The emergence of blockchain technology was a brisk and eventful wave in the early 2010s. Blockchain has arrived spectacularly and proved its worth from the get-go. The selling point here was this brand-new technology's impenetrable, secure and anonymous nature. In simple terms, blockchain enables its users to transact in a secure and transparent environment, eliminating third-party intervention, risks of fraud and asset displacement.
Consensus Algorithms Defined
The consensus algorithm methodology enables blockchain to offer such unique benefits without sacrificing speed and low transaction costs. Consensus algorithms serve as the fact-checkers and guardians of any blockchain system, ensuring that any predetermined transaction conditions are met perfectly. Moreover, consensus algorithms are aptly named, as it confirms that all the participant nodes in the system agree to a specific outcome, which is a favorable state for the entire network.
Consensus algorithms guarantee that transactions will go through if and only if all the relevant conditions satisfy all involved parties. Unlike the traditional means of security and confirmation of Web 2.0, consensus algorithms utilize thousands of nodes within a blockchain system to carry out an astronomically complex mathematical equation, ensuring that every node complies with the stated prerequisite conditions.
This way, even if a fraction of the network is corrupted or manipulated, the overall security will remain intact and protect the interests of participants. While the general process of consensus algorithms is the same across its various types, the proof part of the algorithms has numerous variations. Each proof methodology has its distinct advantages and benefits, and today, we will discuss the most prevalent types of consensus algorithms:
Proof-of-Work Algorithm
Let’s start with the classic example of consensus algorithms – Proof-of-Work (PoW). This one was the first-ever consensus algorithm and remains the most widely used security measure as of 2023. While the technical side of PoW operations on the blockchain is quite complex and involves advanced mathematics, the underlying logic here is fairly simple.
When a blockchain network has a PoW algorithm, each participant is required to complete a certain amount of computational problems. These problems are presented as exceedingly tricky mathematical equations that a computer can only solve. Whoever solves these math puzzles first is entitled to propose the next node in the expansive blockchain network. Hence, the name – each involved party must prove their work to propose a node.
The PoW approach might initially seem unfair, as some participants can throw more computational power at these blockchain problems and have a higher probability of proposing a fresh node. However, in practice, PoW algorithms randomize their outcomes and grant the node proposition privileges to users fairly. This way, even though all participants still need to compete in solving math puzzles, the network will not be dominated by a single overpowering party.
The Cons of POW
While the POW approach is a tried and tested method to ensure security and verify blockchain transactions, there are certain drawbacks. First of all, the POW method requires a lot of computational power, forcing participants to spend significant amounts of energy in the process. As a result, the POW method is costly financially and in terms of damaging the environment, as it causes massive carbon emissions every year.
Moreover, POW has become slower over the years due to the sheer complexity of computational requirements. With blockchain networks becoming more popular, POW has slowed down significantly. Lastly, the POW method needs high startup costs for aspiring crypto miners, since the required equipment is quite expensive.
With these shortcomings, the POW approach has slowly lost its dominating presence in the blockchain market. Soon, the crypto industry started to find interesting alternatives that would alleviate some of the POW shortcomings.
Proof-of-Stake Algorithm
Unlike the POW consensus algorithm discussed earlier, proof-of-stake methodology absolves the network participants from the time-consuming and energy-intensive computational works. Instead of creating new network nodes by solving complex mathematical equations, the POS approach simply enables the network participants to stake a minimum amount of a particular crypto.
This way, the blockchain network can function and approve transactions at a fraction of the energy cost and with significantly fewer delays. The POS approach was specifically designed to answer the flaws of the POW consensus algorithm, and for the most part, it has succeeded in doing so. POS method is swift, low-cost and much more eco-friendly.
The Cons of POS
However, these improvements come at a certain cost. The POS approach demands a particular amount of crypto assets for participation. These assets will be frozen until a new node gets created on the system. As a result, the network participants will have limited funds to trade with for particular amounts of time. While this minimum stake amount is often not significant, it still freezes up a portion of the cryptocurrencies, limiting the trading opportunities for involved parties.
Additionally, the POS method is far less proven and tested in terms of security. While there are numerous similar safeguards to the POW approach, the POS is still technically a weaker option as it doesn’t utilize the computational strategy. While solving complex math problems costs a lot of energy and expensive equipment, this process managed to fortify the entire network from malicious attackers. The POS method has yet to prove that it is an effective alternative in terms of security.
