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What are the consensus mechanisms in blockchain and cryptocurrencies?
What is a consensus mechanism?
A consensus mechanism is the programming and process used in blockchain systems to reach a distributed agreement on the state of the ledger or the state of a dataset. Cryptocurrencies, blockchains, and distributed ledgers benefit from their use because consensus mechanisms replace much slower and sometimes inaccurate or unreliable human verifiers and reviewers.
Key points
- A consensus mechanism is any method used to achieve agreement, trust, and security across a decentralized computer network.
- In the context of blockchains and cryptocurrencies, proof-of-work (PoW) and proof-of-stake (PoS) are two of the most popular consensus mechanisms.
- Consensus mechanisms play an essential role in protecting information using automated group verification.
History of consensus mechanisms
When computers and networks began to gain popularity in the 1980s and 1990s, shared databases were created so that multiple users could access the stored information. Most had a centralized database with permissions that users accessed from multiple workstations. This setup evolved into centralized networks with administrators granting user rights and maintaining data integrity.
Some of these shared databases developed into programs that distributed storage and processing power across a network of storage devices in different locations. One of the most significant issues to address was preventing data tampering and unauthorized access, whether malicious or otherwise. A method was needed to automate the management of distributed databases to ensure that data did not change.
This need led to the creation of distributed autonomous consensus, in which programs on a network agreed on the state of a database using cryptographic techniques. The agreement was designed to be reached by using cryptographic algorithms to create long strings of alphanumeric numbers, called hashes, which were then verified by programs running on the network. A hash only changes if the information entered into the hashing algorithm is changed, so programs were designed to compare hashes to ensure they matched.
When each program running on the network created a corresponding alphanumeric string, the data was said to be agreed upon by consensus of the network. Therefore, consensus mechanisms were created, generally giving credit to Satoshi Nakamoto, the anonymous creator of Bitcoin. However, many people had been working on consensus mechanisms for years before Nakamoto published the white paper that made Bitcoin famous.
Data and computer scientists such as Moni Naor, Cynthia Dwork, Adam Beck, Nick Szabo, and many others have worked and contributed to the development of networked consensus mechanisms.
Types of consensus mechanisms
There are different types of consensus mechanisms, each of which works on different principles.
Proof of Work (PoW) it is a common consensus mechanism used by the most popular cryptocurrency networks, such as Bitcoin and Litecoin. It requires a participating node to prove that the work they did and submitted was valid, and a large network of programs to verify this. However, Bitcoin’s consensus mechanism requires high energy consumption and long processing times.
Proof of Stake (PoS) is another common consensus mechanism that has evolved as a low-cost, low-power alternative to PoW. It involves assigning the responsibility of proposing new blocks to a participating node in proportion to the number of virtual currency tokens held. The rest of the network then verifies the block and adds it to the blockchain if consensus is reached.
However, this approach has the disadvantage of incentivizing accumulation instead of spending.
Proof of History (PoH) was developed by the Solana Project. It is similar to Evidence of elapsed time (PoET), which cryptographically encodes the passage of time to reach consensus without spending a lot of resources.
While PoW and PoS are by far the most popular in the blockchain space, other consensus algorithms exist. Test of ability (PoC) allows contributing nodes to share storage space. The more hard disk space a node has, the more rights it is granted to manage the public registry. Test of activity (PoA), used on Decreed blockchain, is a hybrid that exploits aspects of both PoW and PoS. Burn test (PoB) requires traders to send small amounts of cryptocurrency to inaccessible wallet addresses, effectively “burning” them into disappearance.
The future of consensus mechanisms
Researchers have been experimenting with consensus mechanisms since they became popular to try to find ways to scale blockchains securely while keeping them decentralized. To this end, there are several consensus mechanisms in use, most of which fail to provide improvements in security, scalability, and decentralization. Rather, one of these factors is typically sacrificed to improve one or two of the others, even on blockchains that claim to have “solved” this trilemma.
AI/ML-enabled consensus
To address this persistent “blockchain trilemma” problem, some researchers are proposing blockchain and artificial intelligence/machine learning (AI/ML)-enabled consensus mechanisms. There are myriad proposed methods for implementing AI/ML in blockchains: some use clusters of mobile nodes and AI/ML to manage the nodes, while others discuss using existing consensus mechanisms to train AI/ML-enabled consensus algorithms. AI/ML.
Objectives of consensus developments
Many of these are being developed to address three issues: first, creating fair reward models; second, reduce their environmental impact; and third, increase speed without sacrificing security, decentralization and scalability.
Where will it end?
If developers have their say (which they probably will because they are the ones creating this technology), the current state of cryptocurrencies and blockchains is not what it will ultimately be, but what it will all turn into is another unknown.
Similar to all technological developments, Bitcoin and other existing blockchain systems will likely become obsolete as advances are made: researchers are already proposing quantum state-based consensus protocols as well as those powered by artificial intelligence. The obvious next step is consensus blockchains and AI-enhanced quantum state-based cryptocurrencies.
What is the most popular consensus mechanism?
Proof of Work and Proof of Stake seem to be the most used in cryptocurrencies. Other mechanisms may work better for business, enterprise, or personal uses.
What is an example of a consensus algorithm?
Based on common definitions of consensus mechanisms and algorithms, proof of work is an example of a consensus algorithm. However, algorithms and mechanisms differ in that the mechanisms usually perform the processes described by the algorithms. In reality, on blockchains, consensus algorithms tell consensus mechanisms how to reach consensus.
What is the consensus mechanism?
A consensus mechanism is a system of nodes programmed to agree that a state or blockchain dataset is the correct one.
The bottom line
Consensus mechanisms have become an essential aspect of distributed ledgers, databases and blockchains as much of the world becomes increasingly digital. Ownership of physical assets is being tokenized on ledgers and blockchains, people without access to financial services are accessing them via blockchain, and businesses need data security more than ever.
Consensus mechanisms verify data inputs and outputs, which results in automatic control of digital transactions that are common today, without human oversight or intervention. They create an environment where you do not need to trust that the other party in a transaction is honest because these programs ensure that your information is unalterable and secure.
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