Cryptocurrencies are decentralized, which means they are maintained by a network of individuals who could be based anywhere in the world. To run a network these individuals need to be able to reach agreements without ever physically meeting, or even talking. That’s what consensus mechanisms are for.
Consensus mechanisms are used by blockchains to make sure the network contributors can reach and agree upon a decision that is best for the network. Consensus does not require unanimous agreement, it just requires a majority.
There are loads of different things that network contributors need to agree on, but the most pressing matter that blockchain consensus mechanisms attend to is processing and validating transactions. This process is also partly why you are required to pay a transaction fee when sending cryptocurrency.
How do consensus mechanisms reach decisions?
Good question. There are actually many different consensus mechanisms and they all work in unique ways. There is no absolute ‘best’ consensus mechanism, although each one has its merits. The two most popular and well known are Proof of Work and Proof of Stake. Let’s take a quick look at how each of these works.
Proof of Work
Proof of Work (PoW) is the consensus mechanism used by Bitcoin, which is why it’s so well known. PoW is the reason that crypto miners exist.
‘Miners’ is the name given to network contributors in a PoW network. Miners carry out what is referred to as ‘work’ in order to process transactions. The work is essentially a difficult puzzle that can only be solved by computational work. Miners compete to solve the puzzle because if they do, they get the privilege of processing the next block. This block is validated before it’s added to the blockchain by other contributors.
Proof of Stake
Proof of Stake (PoS) works differently to PoW. The network is effectively controlled by the individuals that hold the native token. If a token holder wishes to become a transaction validator they can stake their tokens. Most networks randomly choose validators from those that are staking, but bigger stakes have a greater chance of being picked. Therefore, the more staked, the more chance one has of being selected to validate a transaction.
The concept behind this model is that the validators have proven they are token holders and if they were to act maliciously, the network would be negatively affected which could then decrease the value of their holding. Staked tokens are also at risk, so malicious action can result in the loss of staked tokens.
PoS is popular because it offers stakers the opportunity to earn a passive income by staking their tokens. It offers a much easier path to earning when compared to PoW. PoS is also arguably more scalable, and undeniably more energy efficient.
If you’d like to start staking and earning with ease, Trust Wallet supports staking of multiple cryptocurrencies. You can start staking and earning in minutes.
Other consensus mechanisms
There are lots of other consensus mechanisms that exist, many of which are modified variations of the two shared above. For example, Delegated Proof of Stake allows stakers to assign their staking power to a delegate, which results in a smaller number of delegates that secure the network on the stakers behalf. Both stakers and delegates get rewards, and delegates will be punished for malicious action.
There are many other consensus mechanisms to learn about, but by understanding the foundations of PoS and PoW you’ll quickly grasp how the majority of cryptocurrencies operate.
Summary
Consensus mechanisms are used by cryptocurrencies to reach decisions between distributed parties. Without them, blockchains would be unable to function.
There are many different types of consensus mechanisms, but the most well known as Proof of Work and Proof of Stake.