With these trade-offs, the POS alternative is not a Pareto improvement over the POW method. There are clear pros and cons involved, and every blockchain network has favored one over the other according to their unique needs and requirements. The POS algorithm has two variations that build on its foundation in fascinating ways. Let’s discuss:
Delegated proof-of-stake (DPOS)
The first variation of POS offers an exciting modification to this consensus algorithm. The network participants can effectively choose a number of delegates who will handle the entire staking process. This limited pool of participants will transparently stake their coins and assist the development of new nodes on the network. This way, the entire network will move faster, as the transactions will be validated much faster than before.
Additionally, the real-time voting process enables network users to add or disqualify delegates instantly. Thus, any malicious activities or manipulations can be weeded out without delays. Moreover, the majority of network users will no longer have to freeze their crypto funds in order to utilize the given blockchain network.
Nominated proof-of-stake (NPOS)
Serving as a stricter version of the DPOS approach, the NPOS method keeps its network participants liable if malicious activity is witnessed on the blockchain. In NPOS, we have nominators who effectively select validator parties on the network.
Both groups have to stake a certain amount of coins in the process of adding nodes. If the node creation process is interrupted by malicious activity, both parties lose all of their stakes. While this approach is much less forgiving than DPOS, it raises the security factor considerably. Nominators are incentivized to decide validator parties carefully, since the risk of losing their assets is a significant one.
Both POS variations offer unique benefits and have been adopted by several blockchain networks. However, they also share the weaknesses of the primary POS method. Therefore, both DPOS and NPOS methods are inherently inferior to the POW approach regarding security, which has discouraged wider market adoption.
Emerging Consensus Algorithms
Aside from these well-established consensus algorithms, several new approaches have made the rounds in recent years. Below, we present the most promising candidates to challenge the dominance of POW and POS algorithms in the near future:
Proof-of-Authority (POA)
POA algorithm is a variation of POS methodology and was designed to encourage enhanced levels of vetting in the ranks of validators on the blockchain network. With this approach, each validator must present their identity, credentials and all relevant information to prove their trustworthiness. The validator at hand needs to have a clear record without any prior history.
While this approach goes slightly against the philosophy of anonymity on the blockchain, it is a superb way to minimize the possibility of fraud, theft or other malicious intents on the network. Moreover, various networks choose this approach at the request of their participants. Therefore, no parties are forced to disclose their identities and personal information without their specified desire to do so.
Proof-of-Time (POT)
Next up, there is yet another POS variant that tackles the network security concept with a fresh idea. With the POT consensus algorithm, the validators with the most time spent in the network are favoured over others. Of course, only active and productive time is awarded in this case. This approach is intended to reward network participants that have demonstrated a continuous and consistent contribution to the consensus mechanism on a given blockchain.
Naturally, the POT system’s effectiveness is directly proportional to the time a given blockchain network has functioned. The more time goes by, the more valuable and precise the POT method becomes as various members prove their loyalty and consistency over long periods of time.
Proof-of-History (POH)
Finally, there is a brand-new POH algorithm created by Solana. This technically complex method enables the protocols inside a given blockchain network to recognize a unique “fingerprint” of newly created nodes. This fingerprint is mainly derived from a combination of previous blockchain transactions. This way, the fingerprint remains uniquely recognizable for the blockchain platform.
The POH approach is a tremendous variation of a POS algorithm, providing an efficient and automated way to validate transactions without delays, freezing staked coins or disclosing identities. However, the POH method is highly dependent on automated validation. This third-party system is a weak point for the entire blockchain network, as it is susceptible to error and human manipulation. So, even with all the benefits it presents, the POH algorithm has a key flaw related to its security and immutability.
Final Takeaways
The consensus algorithms are essential aspects of any blockchain network. They ensure the security and validate each transaction, keeping the blockchain environment decentralized, secure and anonymous. However, each of the discussed algorithms has its trade-offs and shortcomings. None of these systems is a flawless solution without considerable drawbacks.
Thus, choosing a perfect consensus algorithm depends on the preferences and direct needs of the blockchain users and creators. While well-established networks like Bitcoin prefer maximum security with the proof-of-work approach, numerous blockchain networks value speed and low transaction fees offered by the POS. Some network creators enjoy the democratic nature of DPOS, and some prioritize rewarding loyal participants with the proof-of-time methodology.
The list goes on, as there are no objective answers here, and each network has to identify the best-possible consensus algorithm for its purposes. While we have yet to receive an alternative option that unifies all discussed benefits without drawbacks, the consensus algorithms have come a long way from a simple proof-of-work concept. It will be fascinating to see what innovations will emerge in the consensus landscape and if they can deliver a perfect consensus mechanism for the growing blockchain market.
