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What are blockchain consensus protocols?

Blockchain consensus algorithms explained

Discover what blockchain consensus algorithms are and why they are paramount to verifying the authenticity of distributed blockchain platforms.

Blockchains are an incentivised distributed ledger using a plurality of technologies ranging from decentralised communications protocols (whisper), storage protocols (independent nodes) and consensus mechanisms. In this guide, we explain how different Blockchain consensus algorithms work, their benefits and risks, and some examples of prominent cryptocurrencies using each alternative consensus mechanics.

What is consensus?

Blockchain consensus algorithms are paramount to verifying the authenticity of distributed blockchain platforms and are the process of building agreement among a network of mutually distrusting participants.

In order for a blockchain to properly work, nodes need to reach consensus on the state of transactions and blocks. Mostly, transactions are either accepted, rejected, or left pending. Consensus algorithms allow nodes (and mining hardware/software) to agree on:

  1. Transaction data such as amounts and addresses
  2. Block state meaning if a certain block is valid or invalid

In essence, consensus refers to the set of rules that govern the consensus mechanism and ensure its trustless nature. A consensus protocol has three key properties on which its applicability and efficacy can be determined.

  • Safety: a consensus protocol is determined to be safe if all nodes produce the same output and the outputs produced by the nodes are valid according to the rules of the protocol. This is also referred to as consistency of the shared state.
  • Liveness: a consensus protocol guarantees liveness if all non-faulty nodes participating in consensus eventually produce a value.
  • Fault tolerance: a consensus protocol provides fault tolerance if it can recover from failure of a node participating in consensus.

Before we dive-deep into each alternative consensus algorithm, it’s important to understand that each is linked to a governance model. The two most common are:

  • Decentralised governance models where the community participates in the decision-making process. This is achieved by either committing code to the software in order to improve the consensus mechanics, or simply by transacting in the network. Some of the oldest cryptocurrencies that fall under this category are Bitcoin, Litecoin and Dogecoin.
  • Centralised governance models which are usually represented by federated consensus. A party composed of trusted institutions, ranging from for-profit companies and non-profit organisations to financial institutions, have the power to control the network, transactions and overall consensus mechanics. There are a variety of top-10 projects that fall under this category including Stellar Lumens, Ripple and Bitcoin Cash.

Different Blockchain consensus algorithms

There are three main consensus mechanisms.

  1. Proof-of-Work (PoW) based on cryptographic calculations that require miners to spend energy to solve computational problems in order to find a hash. The longer the hash, the more secure it is.
  2. Proof-of-Stake (PoS) based on each participant stake. The PoS requires participants to stake some of their tokens in order to become network validators. PoS is seen to have two main issues. The first is the nothing at stake problem, where participants can’t lose their stake even if they voted for all blocks and did not follow the protocol rules. The second is the fact the network is prone to more centralisation as there is no mining. Both problems get addressed in alternative PoS versions discussed below.
  3. Delegated Byzantine Fault Tolerance (DBFT) based on a federated consensus, meaning the network reaches consensus through the agreement from a number of central authority nodes. Although this consensus algorithm allows scalable solutions to be built on top, it decreases security and user privacy as the network is not truly decentralised and has central points of failure.

Each consensus mechanic has a different purpose, usually connected to either enabling security + privacy, scalability + security or privacy + scalability.

Below, we explain each blockchain consensus algorithm, as well as what it promotes.

POW POS DBFT
Security Yes No Yes
Scalability No Yes Yes
Privacy Yes Yes No

 

 Examples and variants

There are already pluralities of cryptocurrencies with different consensus protocols implemented and fully functional. Below, we list the most used according to each user-base and marketcap.

PoW PoS DBFT
PoA DPoW PoB PoET/PoA/PoI DPoS PBFT FBA
Security Yes Yes Yes No No No Yes
Scalability No Yes Yes Yes Yes Yes Yes
Privacy Yes No Yes Yes No No No
Project  Decred  Komodo  Slimcoin  POET/POA/NEM  EOS/Steemit  Hyperledger  Stellar/Ripple

The PoW group has two main variations, Proof-Of-Authority and Delegated PoW. Each has its own merits and drawbacks. While the first cannot properly allow for a huge network to scale as mining is still a requirement, the second promotes scalability by taking away some decentralisation features. In both, there is a cost associated to electricity, however in the latter that cost may be linked to an underlying protocol – for example Komodo uses Bitcoin’s blockchain to guarantee its networks security by connecting its blocks to Bitcoin’s blockchain’s hash.

The PoS group has considerably more variants, the most important being Proof-of-Burn (PoB). PoB mixes PoS and PoW by having wallets requiring anyone staking to actually burn that stake in order to participate in finding the next block. This is the easiest method to have a fully decentralised PoS system. Other variants include Proof-of-Elapsed-Time, Proof-of-AuthenticityProof-of-Importance and, of course, Delegated PoS which seems to bring considerably more disadvantages to the end user as, on top of a weaker security, participants also need to trust a central mining authority.

Finally, the BTF group has two main existing variants: Practical BFT, which is mostly used by the permissioned distributed ledger Hyperledger and the Federated Byzantine Agreement algorithm, mainly used by Ripple and Stellar. It allows for a higher scalability of a PoW protocol by decreasing privacy as there are groups of centrally controlled nodes which can validate transactions. In addition, participation is not open to everyone.

Conclusion

The main trade-off that consensus protocols face is between centralisation and efficiency. Remember the initial dilemma: how can an algorithm maintain security and privacy, while creating a scalable system at the same time?

The more centralised the decision-making process is, the faster the decision can be taken and the more scalable the network is. On the other hand, the less centralised a network is, the longer it takes to come to a consensus. When the hierarchy between shareholders is flat, unanimous decision making is difficult to achieve. Although the introduction of counterparties may not be a problem in every case, the original goal of the blockchain technology was to create consensus without intermediaries. Miners, oracles, witnesses, delegates, or stakers all centralise the system to some degree.

Don’t forget that you can explore different types of cryptocurrency technologies by reading our latest guides and insights.

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