Each cryptocurrency has its own consensus algorithm. None of them are perfect, but they all boast special features. The ones we’ll discuss mostly underpin blockchains. The data structure known as blockchain is where they are supposed to work. Other data structures can be used in decentralized networks that have their own consensus algorithms, such as directed acyclic graph (DAG), Hashgraph, etc. Looks too difficult? Let us break it down for you!
A consensus algorithm is a protocol by which all nodes in a distributed/decentralized computing network come to a general agreement on the state of ledger data.
Consensus algorithms recognize and validate transactions. Approving transactions in the chain maintain the security of the network and its resilience. To find out the difference between consensus algorithms, we will cover several popular technologies and list their advantages and disadvantages.
Proof-of-Work is a consensus algorithm that requires a certain amount of work to be done before entering information into the blockchain. The entry will not be made until all participants have stated that all information is correct. To confirm the transaction, miners find the hash using the selection method and receive awards for this work.
- The amount of cryptocurrency owned by the miner has a low impact on the mining possibilities.
- Unreasonably high energy input. All participants perform calculations searching for the required hash combination, but only the one that conducts successful work is rewarded.
- Requires tokens, which is unsustainable for enterprise use and permissioned blockchains.
Proof-of-Stake is the type of consensus algorithm in which the creator of the next block is selected based on the share of coins of the network participants. The selection process is pseudo-random, it takes into account the distribution of the participant’s node in the network. The miner stakes his assets, contributing them to the general network. The higher the miner’s rate and the longer this money remains in the system, the more chances he has of making a profit.
- Nodes take an active part in developing the ecosystem.
- Long-time users can receive additional income.
- The only way to earn coins is to be a large old holder of that coin’s assets. This can lead to distribution problems. For example, if most of the coins belong to a limited number of users, then they take a larger share of the profit from the development of the system.
- The fact that PoS coins must be available 24/7 for the staking process makes them more accessible to hacker attacks.
Delegated Proof-of-Stake is a consensus algorithm based on a voting system where stakeholders elect validators who will protect the blockchain on their behalf, i.e. delegate authority. The members of the network with the largest deposit have the most voting rights. DPoS was designed as an implementation of a democracy-based technology that uses voting to restrict centralization and malicious use.
- Democratic and decentralized distribution of rewards.
- Network resilience. Users replace the witnesses who failed by re-electing them at any time.
- High competition.
- The risk of a “51% attack”, when a miner or a group of miners might manipulate the blockchain.
Leased Proof-of-Stake is another modification of the Proof-of-Stake algorithm. As part of this algorithm, any user has the opportunity to lease their balance to mining nodes, and get their share of profit for this.
- You can keep the balance when delegating your votes.
- With LPoS you get income from mining activities without actually mining.
Use case: Waves
Proof-of-Activity is a consensus algorithm that is based upon PoW and PoS protocols. Here’s a brief description: first, the standard mining process begins as in Proof-of-Work, when miners look for a new block and compete in computing power. When a new block is mined, the system switches to Proof-of-Stake. It means that participants can both mine and pledge a stake to validate blocks. So, PoA provides a balance between miners and ordinary users.
- Still requires high capacity costs.
- There’s a strong possibility long-term custodians of currencies become validators.
Use case: Decred
Proof-of-Location is a consensus algorithm that uses beacons to notice a node in a synchronized state, and then mark its presence with a time stamp. It allows users to track and secure a specific GPS location and thus authenticate themselves to the system.
- Beacons that record geolocation and timestamps on the blockchain, prevent system crashes and fraud.
- Independence. The algorithm does not rely on GPS.
- Participants receive rewards for opening and expanding locations.
Proof-of-Importance is a consensus algorithm that functions like PoS. Additional user ratings determine who becomes a validator and receive a reward. The mechanisms track the number of tokens in possession, the activity of account transactions, and the time spent on the network.
- The blockchain is not centralized, as the reward is determined by multiple factors, not only the number of owned assets.
- Those who don’t participate in the data structure development are unlikely to gain profit.
Use case: NEM
Proof-of-Authority is a consensus algorithm that picks a reputed validator. The latter doesn’t deal with tokens, but their identifiers. PoA works with fixed, already approved network members. This increases the credibility of the system because validators are known and reliable.
- Mining is not required, so users don’t have to buy costly hardware.
- It is an attractive solution for large corporations with logistic needs.
- Strong centralization in the hands of the favored few.
- Discovering validator IDs could potentially lead to manipulation by third parties.
Use case: Apla
Proof-of-Burn is a type of consensus algorithm that is analogous to PoW but implies no mining and, accordingly, no energy consumption. The more miners invest in virtual mining rigs (or “burn”), the higher their right to be selected as a block validator and receive a reward as they have demonstrated their commitment. The miner sends coins to a hash-generated random address and gets a constant chance to find a PoB block he is rewarded for.
- Unlike PoW, it does not consume a lot of energy.
- Burning coins creates scarcity in the market and increases the value of coins.
- The Bitcoins that are burned are generated by PoW mining, which is why this method is sometimes referred to as non-sustainable.
- The algorithm is useful only for highly developed cryptocurrencies with a large coin supply.
Use case: Slimcoin
Proof-of-Elapsed-Time is the algorithm that follows in the footsteps of the Proof-of-Work algorithm, but with much lower power consumption. It is an algorithm that is often used on permitted blockchain networks to determine mining rights or block winners on the network. It is based on the simple principle of a fair lottery system so that all nodes have the same chance of winning, and that these odds are fairly distributed among as many participants as possible.
- Fairness: the function distributes the election of leaders among the widest possible range of participants.
- Investment: the cost of controlling the election process is proportional to the benefits received from it.
- Verification: is relatively easy for all participants to verify the decision legitimacy.
- Even though it is cheap, you need to use special equipment. Thus, this algorithm cannot be implemented by the masses.
- Not suitable for public data networks.
Use case: Hyperledger Sawtooth
Proof-of-Capacity is a consensus algorithm that implements the concept of “megabytes as resources.” To receive rewards, you need to share your hard drive space. This helps to channel resources that are not used beneficially. The algorithm creates large blocks of data on disk using hashing, the more hash you have, the higher the chance of a reward.
- Convenient for people who prefer to use cloud storage, and have advanced computers with free terabytes at their HDDs.
- Nothing is at stake. It is more profitable to buy a special ASIC miner for disk space, which again is a struggle of resources.
Use case: Sia
Byzantine-Fault-Tolerance is a consensus algorithm where regular coin holders vote for delegates who consider transactions and decide whether to block or approve them. It was developed for several remote transactors who receive orders from one center. There are Practical-Byzantine-Fault-Tolerance (PBFT) and Federated Byzantine Agreement (FBA), another solution where each general (validator) is in charge of his chain and sorts the messages to establish the truth.
- Protection against system failures through the use of collective decision-making, as well as reducing the impact of faulty nodes.
- Requires trust between participants.
Now you know the ways to handle the verification and protection of each new block in the chain. Without these algorithms, the network could not remain decentralized. Each of them has its benefits and drawbacks. Their development and the emergence of new ones continues. Stay informed and make a safe and successful investment!
Disclaimer: This article should not be considered as offering trading recommendations. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. We kindly ask traders to do their research.