Types of Consensus Algorithms in Blockchain 101 – R&D
June 2, 2018
Consensus is very important to blockchain reliability. So what is the What’s the difference between Proof-of-Work, Proof-of-Stake, Proof-of-Burn and other Proof-of-Xs?
Behind every cryptocurrency, there is an underlying consensus mechanism that verifies the legitimacy of the data that’s added to the Blockchain. The reliable way of achieving consensus in blockchain is critical part for design of any system. Blockchain solves it without of dedicated “middle man” verifying their reliability and loyalty, using some algorithm of achieving “consensus” across the stakeholders in peer-to-peer communications. In other words, consensus algorithm: Anyone can create blocks, but this algorithm makes all of us agree on a single trustful state of blockchain, without the need of trusting each other or a third party authority. To achieve the consensus within the network, everyone needs to sacrifice something, or some valuable resources which is summarized here based on consensus type. Currently, Proof-of-Work is the most common algorithm and this is the consensus algorithm that is used by Bitcoin. It requires a computer to solve a complex problem to verify the data but it consumes a lot of electricity and is very expensive. An alternative to that is rising in popularity, which is Proof-of-Stake, which is a model that will be the base of the Proof of XXX such as being equity based used by Nodes on VeChain, Quantaloop or NEO. Proof-of-Stake doesn’t need all the hardware infrastructure and has more scalability potential. Here are some basic differences:
Mining is the process of verifying transactions and adding new coins to the circulation. It is done through miners solving complex problems by using brute computing force. Miners get a reward for each of the equations they solve, and the equations get harder the more miners there are, which makes it hard to scale. It also uses a lot of electricity to work and soon it is estimated to be the number one use of electricity in the world if crypto mining keeps growing in this pace. To learn more about the exact numbers of calculating work/hashes, read our last article: How Many Hashes Create One Bitcoin?
PoS (Proof-of Stake)
Just like Pow, PoS has the same end goal to verify transactions and requests but it does it in a very different way. Instead of miners competing to solve a mathematical problem faster, there are forgers that are chosen to create blocks based on their stake or equity ownership. The more coins a person has, the higher stake they have. Stakers or owners don’t receive rewards for the blocks, only transaction fees. Here are some of the main reasons why PoS is superior to PoW:
- Doesn’t require the same amount of energy – Using PoS costs way less then PoW since there is no need to have computing power. This makes the validating process more accessible as well, without the need of mining warehouses.
- Not centralized – PoW has the potential to get centralized since it has such high barriers to entry.
- Loyal validators – Users need to keep their tokens in an account to be eligible to be a validator, so they are more likely not to switch over to other cryptos.
- Faster validation periods – PoS transactions go through way faster than PoW because it doesn’t require miners and complex math equations.
These 2 of the baseline models for verifying transactions / provide confirmation on blockchain and as blockchain technology continues other models would appear.
Other types of blockchain related transactions, validation and consensus
- Proof-of-Burn (PoB) and Proof-of-Deposit (PoD) – combine flaws of PoW and PoS as takeover may be performed by either pool of nodes with mining capabilities or pool of nodes capable to coordinated staking with resources of any origin.
- Proof-of-Importance (PoI) and Proof-of-Stake-Velocity (PoSV) – while makes use of social aspects, such as density of communications directed toward each of the nodes in the network, both are still vulnerable to takeover attack from simple bot-net made of nodes managed by the same party coordinating the attack.
- Proof-of-Capacity (PoC) – being economically more efficient than PoW, still vulnerable for takeover performed by pools accumulating hardware resources by means of allocating financial resources to spend on it, like PoS implicitly.
- Proof-of-Reputation (PoR) – Proof of Reputation consensus algorithm assures that network is governed by nodes, acquiring the best reputation in entire network, expressed explicitly or implicitly, with account to reputation of the peers supplying the reputation evaluations following the idea of “liquid democracy”.
One other such variation is IOTA confirmation: The IOTA transactions, validation and consensus operates in contrast to blockchain technologies as it does not build a clocked sequence of static blocks, each one containing a number of transactions. Instead, every single transaction can be attached to a by itself and in parallel to other transactions. As per their website ‘Untangled’ — In order to add a new transaction to the tangle, a user has to randomly pick two tangle tips (yet unconfirmed transactions) and validate them. Validating means that the user is checking the tip‘s signature, its PoW (little “Proof of Work” as spam protection) and makes sure that the tip is not in conflict with any of the previous (directly or indirectly referenced) transactions. If the chosen tips are legit, the user adds its new transaction by referencing them. Transactions neither directly nor indirectly referenced by the chosen tips, are irrelevant for the current validation process. Somebody else, or a later transaction will take care of validating and knitting them into the tangle. To learn more about iota consenus on Git Hub as it can get quite complicated.