Since the dawn of blockchain through Bitcoin in 2009, this technology has been widely praised for its role in revolutionizing finance. Its ability to foster decentralization, financial inclusivity and security. However, blockchain consists of several vital tools to function efficiently, the core of which is the consensus algorithm. 

So, what are consensus algorithms, and how do they work? Keep reading. 

Blockchain Consensus Mechanisms

The first question we must answer is, What are blockchain consensus mechanisms/algorithms? Consensus algorithms are protocols that bring efficiency to the general functioning of a blockchain network. They primarily guide nodes and ensure that every transaction’s validity cannot be challenged after attaining consensus.

Consensus algorithms serve multiple services within the blockchain realm. They provide security and maintain decentralization for blockchains. These algorithms help bolster transparency within blockchain-based transactions. They also help bolster efficiency, providing a platform for nodes to verify transactions.

Proof of Work Consensus Mechanism

This is the first consensus mechanism in the crypto universe. It dawned with the birth of Bitcoin in 2009. The proof of work Consensus algorithm is the brainchild of Bitcoin creator Satoshi Nakamoto.

Proof of work focuses on selecting a set of network participants or miners allowed to validate new transactions and add blocks. 

As per the founder of eCash cryptocurrency, Amaury Sechet: 

“Proof of work is a software algorithm used by Bitcoin and other blockchains to ensure blocks are only regarded as valid if they require a certain amount of computational power to produce… It’s a consensus mechanism that allows anonymous entities in decentralized networks to trust one another.”

The PoW system is used in several top blockchain networks, including Bitcoin, Litecoin, Bitcoin Hash, Dogecoin and Monero.

How Does Proof of Work Function?

One point to note is that, in Proof of Work, ‘WORK’ is the most important thing. The network participants, or validators, must work hard to validate transactions and add the blocks. 

Hard work refers to solving super-complex cryptographic questions that require substantial computational power. These computational machines will often make millions, maybe billions of guesses, before reaching the correct guess. The solution should be lower than the targeted hash.

The entire process associated with the proof of work system is commonly known as crypto mining. Here is a short outline of how the Proof of Work mining system works:

• The data from crypto buy and sell transactions are bundled into one block.
• The network participants, commonly known as miners, all work hard to solve the complex arithmetic task in a mission to process the new block. They provide ‘proof of work’ by getting the hash and earning the right to process the block.
• Through random operations, the network selects the miner to add the new block and awards the miner with crypto coins. 

Rewarding

As already established, the miner randomly chooses to add the new block, which earns the miner rewards. These differ in different blockchain networks.

Bitcoin, the most popular PoW blockchain network, has also attracted the most significant number of miners. So, how much reward do Bitcoin miners get?

When writing this report in early 2024, the rewards for every Bitcoin block stood at 6.25BTC. However, since this was the year of the Bitcoin halving, the mining rewards were later reduced to 3.125 BTC in April.

Criticism of PoW

Despite being popularly used within the crypto realm, Proof of Work has recently been criticized. The two main concerns are:

• Huge energy requirements — Mining Bitcoin is a resource-intensive activity. The electricity consumption of Bitcoin mining per year has been likened to the power consumed in some countries. 
• High carbon footprint – With a large power consumption, Bitcoin mining is criticized for having a large carbon footprint. Over recent years, miners have been switching to more green energy sources. 
• Centralization — crypto is supposed to be inherently decentralized. However, the resource requirements of mining mean only those with significant resources can mine. As such, Bitcoin becomes centralized to significant miners.

Proof of Stake (PoS) Consensus Mechanism

Second in line is proof of stake, popularly POS. 

This is a consensus system originally pioneered in 2012 by Peercoin. The entire philosophy behind Proof of Stake was creating a system of consensus that only demands a small amount of resources.

Which blockchain networks today use PoS? There are many big names like Ethereum, Cardano, Solana, Terra, Peercoin, and NXT.

Unlike in mining, where new coins are released after every block, in PoS, the networks mostly set a fixed number of coins from the get-go. 

How Does PoS Consensus Mechanism Work?

PoS demands that participants stake some amount of coins to validate. A ‘validator node’ locks up some crypto coins in smart contracts based on the blockchain. This allows them to participate in securing the network by validating all new transactions.

