Nodes or computers in blockchains achieve synchronism by adopting a common consensus algorithm (often called consensus protocol/mechanism or governance model). Consensus algorithms are a set of rules that govern a distributed computing network. Simply put, they are procedures through which nodes in a blockchain reach a common agreement about the state of the distributed ledger.
Consensus algorithms or governance models are very important in decentralized systems like blockchains. They form the backbone of the network’s reliability and security. For a new block to be added, it must be verified across all participating nodes. With every network node leveraging a common consensus protocol, they can harness the same set of processes to verify the transaction before adding the block. This way, every node has the exact digital records, and the network maintains security and is completely devoid of external interference.
The two most commonly used and by far the most popular consensus mechanisms are the Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work consensus protocol is an energy-intensive method of validating blocks. It requires participants referred to as miners to contribute computing power to the network. These miners or block validators compete to solve complex mathematical problems. For every correctly solved arithmetic problem, new cryptocurrencies are generated and the miners are rewarded accordingly.
Leading blockchain and digital currency, Bitcoin is the most widely adopted application of proof of work. Of the 21 million bitcoins in existence, over 18 million have been mined, while 2.362 million is yet to be mined. Bitcoin and Proof of Work have been subject to the scrutiny of late, following a slew of regulatory clampdowns to nullify the adverse environmental effect of bitcoin mining. Electric vehicle maker Tesla started the movement after it rescinded the earlier decision to accept bitcoin payments, stating that the environmental threats were conflicting with the company’s vision to go green. China followed suit by issuing a cease and desist order, forcing miners to cease operations in the country.
Proof of Stake is the second most popular consensus algorithm. Network participants or validators on PoS blockchains must stake or lock digital assets for a period. Their staked tokens allow them to verify transactions on the blockchain. The tokens also help ensure that validators act in the best interest of the entire network as they risk losing their stake if they are involved in any dishonest activity.
Although PoS is not energy-intensive and has proven to be an eco-friendlier alternative, it has its own drawbacks. Proof of Stake blockchains operate in such a way that large token holders possess more voting power i.e the larger the number of tokens staked, the more influence you have in decision making. Bad actors can capitalize on this to manipulate the entire network, calling the decentralized nature to question.
Different variants of Proof of Stake include the Leased Proof of Stake (LPoS), Delegated Proof of Stake (DPoS), etc.
