In our crypto-universe, as we know, there is not just one blockchain. Many different blockchains with divergent functions have now been created to be used in different domains. For example, one important differentiator between blockchains is the consensus mechanism. This ensures that all network participants in a blockchain agree on a truth about their data. Consequently, the consensus mechanism addresses the question of how consensus is achieved in a network. In this article, you will learn which consensus mechanisms exist and how they work.

Proof-of-Work (PoW)

Probably the best known and most secure mechanism is the proof-of-work process used by the Bitcoin blockchain. The proof-of-work process is also known as mining, as it is through this process that bitcoins are “mined”. In this process, nodes in the network serve as miners, which must solve complicated mathematical puzzles. The difficulty of this puzzle increases exponentially over time as the number of miners increases and the resulting computing power increases. The so-called “block reward” of 6.25 Bitcoin is given to the miner who is the first to solve the puzzle and create the block. Deciphering these blocks is particularly costly, time-consuming, and requires an enormous amount of energy. Moreover, the probability of emerging as the winner of this random process is extremely low. The purpose of mining is primarily security and not just the mining of new Bitcoins, as is often assumed. It is to ensure that the validation of all transactions and blocks is ensured according to the consensus rules. Thus, the “mining” of Bitcoins is merely a side effect of mining. This reward mechanism originated from game theory to create incentives for network participants. You can learn more about PoW in our article on Bitcoin mining.

Proof-of-Stake (PoS)

Proof-of-Stake has evolved due to the problem of PoW’s enormous energy requirements. The Proof-of-Stake completely abandons the mining process itself. In order to still be able to establish consensus in the network, this process uses the shares held (stake) in the cryptocurrency held as the basis for validating the blocks. Thus, no special hardware is required for the process to validate blocks. Who qualifies as a validator is decided by the amount of the “stake”. The higher the stake of a cryptocurrency stakeholder, the higher the probability that this stakeholder will be allowed to create a block.

As with all consensus models, there are advantages and disadvantages to PoS over the PoW mechanism. Although the energy consumption of PoS is considerably lower than that of the PoW mechanism, it can be criticized that a minimum investment is usually required in order to be selected for the process. This leads to unfair conditions for the network participants and could lead to a monopoly or oligopoly formation since participants with a large stake will increasingly get the opportunity to validate a block. This would be to the detriment of security. Consequently, in summary, while the PoS approach has decentralization and allows for high throughput, this happens at the expense of security.

Proof-of-Authority (PoA)

Proof-of-Authority is most suitable for private-permissioned blockchains. This mechanism is a variation of the proof-of-stake mechanism. Here, the validators are named as authorities by the operators of the network before the blockchain is launched. Potential validators do not need to hold a stake of the cryptocurrency to create or validate new blocks. Instead, they must have a good reputation. This “good reputation” is determined by entering the identity.  

Through this process, the network has a smaller size and decentralization. There are fewer nodes that are allowed to validate transactions. What seems like a disadvantage at first glance is an enormous advantage from the perspective of the user situation of PoA blockchains. Among the authorities, it is determined who is the “leader” and thus has the right to propose new blocks. The majority of the other authorities must then confirm the new block so that it can be appended to the blockchain.

Since PoA does not require mining or native coins to process transactions, this approach consumes little energy and computing power to validate blocks. In this model, transactions can be processed faster and more efficiently than, for example, proof-of-work. In summary, this algorithm is more centrally oriented and is ideal for enterprise solutions.

Proof-of-Activity (PoAc)

The Proof-of-Activity mechanism combines the two most well-known mechanisms PoW and PoS. At the beginning, PoAc starts with the mining process, in which different miners try to outbid each other with higher computing power to find a new block. Once this new block is found, which unlike PoW only contains a header and the miner’s wallet address, the system switches to the proof-of-stake mechanism. Based on the header, a new random group of validators is selected to validate the new block.

