We hear about the two most popular consensus mechanisms, proof of work and proof of stake, but what purpose do they serve? Also, what are the other less-known consensus mechanisms? Furthermore, what is a consensus mechanism, and why is it essential to blockchain and cryptocurrency technology? In short, a consensus mechanism is established to validate transactions across a blockchain network. In other words, they keep the network operating smoothly and as honestly as possible. So, how do consensus mechanisms do this? We’ll discuss this in further detail in the following sections and paragraphs.

Blockchain Consensus Mechanisms Explained

Blockchain consensus mechanisms are algorithms that blockchain networks use to keep the network secure and operate smoothly. There are many consensus mechanisms available, and we’ll discuss a few of them in detail later in this article. Furthermore, the mechanisms we’ll explore are proof of stake (PoS), proof of work (PoW), proof of authority (PoA), proof of activity (PoA), proof of identity (PoI), and proof of elapsed time (PoET). Moreover, on our blog, we’ve discussed proof of stake vs proof of work and proof of work electricity consumption. Check those out to learn about PoS and PoW. Now, let’s dive deeper into how consensus mechanisms work. 

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How Do Consensus Mechanisms Work?

Before we answer the question, “what is a consensus mechanism?” and get into the details of how consensus mechanisms work, let’s first discuss what they are for, how they help, and why they are essential to the blockchain network and cryptocurrency technology.

Every blockchain network consists of a set of nodes. These nodes work in different ways to validate transactions that go through the network to create a new block. The algorithm with which these nodes validate transactions depends on the blockchain network’s consensus mechanism. Essentially, the consensus mechanism is the set of rules that the nodes use to validate a new block.

Consensus mechanisms also help to ensure that the network is safe and secure. Furthermore, each consensus system has different requirements for participants to become validators. For example, to become a validator in PoS, participants must stake a minimum number of native tokens of the blockchain network. These requirements are usually high, as they can help keep malicious attacks away.

Another feature that consensus mechanisms add to the blockchain network is scalability. Some consensus mechanisms work more efficiently than others to ensure speedy and secure transactions that participants can rely on. Scalability allows for the network to process a high number of transactions at lightspeed. This is an especially important feature for blockchain technology and cryptocurrencies because of their growing popularity and global adoption.

Consensus mechanisms all have different energy consumption, security, and scalability but have one thing in common: keeping the network secure and honest. Moreover, let’s look at the specific details of each consensus mechanism in the following sections below.

Consensus Mechanisms

Now, let’s begin this article’s main topic of answering the “what is a consensus mechanism?” question. As such, let’s start by further examining proof of stake (PoS)!

Proof of Stake (PoS)

PoS is a consensus mechanism that requires staking a certain amount of tokens to become a validator node. The validator node is responsible for validating true transactions in the network and, in turn, keeping the network secure. If a node validates a transaction that is not true, it is penalized by losing some of its staked tokens. This particular mechanism does not require much heavy and complicated hardware, allowing more parties to participate. Moreover, as an incentive, PoS mechanisms reward validators with transaction fees rather than issuing tokens. Accordingly, proof of stake mechanisms prove to be energy efficient and deflationary.

In one of the most historical moments for cryptocurrencies, Ethereum recently upgraded to a PoS algorithm. Ethereum’s switch could be the breakthrough the network needs to solve its scalability and high gas fee issues. What will it mean for the price of ETH? Only time will tell. Other networks that utilize PoS consensus are Cardano, Polkadot, Tezos, and EOS.

Proof of Work (PoW)

In the proof of work mechanism, validator nodes compete with one another to solve complex puzzles. The node completing the puzzle first earns the native token of the network as a reward. ​​Otherwise known as “mining”, PoW consensus mechanisms contain some cons, including the requirement of expensive hardware to mine, extensive energy consumption, and can take a lot of time to validate a transaction. Because of its hefty requirements, there may be fewer validators in a PoW network than in a PoS network.

As the first consensus mechanism used for blockchain technology, proof of work is often seen as the most secure, reliable, and truly decentralized of all other mechanisms. The downside is that scalability quickly becomes an issue with blockchain’s growing popularity and adoption. Bitcoin (BTC) is an example of a network that utilizes the PoW consensus mechanism. 

Proof of Authority (PoA)

The proof of authority consensus mechanism may not be as well-known as the two previous mechanisms, PoS and PoW, but it is just as important and secure as they are. PoA may even be more robust than proof of stake. Furthermore, proof of authority requires its participants to stake their identity and reputation instead of tokens. Hence, these are more suitable for private blockchains.

The proof of authority mechanism requires almost no energy consumption and zero technical competition between validators. It doesn’t require heavy and expensive machinery, constant monitoring, or maintenance. Also, participants are incentivized to keep a positive reputation by ensuring their computers remain uncompromised. Furthermore, participants in proof of authority networks are not anonymous and want to maintain a healthy, accurate validation history, or they will lose their status. The consensus mechanism chooses these validators at random, and they become responsible for maintaining the network.

Since this consensus mechanism requires only a limited number of participants, the network can update the network more frequently, allowing for reduced block time and size. With reduced block time and size, proof of authority networks have close to zero transaction fees and work relatively fast.

The downside to a network using proof of authority is that it may not be completely decentralized because of its relatively small number of validators. The most common use cases for PoA are any industry working with supply chains. Moreover, blockchain networks such as VeChain (VET) and Xodex use the proof of authority consensus mechanism. 

