Understanding Blockchain and the Different Consensus Protocols
Blockchain is becoming a more and more commonly discussed technology, as a wider user base adopts cryptocurrencies, NFTs, and web3 in general. It can be a confusing topic, with many layers of complexity, and educating yourself can be a daunting task. Understanding one aspect at a time can ease you into a better grasp of blockchain as a whole, and protocols are a good place to start.
The term protocols can refer to the overall sets of standards that determine the framework of different blockchains, or the individual functions that govern specific actions, like consensus protocols. Here we’ll take a look at a few of these different consensus protocols, also referred to as consensus mechanisms or consensus algorithms, and talk about what they are, how they work, and the differences between them. First, though, let’s define some terminology that will come into play throughout.
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Blockchain: A blockchain is an information database which relies on many decentralized computers called nodes, all connected to each other, to process, validate, and distribute data across the entire public network, instead of concentrating control over that data in one centralized location. As transactions are made within the network, they’re grouped together in blocks of data, which will need to be verified by a majority consensus of eligible validating nodes.
Once validated, these blocks are permanently written onto the chain and this new information is distributed network-wide, making sure that every copy of the public ledger is accurate and up-to-date. Since all verified information is immutable, and anyone who cares to look can view the entire history of data, blockchain offers a level of security, accountability, and transparency that isn’t always present in centralized systems.
Node: A node is an independent computer system that communicates with other nodes in a network, helping to process transactions, and form a consensus to validate the accuracy of a block of data. If one node gets corrupted, instead of potentially corrupting the data in the entire network, all other nodes act as a redundant record of correct data, and reject the input from that rogue node. Nodes can vary in size and type, and be hosted on a variety of devices from large computer systems to single tablets, depending on whether they’re meant to store an entire blockchain worth of information, or process just enough data to validate blocks.
Consensus: In general, a consensus is an agreement between a group of many members. In a blockchain this agreement is between nodes, and serves to verify the accuracy of data stored on the chain. When information is repeatedly verified to be true by a majority of nodes within a system, they come to a consensus and validate the data.
Mining: The creation of new cryptocurrency tokens through the process of adding and validating blocks of data to a Proof of Work chain. When this process is successfully completed, new units of currency are minted (created) and issued to the miner who processed the transaction. The equivalent action on Proof of Stake chains is called validating or baking.
Now that we understand these key terms, let’s get into some of the different consensus protocols and what sets them apart from each other. Whether you call them protocols, mechanisms, or algorithms, there are many means by which data can be validated or “proofed” through consensus. A Proof of X (specified resource or action) algorithm is the most common overall type of consensus, as it improves the security and decentralization of a chain by requiring nodes to show proof of fulfilling a certain parameter, before they can be considered as part of the validating network. There are a wide range of proof options, so this is just a sampling of terms you may encounter: Proof of Work (PoW), Proof of Stake (PoS), Proof of Authority (PoA), Proof of Burn (PoB), Proof of Importance (PoI), and Proof of Capacity (PoC). As a regular citizen of web3, you’ll mostly come across PoW and PoS, so those are the two we’ll look at more closely.
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Proof of Work
Essentially, Proof of Work is a consensus model that requires a node computer to solve a complex puzzle, in the form of a long mathematical equation, in order to add a valid block of information to the chain. In PoW chains, node owners are referred to as miners, a term you may have previously heard in reference to Bitcoin mining, which has been heavily criticized for being environmentally harmful, due to the massive amount of power that this process requires. The miner who can solve the puzzle the fastest is the one who reaps the financial rewards, so miners build huge, energy-hungry computer systems to get an edge on their competition. By solving the puzzle attached to a certain block of data, that miner gets the privilege of adding it to the chain, and distributing it to the entire network to be validated, along with a substantial reward in the native currency of that chain.
Sometimes more than one miner will successfully solve the puzzle at the same time, which creates a temporary fork in the chain. Eventually the main fork will be chosen by the number of valid blocks added to it, and become the one fork that is continued and immutable, and transactions in the other fork will be reversed. This sounds like a long process, but (depending on the network traffic) this is all done fairly quickly and automatically. As a user, you would just get an error message and need to resubmit your failed transaction to be included in the next block.
One way PoW protocols protect the security of a chain is the cost vs. benefit risk of a miner attempting to defraud the network. Since a validated block requires a majority consensus, and this consensus is reached through the computational work of many nodes, a miner would need to control at least 51% of the total network computing power to successfully validate a fraudulent block. They would also need to continue to validate each subsequent block in that fraudulent chain faster than any other miners could solve the next puzzle and identify it as illegitimate. The capital investment to build a large enough computer setup, and pay the energy costs to maintain it, would presumably be more than the financial reward from the fraud.
