions get validated by users themselves, making the whole process fastest, lightweight, and secured.
5. Byzantine Fault Tolerance (BFT)
The Byzantine Generals’ Problem was something established in 1982 that represents a logical dilemma on how a group of generals faced communication problems while trying to decide their next move.
So, Byzantine Fault Tolerance (BFT) is the blockchain system property that resists the failures that might derive from this problem. Simply put, a BFT system can continuously operate even when nodes act maliciously or fail.
BFT is used to fix the problem of unreliable nodes in the network. pBFT and dBFT are two types of BFTs being used for determining unreliable chain code operations.
Practical Byzantine Fault Tolerance (pBFT)
PBFT attempts to provide a Byzantine state machine replication that works regardless of malicious nodes.
Distributed systems with pBFT are sequentially ordered with a primary node (or the leader) and several secondary ones (or the backups). In the event of a primary node failure, any eligible node in the system can become the primary by transitioning from secondary to primary. Using the majority rule, all honest nodes should contribute to reaching a consensus regarding the state of the system.
Delegated Byzantine Fault Tolerance (dBFT)
dBFT is a consensus algorithm that provides remarkable security against fraud. It is kind of similar to the DPoS model as the miners get the responsibility to vote for the delegates but are independent of their investment amounts. Only the right equipment, verified identity, and 1000 GAS are sufficient to become a delegate themselves.
dBFT determines the validators based on real-time voting which improves the algorithm and saves time and confirmation time for transactions. The selected team of validators then uses the BFT algorithm to generate more blocks.
6. Proof of Capacity (PoC)
In the proof of capacity algorithm, miners create a list of every hash that is possible beforehand in the plotting process, then store them on a hard drive. So, it can be said that the more storage capacity a minder may have, the more possibility of finding solutions. And possessing the correct hashes combination increases the chances of miners winning the rewards.
As there’s no need for specialized and expensive components, the chances to participate in the network are for the average participants.
7. Proof of Identity (PoI)
Proof of Identity (PoI) is similar to authorized identities. Each transaction is attached to a cryptographic confirmation of the user's private key. A block of data can be created and managed by each identified user in a network and presented to others.
Read: Blockchain vs Bitcoin
Needless to say, the PoI consensus algorithm helps in ensuring the integrity and authenticity of the data, and therefore, is a great choice for being used in smart cities.
8. Proof of Activity (PoA)
In the Proof of Activity algorithm, miners solve the cryptographic problem as soon as possible using electric energy and hardware. But, one thing to remember while using PoA is that when one comes across a given set of blocks only has the information about the identity and reward transaction of the winner.
A block's validity is verified by its validators. A complete block is activated if the block has been checked many times. Thus, open transactions are confirmed to be processed and are finally incorporated into block containers.
9. Proof of Elapsed Time (PoET)
Proof of Elapsed Time or PoET, developed by Intel, had the purpose to solve the challenge of “random election of leaders” in computing systems. Released as part of Software Guard Extensions, PoET is being used by private blockchain networks that depend on a random timer system to select network participants.
The idea behind PoET is to equally distribute and expand bigger participants' fractions by asking each of them to wait for a certain amount of time before working on the next process. So, whenever a block is available and the node is activated, that node gets the authority to share the information on the network while maintaining decentralization and earning rewards.
So that was all about the Consensus algorithm for blockchain, and we have to agree that there is no one-fit-for-all solution when it comes to verifying and validating the blockchain authenticity. Still, it won’t be wrong to conclude that all these algorithms have the same goal: to have an agreement (consensus) in the decentralized blockchain network.
That being said, the consensus algorithm is being used by multiple blockchain platforms to gain consensus. But, which type of consensus mechanism you should add to your business platform entirely depends on the type of functionality the platform needs to provide along with its timidness to gain integrity.
If you are a company owner who aims to build a blockchain system to fulfill your business requirements, then hire developers who have gained experience in blockchain development from companies like Decipher Zone Technologies now!