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Consensus Algorithms: Pros & Cons

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!

Pros:

Cons:

  • Requires tokens, which is unsustainable for enterprise use and permissioned blockchains.

Use cases: Bitcoin, Ethereum, Litecoin

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.

Pros:

  • Long-time users can receive additional income.

Cons:

  • The fact that PoS coins must be available 24/7 for the staking process makes them more accessible to hacker attacks.

Use cases: NXT, Tezos

Pros:

  • Network resilience. Users replace the witnesses who failed by re-electing them at any time.

Cons:

  • The risk of a “51% attack”, when a miner or a group of miners might manipulate the blockchain.

Use cases: EOS, BitShares

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.

Pros:

  • With LPoS you get income from mining activities without actually mining.

Cons:

Use case: Waves

Pros:

Cons:

  • 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.

Pros:

  • Independence. The algorithm does not rely on GPS.
  • Participants receive rewards for opening and expanding locations.

Cons:

Use cases: FOAM, Platin

Pros:

Cons:

Use case: NEM

Pros:

  • It is an attractive solution for large corporations with logistic needs.

Cons:

  • 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.

Pros:

  • Burning coins creates scarcity in the market and increases the value of coins.

Cons:

  • The algorithm is useful only for highly developed cryptocurrencies with a large coin supply.

Use case: Slimcoin

Pros:

  • 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.

Cons:

  • Not suitable for public data networks.

Use case: Hyperledger Sawtooth

Pros:

Cons:

Use case: Sia

Pros:

Cons:

Use case: Hyperledger, Stellar, Ripple

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.

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