What is a consensus algorithm and why do you need to use one? In this article, we’ll take a deep dive into the world of blockchain technology. We will explore how blockchains achieve “consensus” using various different methods in order to answer some common questions on the topic.

Blockchain is a decentralized, distributed ledger technology that records transactions in an open and shared way. In this article, I will discuss the consensus process of blockchain. Read more in detail here: what’s blockchain.

Inside the blockchain developer’s mind: Blockchain consensus, Part 1

Through its series Inside the Blockchain Developer’s Mind, Cointelegraph is following the creation of an entirely new blockchain from conception to mainnet and beyond. In prior sections of this series, Andrew Levine of Koinos Group described some of the problems his team has experienced since identifying the primary concerns they want to address, as well as three “crises” that are preventing blockchain adoption: upgradeability, scalability, and governance. The consensus algorithm is the center of this series: part one is about proof-of-work, part two is about proof-of-stake, and part three is about proof-of-burn. 

In this post, I’d want to use my unique viewpoint to assist the reader obtain a better grasp of a widely used but misunderstood topic in blockchain technology: the consensus algorithm.

Because the consensus algorithm is only one tiny aspect of a much bigger system, one of the things I usually want to do in these articles is begin by taking a step back and looking at the broader picture in order to obtain a comprehensive grasp of this component of a blockchain.

Blockchains are a game in which participants compete to validate transactions by organizing them into blocks that match other players’ blocks of transactions. The data that would enable these folks to cheat is hidden via cryptography. To award digital tokens to users who follow the rules and create blocks that match the blocks produced by others, a random mechanism is utilized. These blocks are then linked together to establish a verified record of all transactions ever carried out on the network.

Inside-the-blockchain-developers-mind-Blockchain-consensus-Part-1

We term it a “fork” when individuals create new blocks with different transactions in them since the chain is now forking off in two separate directions. This is precisely what we don’t want to happen. The utility of a blockchain arises from the fact that everyone agrees — has reached an agreement — on when transactions occurred. As a result, consensus methods are designed to resolve forks.

Satoshi’s true breakthrough

At the end of the day, how they are penalised when they do not update their databases to match one another is what guarantees that everyone updates their databases to match one another. The protocols provide rules for transaction ordering, but if there are no consequences for breaking those rules, they will be useless. Satoshi Nakamoto’s exquisite application of economic incentives in the Bitcoin (BTC) white paper was the genuine invention.

The concept of the “electronic coin” was not created by Satoshi Nakamoto. He devised a clever mechanism for integrating cryptography and economics to employ electronic money, now known as cryptocurrencies, to address issues that algorithms alone can’t solve. People were obliged to give up money in order to mine blocks of transactions because of his design. People would have to repeatedly sacrifice their money by following the rules of the system and attempting to structure transactions into blocks that would be accepted by everyone else in the network. They would earn a prize in the platform’s money if they performed this for a long time.

Of course, the blockchain has no means of knowing if money was spent in USD, yen, or euro, so he utilized a proxy in the form of useless labour. He made block mining needlessly difficult, requiring everyone who successfully mined a block to spend money on hardware and the energy required to power that gear. As a result, every successfully mined block is backed by money spent not just on the hardware, but also on the energy used to power that gear and generate that block. Proof-of-work (PoW) consensus algorithms are an automated technique that determines which fork is the “correct” fork whenever there are forks.

Proof-of-stake vs. proof-of-work: What’s the Difference?

This implies that those who continue to produce blocks on that fork will continue to get rewards, while those who continue to produce blocks on the other fork will not. Because these folks have already spent money on hardware and running it to generate blocks, the penalty is simple because they have already been financially penalized. They’ve already spent their money, therefore it’s great if they want to keep manufacturing blocks on the incorrect chain. They will not be rewarded and will not get a refund. They’ll have squandered that money for nothing. Their blocks will not be acknowledged by the network, and they will not get any tokens as a result.

This proof-of-work method assures that a hostile actor who does not want to play by the rules may only do so by acquiring and running more hardware than everyone else, such as by launching a 51 percent assault.

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Proof-of-work is elegant in this way. The system cannot function without ever-increasing capital sacrifices. Satoshi used cryptography with economics to construct a transaction ledger that is so secure that it can’t be trusted.

Different consensus algorithms, on the other hand, function in somewhat different ways. Proof-of-stake (PoS), the most well-known of which I’ll explore in the next piece in this series, is the most well-known. Following that, I’ll go through the Koinos algorithm, which is a first-of-its-kind in a general-purpose blockchain.

The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.

Andrew Levine is the CEO of Koinos Group, where he and the former Steem blockchain development team create blockchain-based solutions that allow individuals to own and govern their digital identities. Koinos is their flagship product, a high-performance blockchain based on a completely new architecture designed to provide developers with the capabilities they need to offer the user experiences required to extend blockchain adoption to the masses.

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