The world of blockchains is diverse, and not all of them function in the same way. There are different consensus mechanisms, each of which has distinct effects on accessibility, security, and sustainability.

6 min read

Summary #

The design of blockchain systems can differ significantly, especially when it comes to the consensus mechanisms used to verify network data. The most popular consensus mechanisms are Proof of Work (PoW), Proof of Stake (PoS), and those employed by private and consortium blockchains. Each design choice has distinct consequences for the security, accessibility, and sustainability of the underlying blockchain.

Contents #

• Blockchain Types
• Proof-of-Work Blockchains
• Proof-of-Stake Blockchains
• Private and Consortium Blockchains

Blockchain Types #

Although blockchain technology may seem uniform, there are significant differences in how various blockchain networks function. One key differentiator is the type of consensus mechanism employed by each blockchain. A consensus mechanism is the process by which a distributed network reaches agreement on network information, such as the validity and order of transactions. It also plays a crucial role in securing the blockchain network from malicious actors.

Public blockchain networks typically use Proof of Work (PoW) or Proof of Stake (PoS) mechanisms for consensus. Private or “permissioned” blockchains and Distributed Ledger Technologies (DLTs) can be structured in various ways to prioritize speed, security, and scalability. Let’s delve into the most common blockchain consensus mechanisms to gain a better understanding:

Proof-of-Work Blockchains #

The Proof of Work (PoW) consensus mechanism is widely used in blockchain, and it gained popularity through Bitcoin. PoW systems involve miners who use computer hardware and electricity to verify Bitcoin transactions. These miners run network nodes and use computational power to solve mathematical puzzles known as proofs of work. The first miner to solve the puzzle confirms the most recent block of transactions on the blockchain. Once confirmed, the new block is broadcasted to other nodes for verification and added to their copy of the blockchain, creating a trusted record of data for the entire network. This verification process represents consensus, and only after confirmation can a new block be added to the network. Miners are rewarded with newly minted cryptocurrency, such as BTC, for validating new blocks and adding them to the PoW blockchain.

The goal of PoW blockchains is to generate blocks at regular intervals, with Bitcoin producing one block approximately every ten minutes. However, PoW networks have limitations in terms of speed and scalability due to the energy-intensive nature of the proof of work process. The difficulty of the computational puzzles adjusts according to the amount of computational power in the network. Higher computational power results in more competition and harder proofs of work. Despite these limitations, PoW blockchains have historically offered better security and maintained a meaningful level of decentralization. Since PoW systems are distributed, it becomes prohibitively expensive for malicious actors to take control of the blockchain by controlling the majority of computing power. The associated costs of hardware, electricity, and computation are generally too high to overcome.

However, the security features of PoW blockchains also pose high barriers to entry for individuals who want to participate as network nodes. The cost of operating a mining rig, including hardware and electricity expenses, is too expensive for the average user. Moreover, mining on major networks has become monopolized by large-scale mining operators who hold significant influence over network governance.

Another drawback of PoW networks is their high energy consumption, resulting in environmental damage. The computational power required for solving proofs of work demands a significant amount of electricity. For instance, in 2021, the Bitcoin network consumed as much electricity as Chile and had a carbon footprint comparable to that of New Zealand. The blockchain industry is actively working on addressing these environmental concerns through technological advancements and exploring alternative solutions.

Proof-of-Stake Blockchains #

Proof of Stake (PoS) is another commonly used consensus mechanism in blockchain, which addresses many of the drawbacks of Proof-of-Work (PoW) blockchains such as slow speed, limited scalability, inefficient energy usage, and high entry barriers. Examples of leading PoS blockchains include Polkadot, Avalanche, and Cardano. Even Ethereum, originally a PoW blockchain, is transitioning to a PoS blockchain known as Ethereum 2.0.

Unlike PoW, PoS blockchains don’t have miners but instead have validators. Validators are operators of network nodes responsible for validating data, similar to PoW systems. However, there’s no need for energy-intensive computations to earn the right to validate. In PoS, validators “stake” a portion of the blockchain’s native tokens as collateral to become eligible for selection as a validator node. When it’s time to validate the data in a transaction block, the system randomly chooses a validator to confirm the data. While randomness plays a role, certain factors, such as the number of tokens staked, can increase the likelihood of being chosen. Once the block is confirmed, the validator is typically rewarded with network transaction fees, and the process starts again with a new block.

PoS blockchains ensure network security and validator honesty by requiring validators to stake their tokens. If validators behave maliciously or incompetently, they risk losing their stake and access to the network through a process called “slashing.” This incentive structure encourages validators to follow the rules rather than break them. Different PoS blockchains have variations on this general process.

Since validators on PoS blockchains don’t need expensive hardware or high electricity consumption, the entry barrier for validators is generally lower. However, if you want to become a validator, you still need a sufficient amount of cryptocurrency to stake, which can vary between blockchains and may amount to thousands of dollars’ worth of tokens. PoS blockchains have faced criticism for being plutocratic because the influence of validators on the network is often proportional to the size of their stake.

In terms of sustainability, PoS blockchains are considered more environmentally friendly than PoW networks due to their significantly lower electricity consumption. Proponents argue that future blockchain projects should prioritize the use of PoS consensus mechanisms.

Delegated Proof of Stake (DPoS) is an evolution of the PoS concept where users of the network elect delegates, also known as witnesses or block producers, to validate the next block. In DPoS, you vote for delegates by pooling your tokens into a staking pool linked to a specific delegate. Supporters claim that DPoS is a more decentralized and egalitarian method of achieving consensus compared to PoS alone.

Private and Consortium Blockchains #

There are different types of blockchains, and two additional categories are consortium blockchains and private blockchains. Private blockchains are controlled by a central entity that determines who can access the blockchain, verify transactions, and see the recorded information. Consortium blockchains, on the other hand, are distributed ledgers controlled by multiple entities, with each operating a network node, participating in consensus, and having permissions to view specific data. Because these blockchains lack decentralization, they are often referred to as Distributed Ledger Technology (DLT).

Private and consortium blockchains are commonly used by businesses that want to utilize blockchain technology while keeping certain information private for regulatory or competitive reasons.

Public blockchains like Bitcoin and Ethereum are censorship-resistant and provide a wide range of opportunities for developing applications and platforms. Consortium blockchains may offer faster transaction processing and easier modification, but they are limited in usage outside of the private consortium.

An example of a private blockchain is ConsenSys’ Quorum, which was previously owned by JPMorgan Chase. It is a permissioned version of the Ethereum network designed for interbank information sharing. Consortium blockchains are being developed in various industries such as insurance, food distribution, financial services, and even for prototyping central bank digital currencies (CBDCs) worldwide.

Not all blockchains are the same, and different consensus mechanisms have implications for accessibility, security, and sustainability. Additionally, not all blockchain types are equally suitable for every use case. While public blockchains are secure and resistant to censorship, they may not be ideal for enterprises due to their transparency. While Proof of Work (PoW) has been the standard consensus mechanism since the launch of Bitcoin, Proof of Stake (PoS), Delegated Proof of Stake (DPoS), and DLT are gaining popularity in the blockchain world.

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Author: Cryptopedia Staff