Proof of Coverage (PoC)

Proof of coverage is a consensus mechanism used by the Helium network. Further, it verifies that hotspots truly represent the locations they are supposed to be representing. In other words, PoC tries to verify, using radio waves, that hotspots truly provide wireless network coverage for the location they represent. Proof of coverage is a permissionless, truly decentralized, and censorship-resistant consensus mechanism.

Additionally, proof of coverage involves three main roles: a challenger, a beaconer, and a witness. Similar to PoW, the proof of coverage mechanism provides a “challenge” for the network to solve. The “challenger” in PoC issues the challenge to be solved in the network. Then, the beaconer (a.k.a. “challengee”) is responsible for transmitting (or “beaconing”) challenge packets that will be witnessed by the hotspots. Finally, the “witness” in the network is the hotspot near the beaconer and can “witness” the transmission of a challenge packet. Once the entire process is verified, a new block is created. Rewards are distributed to the hotspots that had a role in the validation process.

Proof of Activity (PoA)

Proof of activity is a combination of both proof of stake and proof of work. The difference comes in after miners compete to solve a puzzle. Once the puzzle is solved and sent out to the network, the network then becomes PoS. The newly created block is a template with a miner reward address and header information. That header information is then used to select validators to sign a block randomly.

Validators with larger stakes are more likely to get selected. In other words, the more a validator has mined, the more likely it is to be chosen. The network fees generated from the transactions are distributed between validators and miners. If, for some reason, a block is not signed, it is discarded from the network permanently. Decred (DCRD) is an example of a blockchain network that utilizes proof of activity.

Proof of Identity (PoI)

In the proof of identity consensus mechanism, validators compare the private key of a user with an authorized identity. In other words, participants’ identities are verified by random identification parties automated by an AI engine. Moreover, proof of identity is a permissionless consensus mechanism allowing each unique individual in a network one unit of voting power and associated rewards.

The proof of identity protocol aims to reduce the risks of identity fraud. The mechanism uses biometric identification to verify participants in the network. Supervision of possible cheaters is computed automatically by an artificial intelligence engine that forms “identification parties” at random.

Proof of identity mechanisms would be useful for smart cities that use blockchain technology to verify the identity of their citizens. Furthermore, PoI is also censorship-proof, and its use case is ideal for running referendums and surveys. Its resilience from possible attackers makes proof of identity networks an ideal tool for cities and governments to use.

Proof of Elapsed Time (PoET)

Proof of elapsed time (PoET) is a resource and energy-efficient consensus mechanism. PoET uses an algorithm that generates a random “sleep” time for each node in the network. The node must “sleep” for that time. The node that wakes up first will win the block, committing that block to the blockchain. Proof of elapsed time consensus mechanisms work with permissioned networks. Moreover, permissioned networks are blockchain networks requiring participants to identify themselves before interacting with the network.

The proof of elapsed time consensus mechanism operates a lot like PoW networks, except it consumes less energy than PoW because it selects a node randomly rather than having all of the nodes work simultaneously to compete with each other.

So, What’s the Difference?

Overall, the difference between each consensus mechanism is energy consumption, selection of validators, how transactions are verified, scalability, level of privacy, and speed of transactions. Ultimately, each consensus mechanism has its advantages and disadvantages but provides a level of security and honesty to the blockchain network.

For example, the proof of authority algorithm is ideal for any industry that deals with supply chains. This consensus system can bring transparency and clarity to food safety and item tracking. The disadvantages of the proof of authority mechanism are irrelevant in this case as privacy is not as much of a concern as scalability, and the low cost of transactions is.

The kind of consensus mechanism a network uses will determine its scalability, transaction time, and level of privacy. What works well with one entity may not work so well with another. When choosing a consensus mechanism, blockchain networks must take population and use case into account in order to provide users with an easy-to-use and reliable experience.

Is One Better Than the Other?

It’s not as straightforward as black and white. Each consensus mechanism has its perks and disadvantages. While one consensus mechanism may provide more scalability and speed compared to another, it may provide less security and decentralization than another consensus mechanism. Each mechanism serves a similar purpose: to bring transparency and honesty into the network. It would not be fair to say that one consensus mechanism is absolutely better than the other. These mechanisms work differently and may be better with one network than the other. Some blockchain networks may prioritize privacy over speed, so they choose a consensus mechanism that best serves those priorities, such as proof of work. Another network, on the other hand, may prioritize scalability and transaction time over privacy, so they may choose a less private consensus mechanism, such as proof of authority.

Which consensus mechanism a network chooses is completely dependent on what its priorities are and what purpose the network will serve. 

What are Consensus Mechanisms – Summary

So, what is a consensus mechanism? At its core, essentially, it is what keeps a blockchain network operating honestly and securely. Consensus mechanisms are a set of rules (algorithms) for a network to utilize in order to validate transactions and create new blocks. These mechanisms are the backbone of blockchain networks. They each work in different ways to bring a collective consensus to the blockchain network which keeps it reliable, transparent, and true. There is no single “best” consensus mechanism but rather what works best for a particular blockchain network and its needs. Blockchain technology and consensus mechanisms are evolving, improving all aspects of the network to improve businesses and the lives of individuals.

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