Consensus Mechanism in Blockchain Technology: Proof of Work and Proof of Stake

Introduction

Transaction within digital banking or in credit card is controlled by a central authority like bank. They play role as validator, and confirm transactions. This role is analogous to consensus mechanism used in blockchain technology where there is no central authority. Transactions are validated and confirmed by using consensus algorithms. First consensus algorithm (Proof of Work) was established by Satoshi Nakamoto. The concept of mining is used in this type of consensus mechanism. Although it is the most powerful in blockchain technology, there are many problems attached with it. This led to the development of Proof of Stake and several other consensus mechanisms which are also more reliable and more energy friendly.

Consensus Mechanism

A consensus mechanism is a vital process used in blockchain and distributed ledger systems to achieve agreement among distributed participants. It ensures that all nodes in the network confirm and validate the same data, maintaining the integrity, security, and reliability of the system without requiring a central authority. By employing various protocols and algorithms, consensus mechanisms enable decentralized networks to function seamlessly, prevent malicious activities, and uphold trust among users. Although there are multiple types of consensus mechanisms but two of them are well-known and widely accepted in blockchain technology. These are Proof of Work and Proof of Stake.

Proof of Work

It was introduced in Bitcoin’s whitepaper by Satoshi Nakamoto and it was the first algorithm at that time. However, the technology behind this type of consensus mechanism is conceived from Dr. Adam Back’s Hashcash. The purpose behind this creation is the introduction of computational costs in email transfer or other performing other actions. This can limit email spam and DOS (Denial-of-service).

In Blockchain Technology, transactions that we broadcast are not immediately considered valid. Proof of Work, in many cryptocurrencies, mechanism is used to verify and validate the transaction and add it to the blockchain. These following are the reasons which make the proof of work necessary:

• This mechanism ensures the security of Blockchain data. In blockchain validators using proof of work validate transactions and add it to blockchain by solving mathematical puzzles using algorithms and computational power. Adding new blocks of transactions in blockchain requires computational power, and through this data tampering and changes to be made in transaction history becomes unalterable. This mechanism ensures the security of blockchain.
• This mechanism introduces the concept of ‘mining’ which incentivize who participate in mining process. Participants are rewarded with transaction fee because of their participation in validation of transaction. This is actually the decentralization factor of this mechanism because participant can be anyone, there is no central authority that can control the transaction verification process like digital banking.

General Process of Proof of Work

While there are benefits to the Mechanism, energy consumption is a concern which led to the development of other Consensus Mechanisms. Proof of Stake is another important in this regard. The general process of Proof of Work involves the following steps:

• In first step, transactions are collected in a block. Miners do not add single transaction into the blockchain. They collect transaction in a block waiting to be added in a blockchain.
• Second step includes hashing of the block. Miners use Hash Function algorithms (mostly SHA-256) to generate hash value (through hashing function of cryptography). In Proof of Work, the hash value of provided data must be met with certain difficult condition.  Data is hashed in order to check whether it matches a condition or not. If not, a slight change to your data can make the result different. Nonce, a random number is used to make slight difference in output (Transaction hash value).
• Third step is trial and error. This means that slight changes of block data with nonce (a random number) is made through out by miners until the hash value or code is obtained with difficulty criteria. This process is called a mining.
• Mining is a process where miners gather transactions in a block and hash it along with nonce until the required the hash value is obtained. After finding the right nonce with right hash value, the transactions are transmitted to the network of node (computers).
• In fifth and last step, other nodes check whether the hash value meets specific criteria. If the hash value meets with the conditions, the nodes validate the transaction and add it to the blockchain. After its successful chaining in blockchain, the miner is rewarded with transaction fees.

There is question widely asked by the user of cryptocurrency that what if someone try to cheat and try to put some fraud transactions and production of valid hash value. Here the concept of public-key cryptography is used to secure the transaction and helps prove the authenticity. When user create a transaction, they sign the transaction (using digital transaction) using private key, which can be easily authenticate using the public key of user. Through this no one can send fraudulent transaction or more fund, then actual holding. Fifth step of final verification cannot allow fraud transaction to be chained. No one can use such expensive method for fraudulent transaction. Profitability can only be achieved through honesty.

Proof of Stake

Another famous and well-known type of consensus algorithm that is designed to address the negative feature of ‘Proof of Work’. Unlike POW, this algorithm relies on other factors for creation of blocks instead of using computational power. This algorithm came into existence in 2011. It was a proposed alternative to Proof of Work. The Proof of Stake operates on the following principles:

• Staking is a core principle of POS where block creation and validation is done on the amount of cryptocurrency participants hold or locks up as collateral. This staking incentivizes honest behavior of participants.
• Selection process for block creation and validation is based on amount of coins the participants stake. Validators with more stakes coins gets the chance of being selected.
• Only chosen validators are responsible for verification of blocks and adding them to blockchain. Honesty, in this case, incentivizes validators.

This system for validation of blocks contains many other things in combination like coin staking age, concept of randomization, and wealth of validator. This system forges the blocks together instead of mining. Two major methods are used for the selection of validators which do not favor the wealthiest. These methods are: selection of Randomized blocks, and the coin age selection. The former one is simple. The later one includes the duration of their staking. Coin age calculation can be accumulated by multiplying the number of days of coin staking, and number of coins. After forging a block, validators coin age is reset to zero. This method prevents large nodes domination.

General process of Proof of Stake

The process involved in Proof of Stake involves the following:

• The process starts with participant coins staking. For becoming a validator, participant must lock up certain amount of cryptocurrency.
• Validators are selected for new blocks creation. Selection can be made through the above discussed methods.
• Validation of chosen block is a process where the validity of transactions are ensured and check whether it follows the rules and protocols.
• After successful validation, it is added to the blockchain where other network of nodes verifies the block’s validity. Rewards are presented to the validators in the form of transaction fees.

As this method is energy efficient, there are lot of concerns critics highlights. One of them is centralization concerns. Some argues that it leads to centralization because validators with huge staked amount have more influence, but its security and PoS implementation mitigate this issue. Dishonesty or validation or fraudulent transaction leads to loss of coins. Modern blockchain that uses this consensus mechanism are: BnB chain, BnB smart chain, Solana, Avalanche, and Polkadot.

Concluding remarks

Both PoS and PoW have their advantages and disadvantages, but technological advancement has put many disadvantages aside and made the technology more reliable. Decentralization is the most important factor which has attracted millions of individuals towards cryptocurrency. Its variables become its strength and prevent it from 51% attack. Proof of work and proof of Stake, both are employed to Fundamental Analysis of Cryptocurrencies. There are other factors as well to consider but beginners must understand how things work in Crypto.

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