In any blockchain platform, there’s this thing called consensus algorithm. It’s used to solve the problem of trust in a blockchain network. Consensus algorithm is basically the centerpiece of a puzzle that connects all the participants in a cryptocurrency’s ecosystem.
Blockchain utilizes cryptographic keys to secure identities as well as hash functions to help the blockchain stay immutable. This process is settled through a consensus algorithm.
Consensus algorithm protects the blockchain from a single point of failure. Considering the fact that blockchain data is decentralized, consensus algorithm ensures that the blockchain users would still have immutable data in thousands of other nodes even if there are 1-2 failures.
Different blockchain platforms use different types of consensus algorithms. The three most common algorithms are Proof-of-Work (PoW), Proof-of-Stake (PoS), and Delegated Proof-of-Stake (DPoS). What are they, and what are the differences?
This is the most common and oldest consensus algorithm that’s also used by Bitcoin itself. In a PoW blockchain, miners have to compete against one another to verify transactions on the blockchain. These miners are incentivized for their jobs. The task of these miners is to solve complex mathematical puzzles through their computing power. This process is known as “mining”.
If you are wondering what the types of complex mathematical puzzles being solved by the blockchain mining process are, there are actually some variations—for example, integer factorization, hash function, and guided tour puzzle protocol. When there are more miners in one blockchain network, the difficulties increase, and miners require bigger hash power to solve the same puzzles.
PoW became popular because Bitcoin blockchain utilizes it. In the very beginning, it was also very cheap to become a miner in a PoW blockchain. Everybody could simply use their own personal computer to provide hash power into Bitcoin blockchain. However, as Bitcoin price kept rising, more participants became interested in joining. When there were more participants, the difficulties increased, and people started to use much more expensive computing equipment to compete against each other.
The concept of Proof-of-Stake is very different from Proof-of-Work. In a PoS blockchain, the ones who confirm blockchain transactions are not miners. They are called “validators”. In order to become validators, you need to stake a certain amount of the native cryptocurrency of that blockchain. For example, in Ethereum, you need to stake 32 ETH in order to become a validator. The idea is that people who stake their cryptocurrencies would get the task to confirm blockchain transactions and they will be rewarded by more cryptocurrencies.
PoS was first introduced by Peercoin, but it became much more popular after Ethereum decided to adopt it for the upcoming Ethereum 2.0. Yes, Ethereum is still transitioning from Proof-of-Work to Proof-of-Stake, but people feel very optimistic about this change. With PoS, it’s said that Ethereum blockchain would be able to process many more transactions per second, as they are far more efficient compared to a PoW system.
PoS system is also claimed to be far better when it comes to equal opportunity. Unlike PoW, you don’t need to be dependent on external factors (such as your expensive mining equipment). You are only required to stake and you will get the “validation” reward.
Delegated Proof-of-Stake (DPoS)
The newer consensus algorithm is called Delegated Proof-of-Stake. This concept was popularized by EOS and now it’s used by almost all newer blockchain platforms from 2018 and above. The idea of DPoS is actually quite similar to PoS but it introduces the concept of representatives.
Unlike PoS where everybody can become a validator by staking a certain amount of cryptocurrencies, in DPoS there are only limited numbers of entities or individuals that can get the validating jobs. For example, in EOS there are only 21 block producers and in Tron there are only 27 super representatives. These 21 block producers are the validators of EOS blockchain transactions and these 27 super representatives are the validators of Tron blockchain transactions.
These block producers or super representatives are voted in by “nominators” who send their votes by staking their cryptocurrencies into these representatives. There are basically two groups of people in DPoS who make money by staking their cryptocurrencies, the representatives and the nominators who put their faith in the representatives.
The Argument About Decentralization
Which consensus algorithm is better? Is it PoW, PoS, or DPoS? Well, nobody truly knows. As we are still in the very early era of blockchain, there’s no “one winner takes all” mechanism here. PoW remains the most popular consensus as it’s used by Bitcoin and is still part of Ethereum’s legacy as well.
Meanwhile, PoS would become the de-facto face of the staking mechanism, as Ethereum plans to migrate to it. It’s interesting to see how decentralized or centralized Ethereum will be when Ethereum 2.0 finally gets fully implemented.
And then, we have DPoS, which has been accused as too “centralized” by PoS and PoW believers. They claim that DPoS’ limited number of representatives would compromise the basic concept of blockchain decentralization. However, it hasn’t been proven to be true so far, as DPoS blockchains work out just fine.
Which one do you believe is the best consensus algorithm for a public blockchain?