With so many blockchain technologies out there nowadays it gets pretty confusing for people to understand fundamentally anything about how these cryptocurrencies work let alone understand the whitepaper of the several cryptocurrencies. Many people after reading a whitepaper are like what? I don’t get it. So in this post, I’ll try my level best to help you guys understand the different types of consensus mechanism of different cryptocurrencies.

So let’s begin, shall we?

What is a consensus mechanism

A blockchain is a decentralized peer-to-peer network that unlike major MNC’s has no central authority figure at its head in charge of all the nonsense happening in the organization. While this builds a system that is devoid of corruption from a particular source, it still creates a significant problem.

How do you make any decisions?
How do you get anything done from start to finish?

So to understand this think of a traditional centralized organization.

All the major decisions that may have a significant impact on the organization are made by the top level a.k.a. Board of directors. However, this luxury isn’t something that you get to see in a blockchain because of one fundamental reason, i.e., it has no “leader.” So if any decisions are going to make within a blockchain, you need to arrive at a consensus using “consensus mechanisms.”

In the words of Wikipedia  “Consensus decision-making is a group decision-making process in which group members develop, and agree to support a decision in the best interest of the whole. Consensus may be defined professionally as an acceptable resolution, one that can be supported, even if not the “favorite” of each. The consensus is defined by Merriam-Webster as, first, general agreement, and second, group solidarity of belief or sentiment.”

Simply put, you need consensus for reaching agreement within a group. While voting, on the one hand, tends to settle the disputes of the majority helping people get what they want without any consideration for the feelings and well-being of the minority, a consensus, on the other hand, makes sure that an agreement arrives at that could benefit the entire group.

The method through which consensus decision-making is arrived at is called “consensus mechanism.”

So, now that we know what a consensus mechanism is, I think so it is time to proceed towards exploring the different types of consensus mechanism.

What is Proof of Work ( PoW)

This was the first distributed consensus mechanism that the anonymous creator of Bitcoin Satoshi Nakamoto had begun for operating his blockchain network. After that several cryptocurrencies like Ethereum joined the party. In PoW, all the computers in the system are allotted a specific function of keeping the blockchain secure. These people are known as Miners within the bitcoin network, and their job is to solve a bunch of puzzles that include a mathematical function known as a hash. This task is easy as eating a banana (for a computer) but incredibly repetitive, and as a result of that, it is computationally expensive or just costly to operate in the long-run. All the miners onboard battle it out to find a hash with certain properties. The person that wins this battle, i.e., proof of doing the required work is allowed to add a new block of transactions on to the blockchain along with being rewarded with a couple of bitcoin on the bitcoin blockchain.

As of now the current rate of reward is 12.5 BTC per block. Besides that, they also get rewarded with the small transaction fees users have paid to send coins.

What is Proof of Stake(PoS)

As you can see from above that PoW is pretty time-consuming and expensive along with being inefficient regarding scaling. Proof of stake (PoS) is another way of achieving consensus that has gained a lot of traction in the past several years, and it needs no fancy hardware.

On the one hand in PoW, the hash rate determines the possibility of an individual member adding the next block of transactions to the blockchain. However, on the flip side, with PoS, the stake hold of any particular participant decides the likelihood of them forging the next block on the blockchain. Simply put, every network node has an address associated with it, and the higher the number of coins that the address possesses, the more likely it is that they will get the opportunity to add the next block on to the blockchain. An analogy for explaining would be similar to how a lottery works: the winner is chosen at random. The more coins (lottery tickets) a person possesses, the higher their odds of winning. Pretty simple. Eh?

Therefore, an attacker who desires to game the system would need to possess half of the coins on the blockchain to validate the required transactions. Also, such a bulk purchase of these coins would result in a spike in the price and consequently turn out to be pretty costly along with being stupid.

What is Proof of Stake Anonymous (PoSA)

Cloakcoin was the first person to initiate this mechanism. In this transactions are screened by other users in the network that get incentivized for assisting in making the transaction pseudonymous in nature. Other users help by offering inputs and outputs for the transaction and render finding the source and destination of the transaction next to impossible, i.e., it is next to impossible to trace the origin of the transaction.

Leased Proof of Stake (LPoS)

In a traditional PoS, if you have a small stake in the system, then it is next to impossible that you are going to get a chance for staking a block and earning a substantial reward for doing so. This is similar to how small miners with a low hashrate on bitcoin will mostly not get to mine a block. It may take a lot of time before a smallholder gets a shot at being many years before a little holder is lucky enough to generate a block. This means that many holders with low balances don’t run a node, and leave maintaining the network to a limited number of more significant players. Since maintaining network security is a lot more convenient when more members are onboard, it is vital that these smaller holders are rewarded for taking part in the functionality of the network.

