What Is a Blockchain Consensus Algorithm?

The blockchain network is decentralized with no central authority or regulation. The verification and validation of transactions are unarguably secured and verified, so how is this possible? It is the presence of the consensus algorithm.

A consensus algorithm is a core part of the blockchain network because it is the protocol through which all the peers and participating nodes of the blockchain network reach a common agreement (consensus) on the present state of the distributed ledger. The consensus algorithm is built to ensure that all agents or stakeholders in the decentralized system can agree on a single fact and consider the divergent issues. The consensus algorithm ensures the system is fault-tolerant and reliable.

What Is a Blockchain Consensus Algorithm?

The consensus algorithm is a set of rules that govern how participating nodes interact and engage in the blockchain ecosystem. It enables the blockchain network and all protocols built on it to attain reliability and ensure high trust between participating nodes.

Blockchain Consensus Algorithm is a smart mechanism that ensures and enables users or machines to coordinate in a distributed arrangement. The consensus algorithm is central to the operations of the blockchain network.

In a decentralized setup like the blockchain network, several participating nodes and stakeholders are likely to have divergent opinions. How do we reach an agreement and ensure that every participating node fully supports the arrangement? It is the consensus algorithm that provides a mutual agreement in this context.

The blockchain network has different servers, nodes, miners, and stakeholders spread across other locations. All these actors must reach a consensus and verify that a transaction or block is accurate before validation. The consensus algorithm enables these mutual agreements making the network reliable and highly secured. There are several objectives that the consensus algorithm is designed to achieve in the blockchain network.

How Does the Blockchain Consensus Algorithm Work?

The blockchain network is robust and decentralized. There are no restrictions to what developers can build on it, and every developer has the liberty to choose what consensus algorithm they want to deploy in their protocol.
The notable consensus algorithm that you can deploy and how they work are:

Proof of Work (PoW)

The Proof of Work consensus algorithm is the blockchain network’s oldest and most notable consensus mechanism. In Proof of Work, the participating nodes use mining to validate transactions and create new blocks, and they are called miners.

The Proof of Work Consensus mechanism requires miners to solve complex mathematical puzzles using comprehensive computational power. The mining methods used in this consensus algorithm include GPU mining, CPU mining, ASIC mining, and FPGA mining.

Blockchain protocols that use the Proof of Work consensus algorithm include Bitcoin, Litecoin, Primecoin, Zcash, Monero, etc.

Proof of Stake (PoS)

The Proof of Stake mechanism is regarded as one of the best and most environmentally-friendly consensus algorithms. The Proof of Stake consensus algorithm works by using validators instead of miners, and the contributing nodes are validators who can create new blocks over everyone. The PoS consensus algorithm saves energy and reduces time spent validating transactions or creating new blocks. The delegated and leased Proof of Stake mechanism can be deployed on the blockchain.

Proof of Stake has a few variations, which are used based on the goals of a given blockchain. One of the most used variants is the Delegated Proof of Stake (DPoS), in which token holders vote for a smaller group of users, known as “delegates,” who are responsible for creating new blocks and maintaining the integrity of the blockchain. The delegates are chosen based on the number of votes they receive, and they typically have a large stake in the network.
One of the main benefits of DPoS is its scalability, as it allows for a large number of transactions to be processed per second, as well as relatively low energy consumption. This makes it a popular choice for projects that are intended to be highly transactional.

Blockchain protocols like Dash, Peercoin, Pivx, Reddcoin, and Ethereum 2.0 use the Proof of Stake algorithm.

Proof of Authority (PoA)

The Proof of Authority mechanism is used in blockchain networks that rely on pre-approved “validators” to create new blocks and maintain the integrity of the network. The validators are typically chosen based on their reputation, identity, or expertise. In PoA networks, each validator is assigned a unique identity, and the validators take turns creating new blocks and adding them to the blockchain. This helps to ensure that the network is relatively fast and efficient, since the validators do not need to compete with one another to create new blocks.

The PoA algorithm is an effective solution for supply chains because it allows companies to maintain their privacy and attain blockchain benefits simultaneously.

Blockchain protocols that utilize the Proof of Authority consensus algorithm include VeChain and BNB Chain

Pros of Proof of Work Consensus Algorithm

The notable advantages of the Proof of Work consensus algorithm are:

• High-security level: the Proof of work algorithm ensures that the blockchain protocol is highly secured. It is difficult to bypass the security firewall and compromise the block chain network deploying a PoW mechanism.

• Decentralized method of transaction: transaction processing is decentralized in the Proof of Work mechanism. Users can operate without having a prior relationship or building trust in each other; their main goal is the project at hand. The unified agreement between all stakeholders will ensure that the verification is accurate and the status of the public ledger is updated.

• Crypto rewards: blockchain protocols that use the proof of work mechanism reward miners with crypto tokens. After mining new blocks or successful verification of the transactions, miners are entitled to crypto rewards.

Cons of Proof of Work Consensus Algorithm

Some of the shortcomings of the Proof of Work Consensus algorithm include:

• High energy usage: the Proof of Work consensus algorithm involves solving computational algorithms that consume high energy. Mining activities are energy intensive.

• Slow transactions and congestion: the PoW mechanism takes a long time to verify transactions. Most times, transactions will be piling up waiting to be validated. The PoW takes more than usual time to verify the validity of transactions.

Pros of Proof of Stake Consensus Algorithm

The notable advantages of the Proof of Consensus algorithm are:

• Energy efficient: block validators in Proof of stake do not engage in solving computational algorithms or puzzles. Therefore, the validation and staking process consumes less energy.

• Scalability: blockchain protocols deploying the Proof of stake consensus algorithm are more scalable and easier to use. It also enables scaling techniques like sharding.

Cons of Proof of Stake Consensus Algorithm

Some of the shortcomings of the Proof of Stake Consensus algorithm include:

• System complexity: the Proof of Stake consensus algorithm has some complex systems. For instance block validator selection is complex.

• Initial distribution: becoming a validator in PoS requires you to have certain tokens. If you do not meet the initial distribution requirement, you are not eligible.

Pros of Proof of Authority Consensus Algorithm

The notable advantages of the Proof of Authority consensus algorithm are:

• Increased security: Since the validators are known identities, the network is less susceptible to attacks from anonymous malicious actors.

• Reduced computational power requirements: PoA requires less computational power than other consensus algorithms, which can help to reduce costs and energy consumption.

• Faster and more efficient: PoA allows for faster and more efficient block creation, as the validators do not need to compete with one another.

Cons of Proof of Authority Consensus Algorithm

Some of the shortcomings of the Proof of Authority Consensus algorithm include:

• Centralization: The validators are usually chosen by a central organization or group, which can lead to a concentration of power among a small number of people or entities. This can make the network more vulnerable to censorship or manipulation.

• Limited anonymity: Since the validators are known identities, the network may be less private and anonymous than other blockchain networks.

• Single point of failure: If one of the validators goes offline or becomes compromised, it can create a bottleneck in the network and prevent transactions from being confirmed.

Conclusion

The consensus algorithm is essential to blockchain operations and gives the procedures and rules to ensure that all participating nodes, miners, and stakeholders reach a mutual agreement. These agreements could validate a transaction, create new blocks, or implement a critical update.

Asides from the Proof of Work and Proof of stake consensus mechanism, there are several others that you can deploy depending on your developers’ preference and your protocol use cases. They include Proof of Capacity, Proof of importance, Byzantine Fault Tolerance, etc.

It is therefore advisable to pick the most suitable consensus mechanism for a blockchain project to help eliminate the imbroglios highlighted above.