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Consensus: what it is and how it works

Consensus: what it is and how it works

Consensus algorithms are one of the most important parts required for blockchains to function properly. They verify that all transactions are performed correctly and ensure that the entire system works.

A consensus algorithm ensures interconnection between nodes, namely, computers connected to a particular blockchain network. By interconnecting with each other, they check that all blocks are written correctly and prevent passing nodes that are suspected of improper operation, for example, after a hacker attack or due to the computer owner's fraud. This supports the continued integrity and security of the blockchain.

At the same time, the key difference between a protocol and an algorithm is something crucial to grasp. For example, a protocol is a set of rules by which a blockchain operates, while a consensus algorithm is a mechanism for verifying the accuracy of such rules. 

Selection of different algorithms

Today, there are many new blockchains in the crypto sector, with more and more of them appearing all the time. Consequently, in the market appear new protocols and new consensus algorithms to verify them and ensure their stable operation. The most common types of algorithms include:

  • Proof-of-Work (PoW)v
  • Proof-of-Stake (PoS)
  • Proof-of-Burn (PoB)
  • Proof-of-Authority (PoA)

These algorithms are based on certain procedures designed to protect the blockchain from improperly executed transactions. Let's take a closer look at each of these consensus algorithms to understand the key differences between them. 

Proof-of-Work (PoW)

This consensus algorithm is actively used in Bitcoin and Ethereum. The protocol works as follows. In order to confirm a transaction, miners in a given blockchain network must solve certain mathematical problems to prevent the same digital coins from being used twice. The first one who solves the problem gets a reward. 

The pros and cons of this method derive from its basic principle, namely, the complexity of mathematical problems. Due to the solution difficulty, requiring a large amount of computing power, the system gets effective protection against most hacker attacks. However, most computing power is wasted since the new block writes down only that node that solved the problem first. Besides, huge capacities consume a lot of electricity, causing environmental problems. 

Still, we shouldn't ignore that PoW was the first consensus algorithm that allowed cryptocurrencies to emerge. For its time, it was a breakthrough in the security field. 

Proof-of-Stake (PoS)

The Proof-of-Stake consensus algorithm was proposed as an alternative to PoW on the Bitcointalk platform in 2011, which is now used by such blockchains as Cardano, Binance Chain, IOTA, Nano, TRON, TomoChain, and Ziliqa. Moreover, such a popular platform as Ethereum is currently completing the process of switching to this algorithm.

The principal difference between this algorithm and its predecessor is the complete absence of mining. It has been replaced by such a process as staking, which is similar in its operation to the usual bank deposit. Validators assume the role of miners, being users who put digital coins into stacking (long-term storage of coins in the blockchain network). The more coins are frozen in the network, the greater the chance of being the one to make a new blockchain entry and consequently get rewarded. 

The PoS advantage is that there is no electricity and computer power waste. Besides, there is no need to keep increasing the hash rate by constantly buying new equipment. Also, this consensus contributes to high transaction levels and, consequently, scalability, both of which are crucial for international projects. 

Still, staking, just like mining, requires expenses and technical skills. In order to become a validator, you have to possess the minimum required number of coins. For example, in Ethereum 2.0, it is 32 ETN (about $41,000 at the current exchange rate). You need to keep these coins frozen in your wallet for at least a few months. You will also need to set up the equipment and make sure it is constantly connected to the network. 

Proof-of-Burn (PoB)

It acts as an alternative to PoW and PoS. Miners send coins to a special address, to which no private keys can be matched. In this way, the coins from this wallet cannot be spent either since they are burned. As a reward, the miner creates a new block and gets rewarded for it with new network coins. The more coins you burn, the higher the chances of getting a block reward. If we draw an analogy, it is similar to a lottery, where the miner destroys some of his coins so as to win the same coins, but in larger quantities. 

The algorithm advantages include low power consumption and cost-effectiveness, as there is no need to spend money on expensive mining hardware. Moreover, if demand persists or grows, the algorithm can increase the value of the remaining coins since their number is constantly decreasing. 

The PoB's biggest drawback is that it is suitable only for fully developed projects where the main coin emission is already completed, so they have something to burn. That is why this algorithm isn't popular. Still, it is sometimes used, like in the Counterparty blockchain (XCP). 

Proof-of-Authority (PoA)

This is a consensus algorithm that considers the merits and rankings of validators and combines the capabilities of PoW and PoS. There is no mining at all, which means no computing hardware competition, as well as no huge energy consumption. In PoA, validators use their own reputation rather than the power of hardware or the number of coins to generate blocks. 

For instance, a fixed number of validators, chosen by network participants or project developers, are responsible for the network's performance. Such an approach guarantees high transaction processing speed and good scalability. At the same time, validators make sure that their work is honest and transparent, otherwise they will lose their status and reputation as a reliable network participant. 

The key drawback of PoA is the potential for excessive centralization and lack of motivation for users, who are not rewarded for mining or staking. Moreover, in a classic PoA, the average user has no influence on the blockchain network because it is handled by trusted nodes, which are usually owned by the same company. 

This algorithm was used in the creation of UMI cryptocurrency.

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