A consensus mechanism is a way of validating transactions and maintaining the integrity of a blockchain. It is there to stop a cryptocurrency from being manipulated or defrauded.
Let’s begin by looking at what a consensus mechanism is
The modern definition of the word consensus is “general agreement”.
In crypto, a variety of consensus mechanisms are used to create a general agreement or “consensus” as to the validity of transactions on the blockchain.
Before we get into the different types of consensus blockchains or consensus mechanisms let´s take a simpler look at what consensus mechanisms actually are.
Crypto is in its essence decentralised, i.e. there is no central organisation or central bank of computers administrated by a single unified team.
If we were to look at a centralised organisation, let´s say a large corporation, they would have a central IT department with administrative access to the central servers containing all of the company data.
In the same organisation, there would likely be a single central accounting ledger that contains all of the accounting information for that corporation.
In that example, a handful of people would have total and complete access to the data.
We could use the example of a corporation to understand a consensus mechanism
Now, let´s imagine a decentralised scenario.
Here the same organisation stores its company data and accounting ledger across a peer-to-peer network of independently owned computers.
These owners offer their computing power and storage capabilities in exchange for fees.
The two key advantages of such as system would be better resilience against downtime and data loss as the data is stored across a lot of computers just as in cloud computing and also, the corporation does not need to invest in and maintain expensive servers.
So far so good. But now, how does the corporation trust this network of computers with its precious and sensitive data?
What´s to stop someone from using that access for criminal purposes? Well, that´s where some form of consensus mechanism is required.
There would need to be a single system or protocol in place across the entire network that would serve to validate each entry or edit made on the single ledger spread across the network.
This way a single person or a handful of these computer owners would not be able to join together to manipulate or defraud the system.
This is in fact what a consensus mechanism is, a means or mechanism that provides a general level of agreement or single truth across the entire network of computers or nodes.
Let’s look at the use of case of consensus mechanisms in cryptocurrencies
As cryptocurrencies are essentially decentralised, there is no central organisation with complete control.
Instead, the blockchain, the large network of computers is made up of perhaps hundreds of thousands of independently owned and operated computers.
Crypto is big business and massive amounts of money are at stake as well as the credibility of cryptocurrencies themselves.
There are two primary types of consensus mechanisms in use that we will look at, these are proof of work (PoW) and proof of stake (PoS). Proof of work is the original consensus blockchain method as used by Bitcoin and also Ethereum, however, Ethereum is likely to move to proof of stake.
The Proof of Work consensus mechanism
The proof of work consensus mechanism works on the basis of powerful computers doing complicated work in order to win the chance to add the next block to the blockchain and in return earn coins as a reward as well as some transaction fees.
This “work” simply put is complex computational puzzle solving and this requires powerful computers and computing time which then requires quite major resources.
On a cryptocurrency like bitcoin, the competition is fierce and the race to win the chance to add the next block means that people are investing in ever faster and more powerful computers to solve the puzzle faster.
This investment in resources is what is intended to keep the system honest and also make it more difficult to manipulate.
The specific details of how proof of work works is outside the scope of this article however in the simplest way, the data in each block is connected to the previous block and the previous block to the one before and so on.
As the chain gets longer, it gets ever more difficult to manipulate the data across the entire chain.
To do this over 51% of the computing power of the entire network would be required.
This is not to say it’s impossible but very difficult.
The downsides of proof of work are primarily the huge amount of computing power and therefore energy needed to solve these otherwise useless puzzles and also the time taken for each block to be added which is around 10 minutes.
This time causes unnecessary bottlenecks, delays and ultimately costs.
Proof of Stake Consensus mechanisms
Proof of Stake uses a different system to that of proof of work in that there is no need for the same high levels of computing power, there are no complex puzzles to be solved.
Instead, the validators as they are called have a “stake” in the system by way of cryptocurrency, think of it as a safety deposit taken by a landlord to cover against damage or non-payment.
In a similar way, validators stake crypto and if a validator tries to defraud or manipulate the system or suffers downtime they can lose some or all of their stake.
As it’s their money at stake they are incentivised not only to keep their transactions honest but also it is in their interest for the blockchain to be honest as they have a stake in it.
The proof of stake consensus mechanism offers the advantages of faster transactions and also less energy use.
A consensus mechanism is central to blockchains and cryptocurrencies, without it, crypto simply wouldn’t work. Whilst proof of work and proof of stake are the dominant mechanisms others too are making an entry, this area is far from finished, there’s plenty more to come.