Cryptocurrency Consensus Mechanism


  • Definition
  • Detailed Explanation
  • Blockchain Consensus Mechanism


A consensus mechanism can be defined as a set of methodologies used to acquire agreement, security, and trust across a decentralized network, just as with cryptocurrencies.

For instance, on a Bitcoin network, the consensus mechanism used is known as PoW or Proof-of-Work. In this mechanism, the miners are required to solve a mathematical problem to ensure that all nodes on the network are honest. To solve the mathematical puzzles successfully a lot of computational power is required. 

Detailed Explanation

In a centralized system, there is a single regulatory authority, with the sole responsibility of adding, deleting, and updating the database. The central authority is also responsible for the complete maintenance of records.

In decentralized public blockchains, there is no single regulatory authority and the self-regulating system operates on a global scale. In public blockchains, participation from hundreds and thousands of participants is required for the authentication and verification of transactions occurring on blockchain. 

In such blockchains, for publically shared ledgers there is a requirement of a real-time, reliable, functional, fair, secure, and efficient mechanism to ensure the legitimacy of the transactions occurring on the network. For the execution of such a critical task, a consensus mechanism is implemented on the network. A consensus mechanism comprises a set of rules, which agree on the legitimacy of the contributions made by different nodes on the blockchain. 

Blockchain Consensus Mechanism

There are different types of consensus mechanisms, which work on different principles.        

  • Proof-of-Work (PoW): It is one of the most popular consensus algorithms that is used by many cryptocurrencies, like Bitcoin and Litecoin. In this consensus mechanism, there is the active involvement of all the nodes on the blockchain to prove that the work done and submitted by the node is qualified to be added as a new transaction on the blockchain. The only disadvantage that is there associated with this blockchain is that there is a huge requirement of high energy and it takes a longer time for processing. 
  • Proof-of-Stake (PoS): Like PoW, it is another common consensus mechanism that is viewed as an alternative for the PoW algorithm because of its low energy consumption and low cost. In this mechanism, the public ledger is maintained by allocating the responsibilities to the participating nodes based on the number of crypto tokens that they have. The disadvantage that is associated with this mechanism is that it incentives crypto coin hoarding instead of spending. 
  • Proof-of-Capacity (PoC): It allows memory sharing among the contributing nodes on the blockchain. The node having more memory space will be granted more rights for maintaining a public ledger. 
  • Proof-of-Activity (PoA): It is used on the Decred blockchain and is a hybrid of PoW and PoS.
  • Proof-of-Burn (PoB): In this mechanism the nodes are required to send a small amount of cryptocurrency to inaccessible wallet addresses, thereby burning them. 
  • Proof-of-History (PoH): It is similar to Proof-of-Elapsed-Time (PoET) and is developed by Solana; consensus is achieved by encoding the passage of time by itself cryptographically without expending many resources.  

Disclaimer: The article should not be considered as any financial advice. It is advisable to conduct thorough research before investing. 

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