One of the fundamental pillars of blockchain technology is the concept of decentralization. Through a decentralized technological infrastructure, data in a network is publicly broadcasted to all participants, or nodes, in a permissionless manner. This data can be recorded by each node in its own individual ledger. As a result, this puts an end to the centralized ownership of network data, which has become the hallmark of web2, and caused numerous concerns regarding the ethical considerations involved in large corporations owning user data and using it to their own discretion, with or without the consent of the users. When data is readily accessible in a permissionless network which has no barriers to entry, the data hegemony is annihilated and data becomes unsellable. Participants of a blockchain network can rest assured that no third party is making profits at the expense of their valuable information.
The type of data stored in a blockchain is subject to the purpose that blockchain is created to serve. For example, data in the Bitcoin blockchain relates to a record of every historical Bitcoin transaction that has ever taken place. Here, our point of interest is the fact that data in a blockchain is authentic, verified, and immutable. If data is publicly broadcasted and each node keeps its own individual record, how does a network choose which node’s record is to be trusted and regarded as the true representation of the broadcasted data? In other words, when a network lacks a central authority which can be trusted to verify the authenticity of data, how is data in a decentralized network to be regarded as trustworthy? Hence, every blockchain needs to establish a standard procedure which defines the metric or condition against which any node’s individual record of data can be compared to gauge its authenticity.
This standard procedure is commonly known in blockchain parlance as a “consensus mechanism”. In a peer-to-peer network, consensus is achieved over the validity of network data when 51% of all peers agree to the same. Various mechanisms can be used to achieve consensus. Having a consensus mechanism not only ensures the reliability of data in a distributed network but also makes it secure by bringing about unfeasible conditions if a hacker wants to alter blockchain data to their advantage by setting the precondition that such a hacker has to control 51% of the network nodes to pass off his inauthentic data as valid. To achieve such a thing is not only extremely resource and cost intensive, it will not go unnoticed and will likely cause a hard fork of a blockchain. The attacked blockchain will be abandoned and its tokens will become worthless.
Let’s explore and compare the benefits and drawbacks of the two most popular forms of consensus mechanisms : Proof Of Work (PoW) and Proof of Stake (PoS).
Proof of Work (PoW) : Proof of Work is the original consensus mechanism utilized by the world’s first practical application of blockchain, i.e, Bitcoin. Proof of work has since been adapted by many popular subsequently developed blockchains, the most notable of them being Ethereum.
Proof of Word requires miners to run the data they want to add to the blockchain through a hash encryption function. A hash function produces a random string of characters when input is fed into it. Although it is impossible to logically decrypt a hash to derive the data, the same data will always produce the same hash, whereas even minor differences in data will generate a completely different hash. In PoW, the catch is that the blockchain’s protocol will predefine the characteristics of the hash which represents authentic data. Therefore, only a miner who inputs data which produces this protocol-defined hash is able to achieve consensus in the network. Since the required hash is pre decided, the only way to find the input which will produce that particular hash is by guesswork. PoW miners usually have dedicated processing units known as ASICs, which are extremely efficient and speedy, optimized to randomly tweak data in order to crack a Proof of Work puzzle. The miner who cracks the puzzle first is awarded with network tokens, known as the block reward.
The problem with PoW is the amount of computational power required to solve the puzzle. It not only creates a plutocracy, but the massive energy demanded is also environmentally damaging. Hence, many alternative methods to achieve network consensus have been proposed. Proof of Stake is currently being looked into as the most popular alternative to PoW, with Ethereum 2.0 making a shift from PoW to PoS.
Proof of Stake (PoS) : In this system, a network node “stakes” their network tokens, by locking them in a wallet. A participating node bets its tokens on any given record of transactions. The network protocol chooses the valid record. If the record that a node bets on is chosen, a reward is given to the node in proportion to its stake. This incentivizes the nodes to bet on authentic transactions, because pushing invalid transactions puts a node at risk of losing its entire stake. While PoS is relatively much simpler than PoW, its practical applications have been limited to smaller blockchains as of yet. To gauge its benefits, and discover any potential loopholes, Proof of Stake needs to be implemented in a large-scale blockchain such as Ethereum.
Although we have limited our discussion to Proof of Work and Proof of Stake, there are several other alternatives to PoW and PoS which you can explore here.
Consensus mechanisms are the cornerstone of creating a trustless, secure and reliable decentralized network. Decentralization not only improves data privacy, it makes systems resilient against centralized attacks that target a single data server and cause massive data loss with one swift attack. The technology surrounding consensus mechanisms is constantly evolving. They are not only being used in cryptocurrency blockchains, but also in network governance, DeFi, DApps, and other blockchain based services. Keep an eye on Unblocked for the latest updates regarding consensus mechanisms.
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