Related Articles

An Introduction To Blockchain Consensus Algorithm

BitForex Editor
Dec 11, 2020

It is no news that blockchain is a distributed decentralized network that ensures as well as guarantees transparency, immutability, security, and privacy. This system does not have a central authority tasked with validating and verifying transactions, and irrespective of that, every transaction on the blockchain is still considered to be thoroughly verified and secured. This is only achieved due to the existence and influence of the consensus protocol, which serves as an important aspect of any blockchain network.

What is a Consensus Algorithm?

Aconsensus algorithm refers to a mechanism that provides the opportunity for machines or users to coordinate in a distributed setting. It is tasked with ensuring that all agents present in the system are capable of agreeing on a single source of truth even if some agents will compromise. In context, the system must be fault-tolerant.

A single entity has power over the system in a centralized setting. Generally, they are capable of making changes as they deem fit, plus there isn’t any complicated governance system for attaining a consensus amongst many administrators. However, in a decentralized system, the story is quite different. Let’s assume we are working with a distributed database; how do we decide or agree on what entries get added.

Successfully dealing with the problem associated with an environment where strangers have no trust or assurance in one another was perhaps one of the most essential developments which gave room for blockchains. This is why this article will focus on the importance of the consensus algorithm to the functioning of distributed ledgers and cryptocurrencies.

Consensus Algorithms And Cryptocurrency

 In digital currencies, users’ balances are usually registered or saved in a database in the blockchain. It is vital that everyone or rather every node has a similar copy of the record. Failure to adhere to this often results in conflicting information, which will, in turn, undermine the absolute purpose of the cryptocurrency network.

The aim of public-key cryptography is to ensure that users don’t send each other’s coins; however, there is a need for the availability of a single source of truth that users can depend on in other to know whether funds have already been spent. The creator of Bitcoin, Satoshi Nakamoto, proposed a Proof of Work system with the goal of coordinating participants; however, before going into that, we will first of all identify some of the typical traits among the numerous** consensus algorithm**s ever created.

It is, first of all, required that users or validators who want to add blocks must provide a stake. In this case, the stake is some sort of value that a user or validator must put forward in other to discourage them from dishonest acts. If they go ahead to cheat, they end up losing their stake. One question is, why choose to risk their resources? This is simply because there is a reward available, which could consist of the protocol’s cryptocurrency or freshly generated cryptocurrency units.

The last thing to consider is transparency, as there is a need to be able to know when another user lacks integrity. Generally, it should be expensive for them to produce blocks but cost-effective for anyone to validate them; through this, validators are kept in check by users.

Types Of Consensus Algorithms

Proof of Work (PoW)

Proof of work or rather POW is often regarded as the spearhead of consensus algorithms. Its idea has been in existence for a while but was first integrated into Bitcoin. In POW, users also known as miners, hash the information they want to add until they get a specific solution. A hash is basically a random string of numbers and letters created when users run data through a hash function. It is necessary to understand that if you run it through again with the same data, it will always result in the same output, but if you make a change to one detail, then the hash will be different.

From the output, it is impossible to know the information or data that was fed into the function. This is why they come in handy, especially when you want to prove that you were aware of a piece of data before a certain time. You can give the hash, and once you disclose the data, the person can confirm the output is identical by running it through the function.

The protocol sets the requirement for what makes a block valid in a proof of work; for example, a block can only be valid if it hashes begins with “00,” and the only way for a miner to create one similar to the combination is through brute-force inputs. The bar is set high with major blockchains, and to compete with other miners, one would need a warehouse equipped with special hashing software in other to have a chance of producing a valid block. If you are able to create a valid hash, then not only will it be accepted, but you also get a reward.

Proof of Stake (PoS)

POS comes up, especially in areas where POW is discussed; it is often regarded as the alternative to POW. The Ethereum platform moved from Proof of Work to the Proof of Stake consensus. This type of consensus is based on validators investing in the coins of the system by using some of their coins as a stake rather than investing in costly hardware to solve challenging puzzles. In this case, validators validate blocks by putting a bet on them if they notice a block they believe can be added to the chain. Based on the blocks added in the blockchain, validators are rewarded proportionately to their bets, and their stakes rise accordingly. It is from their economic stake in the network that a validator is picked to create a new block. The proof of stake motivates validators with the use of an incentive mechanism in other to arrive at an agreement.

While Proof of Work and Proof of Stake is the most referenced and much talked about consensus algorithms, it is necessary to understand that there are a wide variety of other ones, including; Proof of Burn (POB), Proof of Elapsed Time, Proof of Capacity amongst others and each has their advantages and disadvantages.

The mechanisms for obtaining consensus as essential, especially to the functioning of distributed systems. A lot of people are of the opinion that the use of proof of work was Bitcoin’s most significant innovation as it enabled users to come to an agreement on a shared set of facts. Consensus algorithms today serve as the backbone of blockchain technology and are essential for the long-term viability of the different networks in existence.

About BitForex:

BitForex is an exchange service platform that can be classified as one of the Top 10 cryptocurrency exchange services. It is focused on providing millions of users with a digital currency trading and investment tool that is not only safe but also professional and convenient. BitForex has a high customer-oriented culture and state-of-the-art financial technology.

BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

More details:

BitForex / Social Trading / CAPP TownEazySwap

Scan to download for iOS or Android