Chapter 2: Consensus Mechanisms

Dear reader,

I hope you found the first part of “Crypto Talk” insightful. If you missed it, do read it here because the following one builds on the foundation we laid there.

Today, we’ll go over different consensus mechanisms of blockchain, the ones that help a blockchain network engage and stay secure based on consensus. Let’s go through it.

Throughout history, there have been various ways to build trust in currencies. Sometimes, the currencies themselves held value, like the earlier coins made of gold or silver. Then governments realized that it would be better if they purchased gold and issued currencies commensurate with its amount. As you might figure, if you issue more currencies without purchasing gold, the value of the currency falls.

So the government moved to a more novel idea. They promised to honor their commitment without the need to purchase gold. Here, the trust shifted from something tangible to an institution.

History has taught us that at the end of the day, individuals who run the government are capable of taking decisions that can crumble a whole economy. This is where blockchain-based new-age currency comes in.

Now, suppose you have a system where the trust is not dependent on a central authority but on a network itself. However, it leads to what is called the Byzantine Generals problem, where even one bad node can make the whole system fail. But this is also where Satoshi Nakamoto’s ingenuity comes in. He built a system that can not easily be broken by a rogue agent. And the larger the network, the more difficult it becomes, which is something I explain in the first part of this blockchain series.

So the chances of a 51% attack reduce considerably. As the price of the coin rises, more and more distributed nodes come up, which means that the rogue agent will need control over 51% of the effort required to create the blockchain networks to corrupt it. In essence, this is where the consensus mechanism comes in. It has to be difficult for the agents or nodes to go rogue.

With that, let’s understand some of the most popular ways the consensus mechanisms are built in the system:

Proof of Work: This is the consensus-building mechanism that Elon Musk and Bill Gates criticized. As the name suggests, Bitcoin miners (mining is the process to create new Bitcoins) need to earn the right to add data to the platform. For that, they have to work. The work is solving a puzzle. And as the number of parties increases in the network, the puzzle gets harder.

Now to solve the puzzle, we need to use advanced computers capable of managing numerous hits and trials that result from the process. Even if the puzzle is solved, other players verify its solution.

The key is to solve the puzzle faster. Once we do that successfully, we get the right to add the next block of the blockchain. For all the effort we do, we get paid in newly minted Bitcoins.

Now, we might argue that the computers (more specifically, ASICs) make the effort. These ASICs consume a lot of energy, so even if we don’t end up solving the problem, we spend considerable energy to earn the right to add the next block of the transaction.

This also means that it becomes extremely difficult and expensive to try to hack the system. This is because for that to happen, they need to have at least 51% of the mining power, which amounts to about 0.1% of the world electricity consumption.

So if we believe that Bitcoins are made out of thin air, then the same goes for all the money we hold in digital form in banks. But the factor of trust is critical–we trust banks to safeguard our money using some form of coding.

Proof of Stake: It is difficult to look past the electricity consumption when we mine Ethereum or Bitcoin. The whole point of the network is to build one that does not give false information. One of the ways is to stake the coins we already have.

This is like locking our holding in a locker. Those who stake their currencies are called “validators.” The system then pseudo-randomly chooses a validator who would get the right to add the next set of blockchain and earn new coins.

Even though the process is random, the chances increase in proportion to the coins staked. In case the validator tries to act fraudulently, the stake is forfeited by the system. Hence, the risk of losing all of the staked currency is what stops any validator to act fraudulently.

Ethereum initially worked on the Proof of Work concept but soon it will move completely to Proof of Stake.

Delegated Proof of Stake: If you’re familiar with Gini coefficient, it is high in proof of stake. It is because the rich can stake more coins than those with fewer coins. Taking it in the light of blockchain, even though it is a matter of probability, the rich can substantially increase their chances of constantly earning the rights to add new blocks. To mitigate this, we can collect our stakes in a group.

We choose a delegate, similar to choosing a leader (there can be as many leaders but with varying powers). Now, the randomized selection process runs on these delegates. This is important because the weight assigned to the percentage stake gets negated and other factors (like the time for which the stake has been put) are taken into account.

Cardano, EOS, and TRON use delegated Proof of Stake. The advantages are a faster network as well as higher efficiency and output of the blockchain.

Proof of Capacity or Proof of Space or Proof of Spacetime: This is another mechanism that is used to check if the nodes/validators have their skin in the game. The idea behind Proof of Work–the first mechanism–is to ensure that someone spends money by using electricity in order to prove that they have an interest in keeping the network up and running. But here we say that we will purchase storage, which will be filled with random data to ensure that we still have interest in keeping this network up and running.

This saves considerable electricity since it’s needed to fill data and for validation checks from time to time. However, that would be substantially less than what would be used in Proof of Work since this exercise leads to the wastage of a number of silicon chips.

That said, people have found ways to check if the spaces are genuinely getting allocated for the system. One of the tests for this is Graph Pebbling.

Proof of Burn: I personally prefer this one. We literally have to burn our money here–we send cryptocurrency to a particular account which ends up burning it. The more we burn it, the more we show that we have an interest in the network. In other words, the bigger the gesture, the more our chances of earning the right to add the next block of the chain.

We need to do this consistently as the power of burning reduces with time. However, in this method, it is easier to assume control as theoretically we are rewarded more than what we end up burning. Slimcoin is an example of cryptocurrency that uses this mechanism.

Proof of Authority: Let us understand this through an example. Let us consider that a road construction contract is up for bidding. Out of all bidders, one is chosen after following due process. When the construction of the road is complete, the road is named after the road constructing party and also holds the contractor’s contact details.

If the road breaks, people can call that constructor and give him/her their piece of mind, leading to staining his/her reputation. This is what happens in Proof of Authority.

Instead of staking money, we stake our dignity. Similar to usual bidding processes, the authority has to pass a test to become a validator. Validators are randomly chosen but everyone in the network knows who the validator is. If the validator ends up acting fishy, they can be immediately removed.

In such a scenario, a 51% attack again becomes pretty difficult. However, this system seems similar to a centralized system where control is consolidated with a few.

There are several other concepts which exist or will exist to ensure that the consensus-building mechanism does not break. Some of them are Proof of Brain, Practical Byzantine, and Proof of Activity, among others.

Proof of Work was just an initial iteration of consensus building. As time progresses, new and better ideas will emerge to solve most of the problems. Every consensus-building mechanism has an advantage and they may be used for particular use cases. For instance, we may move to Proof of Activity, where likes and comments might end up determining the mining power. The superior the content, the stronger the reach would be.

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This blog is the second part of a weekly series called “Crypto Talk” which goes through the A-Z of blockchain and untangles the matter. Subscribe here[1] if you want it to be delivered right to your inbox.