The algorithm will select a node from the many validator nodes to validate the newest block. While choosing the validator node to add the new block, the algorithm looks at the amount of stake and the age of coins staked.

So, what if other network nodes do not validate the block? The validator earns a penalty for validating a wrong or forged block. They can even lose their stake

This entire PoS staking system works as follows:

• Participants make transactions that are bundled together.
• Validator nodes raise the stake, and the algorithm randomly selects a validator.
• The validator verifies and publishes the transitions, and other nodes reach a consensus on the block’s validity.
• Once the block is verified, the node receives its stake while also earning rewards.

To foster fairness across all validator nodes, the latest validators’ coins’ age will be set to 0, meaning they will not be prioritized in the next round.

Rewards

As mentioned, the network validators earn rewards for participating in securing the network. This is mainly collected from the network’s transaction fees. In essence, every transaction within the PoS chain must pay some fees used to pay the minters. If the block is forged, the validator will not get rewards. 

Pros of PoS Consensus Mechanism

So, what advantages does PoS afford over the previously discussed PoW? Well, they include:

• PoS blockchains enjoy more decentralization than PoW chains.
• PoS blockchains afford more energy efficiency. For instance, the energy used is almost over 99% less than that used in networks like Bitcoin.

Other Iterations of Proof of Stake

Delegated Proof of Stake

This type of consensus relies on a small subset of validators called delegates. The network token holders participate in votes, selecting a small number of delegates to participate in transaction validation. As a reward for their honest work, the delegates earn rewards. However, if they act fraudulently, they risk losing their rewards and position. 

DPOS comes with its own merits, including decentralization and fast transaction finality 

Leased Proof of Stake (LPoS)

LPoS allows even small token holders to participate in network validation easily by leasing tokens to other larger validators. A small token holder chooses a larger holder and leases their tokens to them. The large holders increase their stake in validation. In the process, both holders earn rewards.

Byzantine Fault Tolerance

Another popular Consensus mechanism in digital assets is Byzantine Fault Tolerance. So, what is BFT?

In the computing universe, Byzantine fault Tolerance mainly refers to the ability of a system to operate effectively, even when other smaller parts or nodes of the system act maliciously or even fail.

Blockchain consensus explained – BFT

Within the blockchain universe, BFT ensures that consensus even in the face of attacks. In essence, only a certain percentage of nodes are needed to add a transaction to the chain. In most cases, just more than ⅔ of the nodes should agree.

There are two popular sub-types of Byzantine Fault Tolerant consensus mechanisms, namely:

• Practical Byzantine Fault Tolerance (pBFT)
• Delegated Byzantine Fault Tolerance (dBFT)

Practical Byzantine Fault Tolerance

The above-discussed Byzantine Fault Tolerance system is how the pBFT system works. 

The main benefit of pBFT is the ability to reach super throughput with low latency. Moreover, the network fosters high levels of network security. Its ability to accept a threshold number of faulty nodes without affecting the chain’s integrity makes pBFT a highly reliable consensus mechanism.

Yet, the demand for a particular threshold of nodes to validate transactions makes this consensus unsuitable for smaller networks.

Delegated Byzantine Fault Tolerance

DBFT is a merger between BFT and DPOS. In this system, the network nodes reach a Consensus through voting for a transaction’s validity. 

However, dBFT brings its twist. The network stakeholders delegate their voting powers to validators, who verify transactions and attain consensus. Block validators are selected randomly based on stake and reputation.

Like the other BFTs, dBFT also attains low latency and high throughput. Its primary drawback is its reliance on a validator. A potential centralization issue exists if one person controls many validator nodes. 

Less Popular Types of Consensus Mechanisms

While the aforementioned consensus mechanisms are the most popular in the blockchain realm, several smaller mechanisms have emerged in recent years. Among them include:

• Proof of Authority (PoA) 
• Proof of Capacity 
• Proof of Burn (PoB) 
• Proof of Activity (PoA)

Conclusion 

Consensus algorithms play a crucial role in bolstering the security of blockchains. The success of many blockchains relies on the type of consensus applied. Bitcoin’s success story, for instance, depends primarily on PoW mining, which rewards miners.