30 June 2022

The Consensus Mechanism: A Crypto's Beating Heart

In this article, we'll explore the consensus mechanism and how it underpins the security of cryptocurrency networks.

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The Consensus Mechanism: A Crypto's Beating Heart

    Index

    Types of Consensus Mechanisms
    Many Options—But Why?

At the centre of every crypto asset is its consensus mechanism. Consensus mechanisms are the rules by which crypto assets validate transactions. If blockchain is the new brain of the digital age, consensus mechanisms—how the network collectively agrees on validating transactions—are their beating hearts.

With no consensus mechanism, the blood can’t keep pumping through the system. With no consensus mechanism, the system falls apart.

The crypto space moves rapidly, and just a few years ago, there were only a handful of crypto assets and even fewer consensus protocols. Now, there are over a dozen. To date, most crypto assets haven’t created ecosystems with consensus mechanisms that don't compromise on at least one metric in the Blockchain Trilemma.

The Blockchain Trilemma suggests that a blockchain cannot reconcile issues of scalability, security, and decentralization simultaneously. As such, innovators are on a journey to create new consensus mechanisms that maximize the give and take among these areas.

While the Blockchain Trilemma precludes a crypto asset from maximizing scalability security, and decentralization, it's only in theory, as the Lightning Network has shown that it's possible to improve speed without compromising other metrics.

Types of Consensus Mechanisms

More consensus mechanisms are being developed all the time, so let's just take a look at some of the more common ones.

Proof-of-Work (POW): Imagine giving someone a padlock and telling them to solve it by random guessing—pretty difficult. But once they find the code, it’s easy to verify: just plug it in, and see if it works. Miners in the network solve cryptographic puzzles that are extremely difficult to solve but trivially easy to verify. Transactions are packaged into these cryptographic puzzles in blocks. Once a miner solves a block, their work is proof that they put in the energy necessary to find the solution.

Proof-of-Stake (POS): Instead of validating transactions through energy consumption, POS validators stake their holdings and are chosen in a pseudorandom way to determine the next block. Stakes are used as collateral. Manipulating transactions fraudulently results in loss of stake while playing fairly is rewarded. The chain with the biggest stake is the valid chain.

Delegated Proof-of-Stake (DPOS): DPOS reportedly adds more speed and efficiency to a basic POS system. With their coins, stakeholders elect block producers to verify transactions. Most DPOS systems have anywhere from 20 to 100 block producers to validate. Choosing block producers lightens the load to theoretically expedite transaction times. Furthermore, DPOS systems can elect delegates to rule over governance decisions.

Byzantine Fault Tolerance (BFT): Byzantine Fault Tolerance is the degree to which a blockchain network can reach a consensus to function appropriately given the possibility of nodes propagating malicious or incorrect information. BFT pseudorandomly elects a leader out of a preselected group of nodes to present information to the blockchain. If 66% of the nodes agree, then consensus is reached. If 66% is not reached, a new node is selected.

Many Options—But Why?

There are many consensus mechanisms, each with its own benefits and trade-offs. Some focus on scalability, while others focus on security or decentralization. With the rise of crypto, there was a widely accepted understanding that a single protocol had to make sacrifices in some areas to excel in others. This is why many consensus mechanisms were developed—to try and find the perfect balance of these three key components.

But we've come to understand as an industry that efficiencies will flourish in layered architectures, not all on one base protocol. We know the Bitcoin network to be the most secure consensus mechanism out there (POW), and if we build additional layers on top of it, we won't have to settle for trade-offs. For example, the Lightning Network creates a second layer on top of the Bitcoin protocol to greatly improve transaction times without compromising decentralization or security. In this way, we can have our cake and eat it too.

POW is tried and true. We don't have to worry about its robustness because it's been battle-tested for over a decade. Other consensus mechanisms are technological experiments that may or may not succeed. Building layers on top of a trusted foundation like POW allows us to innovate without having to sacrifice security or decentralization.

Lightning still follows the same protocol rules as the Bitcoin blockchain, meaning it is just as secure. And because it's a layer on top of Bitcoin, we can still take advantage of all the other features that make Bitcoin great.

Please be aware that: Cryptocurrencies are unregulated in the UK; Cryptocurrencies are not protected under Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS); Profits may be subject to capital gains tax; The value of investments can go down as well as up.

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