Consensus algorithms: PoW, PoS, etc.
Even seasoned bitcoiners sometimes are stuck to explain what is a consensus in blockchain transactions. Although it's easy, let's explain!
You may already know that every transaction on a blockchain network is verified and secured by the nodes. It's pretty understandable, why the transactions should be verified — no one wants to receive the "faked" payment, but I bet many of you are wondering, how such verification can be realized? This is what consensus is all about: a consensus algorithm is a process in Computer Science used to achieve agreement of a single piece of the data value (a transaction, in our case) among distributed systems; hence the name, "consensus" is nothing but a fancy name for "agreement". Various networks rely on different consensus algorithms that maintain the integrity and security of the system and specify how exactly are the transactions confirmed from a technical point of view. Algorithms are responsible for verifying the balances and validation of the blocks: once it's ensured that the next block in a blockchain is fully compliant and is the only possible, the system remains stable, transactions are always genuine, etc. Let's familiarize ourselves with the most widely used algorithms:
Proof-of-Work (PoW)
The very first and currently the most widely used consensus algorithm is the PoW, invented by Satoshi Nakamoto and first introduced with Bitcoin. Proof of work is used for the block generation: the process of blocks generation aka the "mining" requires the "miners" to solve complex cryptographic puzzles to secure the network. Once the block is generated, the miner gets a reward; other network nodes verify that it's correct before adding a block to the blockchain.
Such an algorithm comes with downsides: it requires big amounts of energy to mine Bitcoins and other PoW cryptocurrencies; that's not very environment-friendly. Besides, it does not scale well, transaction confirmation takes minutes. There are also some centralization concerns: miners are placing the devices in areas where electricity is cheap, most of these are currently in China and few other countries. Despite all these, PoW is still the most popular algo, some random examples of coins utilizing this one:
Verge (XVG)
- rank: #492
- type: Cryptocurrency
- consensus: PoW
- mineable
- Privacy-focused
Proof-of-Stake (PoS)
PoS algorithm was invented next after the PoW and first adopted by the Peercoin cryptocurrency. The logic behind this one is significantly different from the PoW; there are no miners involved. The nodes participating in block generation and validation are called "validators" and the process is "staking". During the staking, a validator is chosen to generate a block based on an economic stake in the network. There are usually two factors taking into account to estimate the stake: a number of coins the validator possesses and the "coin age" (number of days the coins are held in a wallet; one should usually leave the coins without movement for a while, before being able to participate in staking).
PoS is seen as being superior to PoW mostly by the reasons of significantly lower energy consumption; there are fewer risks of centralization and the staking usually requires less time. There are many successful implementations of the PoS model; one of the leading cryptocurrencies, the Ethereum network will switch to the PoS consensus algorithm with one of the upgrades. Although there are some downsides as well. For example, in the case of the blockchain fork (when a chain splits in two), the generators have nothing to lose by supporting both the chains, although it will be impossible with the PoW network. Examples of cryptocurrencies, using the PoS algorithm (chosen randomly):
Delegated Proof-of-Stake (DPoS)
DPoS was invented by cryptocurrency entrepreneur Daniel Larimer in 2014 and first used by the Bitshares. It can be briefly described as "PoS meets democracy" (or reality TV show ). Delegated PoS is maintained by the means of the election process; the users are voting for "witnesses" (who generate blocks and confirm transactions) and "delegates" (oversee transaction fees, block size, witnesses' rewards, etc.); the number of voices depends on the stake users hold. DPoS is somewhat similar to corporate governance models.
The algorithm has all the upsides the PoS has and is more flexible, although the weak point is that DPoS sacrifice decentralization for scalability. Many popular modern cryptos are adopting this algorithm, some randomly chosen examples:
The Open Network (TON)
- rank: #10
- type: Cryptocurrency
- consensus: DPoS
- Smart Contracts
There are also hybrid cryptocurrencies, using PoS + PoW; there are custom algorithms as well. You are most welcome to browse our cryptocurrencies listings to know more, feel free to apply the filters to get the selection of cryptos using the algorithm you are most interested in!
See also:
- Introduction into Bitcoin for newcomers from Quick start in Crypto
- Cryptocurrencies, Coins, and Tokens: what's the difference? from Quick start in Crypto
- How to make money using ExchangeRates.Pro from Quick guide to ExchangeRates.Pro
- How to use ExchangeRates.Pro from Quick guide to ExchangeRates.Pro