In this mechanism, the more stakes a validator has, the greater the chances of validating the new block. After all validators have signed the new block, it is given the status of a complete block.

Proof-of-Importance (PoI)

Proof-of-Importance is also derived from the Proof-of-Stake mechanism and can be translated as “proof of importance.” This consensus model was introduced with the aim of empowering individuals and thereby building an economy based on the principles of decentralization, equitable distribution of opportunities and financial independence.

Similar to the proof-of-stake mechanism, a potential node must have a certain amount of “stake” in order to operate a node on the network. Compared to PoS, the node that has the largest “stake” would now have the greatest chance of validating the next block. With PoI, a so-called “Importance Score” is used, which assesses the importance of the participant for the system. The higher the score for the system, the more often the node operator can be chosen to create a new block.

The “Importance-Score” is determined from several factors:

  1. financial status
  2. number of transaction partners and activities
  3. quality of transactions in the last 30 days

Similar to Proof-of-Authority, PoI is very resource efficient and energy efficient compared to the costly PoW. However, the consensus mechanism is based on a very fragile rating system. For example, users could create fake accounts to build their own network and thus create a monopoly of power. What makes this approach particularly exciting is that this procedure encourages users to use their cryptocurrencies in real life and pay with them.

Proof-of-Reputation (PoR)

This consensus algorithm is most suitable for blockchains where strength and security is developed by the community. This process provides for keeping the network secure through the reputation of the network participants. A participant (validator) must have a good reputation, otherwise he/she will face significant financial and trademark consequences. Especially large companies would have a lot to lose in this case. In order to be selected as a validator, a verification process must be run through in order to be able to ensure the authenticity of the identity. The verification process is carried out completely autonomously by a smart contract. In this way, neither miners nor coins are needed as incentives to ensure the security of the network. 

Due to both financial and trademark consequences for companies that do not adhere to the consensus rules, the PoR process has a high degree of decentralization and creates a secure environment for the network. Such a consensus process would be ideal for hospitals, for example, because they are particularly reliant on a good reputation for your “company” and employees. 

Proof-of-Elapsed-Time (PoEt)

The Proof-of-Elapsed-Time was developed by Intel and is supposed to reduce energy consumption as well as further resource usage compared to PoW. This consensus mechanism is ideally suited for permission blockchain approaches. In this approach, network participants must identify themselves in advance. Once this process is complete, this approach works as follows: Each node must wait for a random period of time. The first to fulfil this random waiting period wins the new block. This is based on the idea of a fair lottery system, where each individual node has an equal probability of winning. Thus, the PoET mechanism is designed to give as large a number of network participants as comparable a probability of winning as possible.

Proof-of-Burn (PoB)

As the name suggests, this consensus mechanism involves burning coins. The burned coins are irrevocably deleted and are no longer available to anyone. The idea behind this is that a miner is willing to accept short-term losses in order to make a long-term profit. By burning the coins, the miner gets the right to sign a new block. Every miner who has burned coins once gets a lifetime right to sign new blocks. The probability of being selected for the next block increases with the number of coins burned over time.

Zero-Knowledge-Proof (ZKP)

The Zero-Knowledge-Proof protocol is a protocol from the field of cryptography. In a zero-knowledge protocol, two parties (the verifier and the verifier) communicate with each other. The verifier has some probability of convincing the verifier that he knows a secret without revealing any information about the secret itself. This is especially necessary when transparency is more of a hindrance to an application and requires more privacy. For example, this can be beneficial for companies in the financial industry that work with confidential information.

Proof-of-Coverage (PoC)

The proof-of-coverage algorithm continuously attempts to verify that hotspots are truthful about their location and the wireless network coverage they create from that location. To do this, the algorithm uses radio waves to verify that a hotspot is providing legitimate wireless coverage. Validation works by adding new blocks, performing new tasks, and rewarding miners. For example, in the Helium network, the reward would be in the form of HNT.

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