In one of the previous articles, we talked about designing and launching a blockchain and choosing an off-the-shelf solution or building your own network. Choosing a blockchain consensus algorithm is an important step that will determine the performance of the network.

In this article, we'll analyze popular consensus mechanisms for different business purposes, examples of their implementation as well as understand what consensus means.

How does blockchain work and what’s the consensus algorithm role

Blockchain is a distributed database that stores transaction information in a decentralized manner without the ability to tamper with or delete data. Therefore, blockchain has no centralized authority to verify and validate transactions. Who then manages the network, and how exactly is security ensured if there is no centralized management?

This is when the consensus mechanism gets in the game, the backbone of the blockchain that keeps it working and secure, ensures that all nodes in the blockchain network are in synchronized.

Thus, we can form the following definition of consensus — it is a protocol by which all users of the network come to a common agreement on the current state of data, and verify transactions from different nodes using cryptographic hashes. The consensus algorithm is designed to ensure the reliability of a network that consists of many users.

Five characteristics of consensus algorithms

Unified agreement. Unlike centralized systems, users of decentralized networks can work without trusting each other. Consensus protocols ensure the validity and accuracy of the data that participants provide.
Regulation. The alignment of participants' interests in decentralized systems is considered a prerequisite, which is achieved through consensus protocols. The system then rewards the best users and alienates abusers.
Fairness and equity. Enables any user to participate in the validation of new blocks.
Prevention of double-spending. Established consensus mechanism algorithms ensure that only valid and confirmed transactions are added to the blockchain. This solves the traditional problem of double spending of digital currency.
Fault tolerance. The consensus mechanism ensures that the blockchain is fault-tolerant, consistent, and reliable. That is, it ensures that the system will work indefinitely even in case of any failures.

There are many consensus algorithms that blockchain platforms use. For example, Bitcoin blockchain works on PoW mechanism, Ethereum since recently on PoS (previously supported PoW), VeChain on PoA. Let's take a closer look at the three main consensus algorithms: PoW, PoS, PoA.

PoW (Proof of Work)

A consensus algorithm that makes the Bitcoin blockchain work, as well as cryptocurrencies like Litecoin, Monero and others. The addition and validation of transactions takes place through the use of mining. Participating nodes (miners) solve complex mathematical problems to decrypt the block hash and mine it using processing power. PoW cryptocurrencies can be mined on GPUs, CPUs, ASICs and FPGAs. The miner who finds the block hash first mines it and is rewarded for it.

But the process is not that simple. The level of complexity of mathematical problems is increasing all the time, so you need more computing power to solve them. For example, if previously Bitcoin could be mined on ordinary computers, now it will require high-powered mining farms.

The use of the PoW algorithm ensures that every network transaction is verified and prevents double-spending. In other words, if someone tries to duplicate a transaction in the blockchain, the miners will notice it and not accept the transaction.

But it is important to understand that this effect is achieved through powerful computing hardware. So if you decide to develop a blockchain based on this mechanism, take care in advance to create powerful mining pools. If not, there is a risk of a low hash rate and a 51% attack — when an attacker rents more than 50% of the capacity and gets the power to validate and verify transactions.

Despite this, the PoW algorithm is still one of the most reliable and secure mechanisms, but with problems in network scalability. That is why Ethereum switched to the PoS algorithm in order to scale the network and add new functionality.

In any case, when developing a blockchain on the PoW algorithm, you need to plan a complex launch procedure. The first thing to do is to launch the network with its own validators, and then allow mining by miners, who will gradually build up the capacity.

You may also be interested in ...

What smart contracts are, their types and how they actually work

How to Create a Blockchain Application: A Complete Guide

Ready to Discuss Your Project?

Ready to Discuss
Your Project?