This article is written for beginners who are just starting to learn the crypto world. We want to help you a little. As you might have guessed, this article will be about blockchain consensus algorithms.
On the blockchain market, there are a lot of consensus algorithms allowing us to choose what is the most relevant node for signing the next block. Some of them are well known and used often, such as the PoW algorithm, and some are only trying to earn a place in the sun.
What are the consensus algorithms?
Most cryptocurrencies have a blockchain, which is controlled by a consensus-building mechanism. The objective of this consensus algorithm is to record information in the blockchain, as well as to ensure the safe and efficient operation of the cryptocurrency network.
Transaction data in cryptocurrencies is recorded in the blockchain and then can not be changed. A consensus mechanism verifies the validity of these transactions. The peculiarity of this principle is that the confirmation of the information from each transaction should be provided to 51% of participants in the network. The consensus algorithm should be made in such a way as to ensure the stable operation of the network.
Here are the most popular varieties of blockchain consensus algorithms.
Thanks to Bitcoin, the PoW consensus algorithm is the best-known way to confirm transactions. The main idea is that the nodes of the blockchain network while confirming transactions do complex computational work, the result of which would be easily and quickly checked by other nodes of the network.
The first node that has fully performed all the necessary calculations receives a reward from the blockchain network. All nodes are struggling with each other (increasing the capacity of computing resources) to be a node that receives a reward.
Disadvantages of the PoW consensus algorithm:
- Senseless energy costs
- A large number of nodes produce calculations, but in reality, only one (the first) conducts successful work and receives a reward. This is the main reason for creating new consensus algorithms.
PoS is one of the most popular consensus algorithms in blockchain networks. In this algorithm, the creator of the next block in the blockchain selects a node that has a larger balance — the number of resources, such as coins in the cryptocurrency. For the creation of the block itself, the node does not receive a reward. The reward is paid for the transaction.
Possible node selection options:
- randomly from the most “rich” nodes;
- randomly from the oldest nodes.
Disadvantages of the PoW consensus algorithm:
- Motivation in the concentration of funds, which can lead to the centralization of the network.
Delegated Proof-of-Stake (DPoS)
DPoS is one of the varieties of the Proof-Of-Stake consensus algorithm, in which blocks are signed by the selected representatives. The owners of the largest balances choose their representatives, each of whom has the right to sign blocks in the blockchain network. Each representative with one or more percent of all votes goes to the Council. From the formed “Board of Directors” is selected (in a circle) the next representative, who will sign the next block. In the event that for any reason the representative has missed his turn in the signing, he is deprived of the delegated votes and leaves the “Board of Directors”, after which the next most suitable candidate is chosen in his place.
Owners of balance sheets delegating the votes in no way lose control over them as at any time can withdraw them from the representative.
Leased Proof-of-Stake (LPoS)
LPoS is another modification of the Proof-of-Stake algorithm. It is supported only by the Waves platform. As a part of this algorithm, any user has the ability to transfer their balance to rent mining nodes, and for these mining nodes – to share part of the profits with users. This consensus algorithm allows you to get income from mining activities without using mining itself.
PoI is the consensus algorithm that used the blockchain platform NEM. The importance of each user in the NEM network is defined as the amount of funds available to him on the balance sheet and the number of transactions made from/to his wallet. Unlike the more usual PoS, which takes into account only the balance of the user’s available funds, PoI takes into account both the amount of funds and the user’s activity in the blockchain network. This approach involves users not only to hodl funds, but also to actively use them.
PoA consensus algorithm stands apart from other algorithms because it does not need to have any mining at all, as in the cases of PoW or PoS. In a PoA-based blockchain network, all transactions and blocks are verified through approved accounts (validators). Conducting transactions and creating blocks takes place automatically using the computing power of the validator.
The negative point of using the PoA consensus algorithm:
- As it is clear from the description – the key persons are validators, which leads to centralization. Probably in some cases, in private networks and with the help of fully (as far as possible) trusted accounts, it makes sense.