What are consensus Algorithms? (For starters)

Distributed Ledger Technology (DLT) and the blockchain are the technological basis for cryptocurrencies to exist. These decentralized networks operate thanks to different consensus algorithms such as Proof-of-Work (PoW), Proof-of-Stake (PoS) and Proof-of-Authority (PoA). These algorithms are essential to validate and create new blocks on chains. Without them, both making transactions and executing smart contracts would be impossible.

What are consensus algorithms for?.

The reason why consensus algorithms are so important is that every transaction on a blockchain must be validated. To do it safely and transparently, networks must have a series of regulations. In other words, an algorithm that allows its proper functioning. And based on this, consensus protocols arise. With these mechanisms, blockchain developers stipulate the way in which the nodes will have to agree, which is essential for the security of any project. In addition, it defines it in many aspects. One of them is the computational effort required to create a new block. The more complex it is, the more energy the network will consume. This directly affects the speed of transactions and the fees that users will have to pay. On the other hand, consensus protocols define its scalability and centralization. With more validators, a more decentralized blockchain is achieved, but when the number is smaller, it will be more scalable. If you want to develop your own project or surf the Web3, you should know the characteristics of the Proof-of-Work (PoW), Proof-of-Stake (PoS) and Proof-of-Authority (PoA) protocols.

Proof-of-Work (PoW): the Bitcoin consensus protocol.

To know the origins of Proof-of-Work (PoW), it is necessary to go back in time. In the mid-1990s, several developers looked for ways to make it more difficult to send spam emails. Anyway, its theoretical concept was introduced by Hal Finney, in 2004. In his work, the crypto pioneer proposed using this consensus protocol as a security method in transactions. But it was not until October 31, 2008 when Satoshi Nakamoto – a figure who currently remains anonymous – published the Whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”.

“Nakamoto writes that his objective is to give the user more interdependence, allowing direct transactions without any type of intermediary, also resolving double spending.”

Proof-of-Work (PoW), as its name suggests, is based on the work carried out by miners in charge of solving a series of mathematical equations to validate network transactions. Miners need high powered computers in order to compete with others. When one manages to solve the equation, the block is validated and added to the blockchain, at which point the miners receive the reward for their work with cryptocurrencies. Such a consensus algorithm makes it very expensive for an attacker to monopolize the network. This is because if someone tries to add a new block to the chain, they would have to redo all the work that has been done since the last one was created.

The two most important projects that use this consensus protocol are Bitcoin (BTC) and Ethereum (ETH). And although it is considered decentralized, in the Bitcoin network there are groups of miners that control a high percentage of the computing power. It has also received criticism for the large energy consumption it requires. For example, the Bitcoin (BTC) network produces an enormous amount of carbon dioxide (CO2), surpassing even entire countries.

Proof-of-Stake (PoS): validation by staking.

The Proof-of-Stake (PoS) mechanism was born thanks to the developer Sunny King in 2011. In his Whitepaper PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake, he details the four problems that PoS solves:

-Slow transactions and lack of scalability
-An increasing centralization in the network
-Pollution
-The end of the threat of majority attack

For King, these disadvantages were typical of Proof-of-Work (PoW). PoS allows users to validate transactions based on their participation in the network, instead of solving the math problems with mining. Its validation process is based on the number of cryptos that the nodes have placed in reserve, through a block called staking. By doing this, people receive passive earnings over time. The more coins staked, the higher the reward. One of the advantages of Proof-of-Stake (PoS) is its speed in processing transactions. It is also more friendly to the environment, since it is not necessary to purchase special computer equipment to participate in the network, which also reduces the value of the rates. In addition, PoS systems allow you to participate with a much smaller amount of money than the investment required to mine.

However, the main concern generated by this consensus protocol is the risk of centralization, since some parties could control the network. Among the most popular PoS projects are Cardano (ADA); that it has demonstrated its concern for the care of nature; Polkadot (DOT), by operating with the Nominated Proof-of-Stake (NPoS) derivative; and Solana (SOL), which also adds its Proof-of-History (PoH) system. This protocol has been gaining followers within the crypto ecosystem. To the point that Vitalik Buterin has already incorporated it into his plan to modernize the Ethereum network, in what will be the move to ETH 2.0.

Proof-of-Authority (PoA): a centralized solution.

The Proof-of-Authority (PoA) mechanism is an algorithm that, unlike Proof-of-Work (PoW) and Proof-of-Stake (PoS), requires knowing the identity of the nodes. The term was proposed in 2017 by Ethereum co-founder and Polkadot creator Gavin Wood. For this reason, this consensus protocol is notably more centralized than PoW and PoS. But because the blockchain creator must use a standard to select validators, its operation is based on trust. Thus, PoA incorporates a more humane approach to security, eliminating the need for a complex and expensive consensus protocol such as Proof-of-Work (PoW). One of the most recognized is the Binance BNB Chain, which operates with the Proof-of-Staked Authority (PoSA) derivative. PoA is a solution to consider for companies with complex logistics needs, since these blockchains can be quite efficient and scalable. For example, with this consensus protocol you can manage supply chains or track financial transactions. And while it’s pretty safe, that doesn’t mean it’s foolproof. By knowing validators, attackers can try to manipulate them or force them to act dishonestly.

Conclusion.

Both Proof-of-Work (PoW) and Proof-of-Stake (PoS) and Proof-of-Authority (PoA) have their advantages and disadvantages. For the same reason, it will be the developers and users who define the type of network in which they want to operate.

First of all, Proof-of-Work (PoW) offers a secure way to confirm transactions but has some drawbacks such as its energy consumption. Something that affects its speed, since it increases the difficulty of adding new blocks.

The Proof-of-Stake (PoS) consensus protocol, on the other hand, is becoming increasingly popular. Thanks to the participation of nodes that operate through locked cryptocurrencies, miners are no longer needed. However, this does not mean that all blockchains that use PoS are decentralized.

Lastly, Proof-of-Authority (PoA) is similar to PoS, but uses identity verification instead of cryptocurrency staking. In this case the validators are chosen based on their identity in the real world.

Fabrizio Bustamante Escudero, (CEO) Hooclass.com