What Are Consensus Mechanisms?
In a centralized database system, one individual or group of people owns and controls all of the databases which means that the owner can alter the data if he has more benefits than downsides and wants to do so. That’s why cryptocurrencies use a decentralized database system called blockchain in which there isn’t a single individual or group that controls it.
The blockchain consists of many blocks. Each one of these blocks is a group of transactions in a specific period of time. To be trustworthy a blockchain must be reliable, fair, real-time, efficient, and transparent. Every user of the system must have the same blockchain (record of transactions). To make sure that everyone has the same record consensus mechanisms are created. They grant that the block is not illegitimate (no fraud has been committed in one of the transactions). There are two major types of consensus mechanisms:
- Proof of Work (PoW)
- Proof of Stake (PoS)
What is Proof of Work (PoW) and how does it work?
This is the older and more tested type of consensus mechanism. It’s used by Bitcoin, Litecoin, Dogecoin, and other cryptocurrencies. Miners must use their computing power to obtain a new block and add it to the blockchain. They must solve a complex math puzzle (basically try to guess a random password of the block by using algorithms) to be able to obtain that new block.
Those who try to solve these puzzles are called miners. The first miner that solves the puzzle gets this new block. This puzzle requires a considerable amount of computing power to be solved (which means that miners with more computing power are more likely to be the first to solve it). The amount of electric energy that must be used dissuades people from trying to add invalid blocks because if they fail to add it, they still will have spent a lot of electricity.
This grants high levels of security but is also a problem because it’s very energy-consuming. That’s why some people are concerned about its usage as a consensus mechanism. Another downside is the relatively high amount of time needed to add a new block to the blockchain. On average every 10 minus a new block is added to the blockchain.
What is Proof of Stake (PoS) and how does it work?
As we said in the previous paragraph, PoW requires a lot of energy and time to function. That’s why some newer cryptocurrencies like Ethereum, Cardano, and Polkadot have adopted Proof-of-Stake as a consensus mechanism. This mechanism requires block proposers and validators to stake a minimum amount of tokens to validate a transaction.
The more tokens that are staked, the higher the chance to become a proposer of a new block or validator. After a block is proposed it’s checked by the validators. If enough validators agree that the proposed block is valid, both the proposers and the validators get rewarded. However, if a proposer gives an illegitimate block and validators declare it as invalid proposers and validators that declared the block as valid get penalized by losing some or all of their stake. In that way, people are dissuaded from trying to commit fraud.
This consensus mechanism grants a higher speed of transactions and requires much less energy. However, because those who stake more are more likely to participate in it, the system can become more centralized. However, if there are enough participants in a network, it’s harder for it to be more centralized. That’s why Ethereum switched from PoW to PoS. It saves lots of electricity, and computer hardware as well.
Differences between Proof of Work vs. Proof of Stake
In PoW, those who pose the highest computing power are those who are more likely to mine a block (to solve the mathematical puzzle) while in PoS those who stake the most have the highest likelihood to become validators or proposers. The equipment required for PoW is much more expensive and complex in comparison with PoS where any electronic device with an internet connection will do the job.
Proof of Work usually is more likely to grant more security but it requires much more energy and time. That’s why Proof of Stake is preferred in cryptocurrencies where the need for transaction speed is higher. Also, the penalties for validating illegitimate blocks dissuade anyone trying to defraud. The carbon output is another reason why more people turn to the newer type of consensus mechanism.