LPoS accomplishes this by authorizing its holders to sublet their balances to staking nodes. The leased funds thus remain under the control of the holder and could be moved or spent at any point of time (whenever the lease ends). Leased coins uplift the ‘weight’ of the staked or staking node, thus enhancing its chances of being afforded the opportunity to forge a block of transactions within the blockchain. Any rewards received are shared proportionally with the leasers. This approach has been opted for by Waves.

What is Delegated Proof of Stake (DPoS)

Blockchain like STEEM & many other platforms have taken to collateral but a different approach in regards to how they achieve consensus. With DPoS, coin holders utilize their balances to choose a list of nodes which will be held responsible for staking a new block of transactions and add them to the blockchain platform. This engrosses all coin holders, even though its rewarding mechanism may not be the same as LPoS. Therefore, it is possible for holders to vote for changes to be made on network parameters, granting them a higher stake or ownership over the entire network to some extent.

What is Proof of Importance (POI)

Another notion of achieving consensus is PoI. NEM was the first cryptocurrency platform to make use of this mechanism. With PoI, it is not only the stakeholder, i.e., the coin balance that an individual possesses on the blockchain that matters for forging a block on the blockchain. NEM’s consensus system is established on the principle that not only the individuals with a high amount of coins but also those individuals that provide a lot of value on the network should be incentivized. Thus the odds of forging the next block depend upon many factors that include coin balance, authority ( actuated by a unique purpose-designed system), and the number of transactions made to and from a particular address. This offers a more holistic insight of a ‘valuable’ network members importance on the blockchain.

There are several alterations on these long approaches, and several platforms take advantage of an amalgamation of PoW and PoS; often using the prior for allocating coins and then shifting to the latter at some point of time to perpetuate the network. A different approach would be to make use of Master nodes in affiliation with PoW mining, just like DASH and Crown. These assist in processing transactions and in return get a share of the block rewards from miners activity.

In all cases, the goal of mostly all consensus mechanism is to secure the network, primarily through economic measures so that it should become too costly to game the system, and more profitable to aid it in its growth.

What is Proof of Storage

Proof of Storage was first classified in 2013, and an example of a crypto coin making use of a Proof of Storage consensus mechanism is Storj. Rather than using a blockchain, the network makes use of a block tree. Thus instead of having to sift through every single transaction listed on the blockchain, the user can only see the transactions that are of some importance to him. An individual node on the block tree consists of a blockchain. Currently, there is no substantial proof a publicly verifiable proof of storage and no known scheme for independently evaluating whether a privately valid audit was issued or answered as claimed.

What is Proof of Stake Time (PoST)

Vericoin is the first coin to have implemented this consensus mechanism. Proof of Stake Time utilizes coinage, i.e., instead of using the number of coins for calculating age, they use the time duration for which the coins have been held at the specific address. This method was implemented so that the rich don’t become more prosperous which tends to be the case in a lot of the Proof of Stake methods.

What is Proof of Stake Velocity (PoSV)

Proof of Stake Velocity (PoSV) has been proposed as an alternative to Proof of Work (PoW) and Proof of Stake (PoS) for securing the peer-to-peer network and validating transactions on Reddcoin; a cryptocurrency explicitly created for facilitating social interactions in the era of the internet. PoSV has been developed to stimulate both ownership (Stake) and activity (Velocity) which directly correlates to the two primary functions of Reddcoin as a real currency: a). to be a store of value b). act as a medium of exchange. Reddcoin can also operate as the unit of account ( an economic term that means to represent the real monetary value of a commodity ) in various social context. The geeky features of PoSV are displayed after a thorough review of existing designs. After this, the monetary aspects of Reddcoin are analyzed. After all of the steps mentioned above are done and dusted, then the unique position of Reddcoin as a digital social currency, in the competitive landscape of cryptocurrencies is pondered upon.

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Alright, that is the end of this post. However, this is not the end of this segment as I will writing a part two on this in some time from now. Until then apart from all your super duper important work, it would mean the world to me if you could follow us on Facebook, Twitter, Instagram, Youtube. Bye for now guys and have a beautiful day.



Owner | Direcor at CoinGyan & JM Bros Infotech
I am a tech enthusiast & Digital nomad from Dhenkanal, India I've been dealing with Bitcoin since 2014.I started CoinGyan to help users around the globe to learn about popular Cryptocurrencies. Here at CoinGyan, I write about Bitcoin Wallet, Cryptocurrency wallets, & making money from Crypto.

About Author

I am a tech enthusiast & Digital nomad from Dhenkanal, India I've been dealing with Bitcoin since 2014.I started CoinGyan to help users around the globe to learn about popular Cryptocurrencies. Here at CoinGyan, I write about Bitcoin Wallet, Cryptocurrency wallets, & making money from Crypto.

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