You’ll most likely run into PoW if you use the Bitcoin blockchain, though there are others like Dogecoin and Litecoin. Ethereum, the chain that has come under scrutiny in the last few years because of the hype surrounding NFTs, and is home to those infamous monkey JPGs, used to be a Proof of Work chain, but transitioned to Proof of Stake late last year. Bitcoin has been around as a PoW chain for so long, and is such a lucrative source of income for miners, it would be difficult and highly unlikely for it to follow Ethereum’s lead, and will remain PoW for the foreseeable future.
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Proof of Stake
A Proof of Stake protocol is different from Proof of Work by the means in which the nodes prove the validity of a block of data. Instead of needing a powerful computer to solve a complex puzzle (work), anyone with a node and the appropriate software can participate in the validation process, by having at least the minimum required amount of a chain’s native currency invested (staked) in the chain.
In a PoS chain, these nodes are referred to as validators, or bakers in the Liquid Proof of Stake variation. An algorithm randomly chooses a node from among the validator pool, to be the one to create and initially verify a block of transaction data, and if the majority of other nodes vote to validate the block, it gets added to the chain. The originally selected node and all corroborating validators earn a transaction fee, calculated as a percent of their staked amount of currency. This incentivizes a node owner to invest more of their currency into the chain, even though it will be locked while staked, because they will earn more back in proportion to their investment.
One of the benefits of a Proof of Stake chain is the exponentially lower energy consumption relative to a PoW chain, making it a great choice for users who are environmentally conscious. Another benefit is the even higher cost vs. benefit deterrent for potentially malicious actors. In a PoS consensus, an entity would need to own 51% of the total staked value of currency to be able to successfully validate a fraudulent block of data, making the permanent creation of a corrupted fork far more expensive than the cost of hardware in a PoW system.
Since that currency is frozen while staked, when this fraud is detected by other validators, that malicious node will be punished for their actions by having a significant portion (if not all) of their currency slashed (destroyed) and be permanently kicked out of the network. Additionally, it takes a supermajority of 66% in a PoS system to affect a protocol-wide attack and do damage to the full chain, adding an extra layer of security that doesn’t exist in PoW. In addition to Ethereum, Solana is a popular chain that runs a PoS protocol.
Delegated and Liquid Stakes
There are two other slightly different consensus protocols that I want to briefly mention, as they are close variations on Proof of Stake and often get lumped together under that heading. Delegated Proof of Stake (DPoS) chains like Cardano are similar to PoS, except that instead of needing to own enough currency to run their own node, any participant in the network can delegate some of their currency to another validator, giving that validator’s node a larger stake in the chain, and a higher probability of being randomly chosen by the algorithm. A delegator is essentially voting on their favorite validator by contributing to their stake. In return, delegators receive a percent of any rewards a validating node earns. The more votes a delegated node receives, the higher chance of it being selected by the algorithm to initiate the block validation. This makes DPoS a little more centralized than standard PoS, since validating influence can be even more concentrated by collective wealth.
Liquid Proof of Stake (LPoS) also uses a delegation mechanism, but instead of transferring currency to a validator node, called a baker in this mechanism, and locking it away for a prolonged duration as in traditional staking, a participant’s funds remain accessible (liquid) for them to remove (unstake) at any time. Think of it like loaning a baker access to your funds, with the right to revoke that access at any time. Since the required duration for funds to be staked in a DPoS chain can vary from 6 months to 2 years, the LPoS variation is a much better option for users who want to retain control of their own currency. Tezos, my personal favorite blockchain, is an example of a LPoS consensus chain.
Continuing Your Education
There’s so much more to learn about all the different consensus protocols, including those we discussed and all the other Proof variations. Hopefully this brief outline has provided a starting point to understanding the most commonly used options of Proof of Work and Proof of Stake. If this article piqued your interest, you could spend many hours taking a deep dive into each protocol, and each chain that uses them, as individual chains will have slightly different mechanisms tailored to their needs, even under the same general protocol.
Each protocol has its benefits and drawbacks, with variances on how its mechanisms affect security, decentralization, environmental impact, and more. When researching a chain to buy into, and especially if you’re a developer looking to build an application or platform, it’s worth it to look into each option and weigh the aspects that matter most for your purposes, before committing your assets to a chain. For more in-depth reading, check out this great resource from Gemini to get started on your continuing blockchain education.