Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly. - Vitalik Buterin, Co-Founder of Ethereum
In this lesson, you are going to learn about consensus mechanisms.
When choosing a blockchain platform, security is highly important. A blockchain network has to be kept secure. The consensus mechanism of a blockchain is what determines its security.
Unfortunately, people make poor choices in choosing a blockchain platform because they have no clue what a consensus mechanism is.
Let's get to it.
A "consensus" means a general agreement has been reached. For instance, consider a group of people going to a game station. If there is no disagreement on the proposed game to play, then a consensus is achieved. If there is disagreement, then the group must have a way to agree on a game to play. In a case where they couldn't reach an agreement, the group will eventually split.
A consensus mechanism is a way in which the blockchain network agrees on what new information is stored in that database.
Each blockchain has a consensus mechanism ensuring that the data stored in that database is true and therefore trustworthy.
The two widely used consensus mechanisms are:
- Proof of Work (PoW)
- Proof of Stake (PoS)
Proof of Work(PoW) is Bitcoin consensus mechanism. In a POW, we have miners, a group of people verifying transactions (the new information being written to the Bitcoin database). Miners compete with each other by using computers to solve a hard mathematical puzzle. Since solving this puzzle is difficult, miners invest in high computers and electricity, and as a reward for their work, the network pays them bitcoins.
A bitcoin is a reward that the network gives to miners to thank them for verifying transactions. These transactions are verified in batches or blocks.
Proof of Stake(POS) is another consensus mechanism many blockchain platforms use. Instead of needing to do intense computation work like in PoW, we have validators, a group of people who validate transactions by staking their coins to the network. If a validator successfully validates a transaction, they earn a reward e.g ETH. Ethereum once used a Proof of Work(PoW) consensus mechanism but later switched to a Proof of Stake(PoS) in 2022.
In a PoW, we have miners who risk capital by expending energy to verify transactions. In a PoS, we have validators who explicitly stake their coins to validate transactions. Miners and Validators who act dishonestly by trying to verify inaccurate information are penalized or kicked out of the network.
Security is a major consideration in a consensus mechanism; the blockchain network has to be kept secure.
In a Pow, the network is kept secure by the fact that you'd need 51% of the network's computing power to defraud the blockchain. This would require such huge investments in equipment and energy; you are likely to spend more than you would gain.
In a PoS, the network is secure crypto-economically because an attacker attempting to take control of the chain must destroy a massive amount of ETH. A system of rewards incentivizes individual stakers to behave honestly, and penalties disincentivize stakers from acting maliciously.
ETH or ether is the native cryptocurrency of the Ethereum network. Every Blockchain network usually has a native currency to pay for gas fee or transactions. BTC or bitcoin(with lowercase b) is the native currency of the Bitcoin network.
In this lesson, you learned what a consensus mechanism is and the two widely used consensus mechanisms in the world. However, Proof of Work and Proof of Stake alone are not the only consensus mechanism. Proof of Authority and Proof of History are also widely used.
When choosing a blockchain platform, it is important you consider and understand the consensus mechanism it is using.
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