Blockchain networks use a consensus mechanism among the various existing blockchains, based on the required resources and desired outcome.
Blockchain has made headlines constantly due to the popularity of cryptocurrencies such as Bitcoin and Ethereum. Multiple organizations are utilizing cryptocurrencies to create new revenue streams. Also, organizations are deploying blockchain for various applications such as securing data and verifying the identity of investors. These applications utilize various types of blockchain consensus mechanisms. Blockchain consensus mechanisms basically help guarantee that all nodes on a network are synchronized and its transactions are legitimate. Such consensus mechanisms are necessary for blockchain networks to ensure that every node is connected to the same network and all transactions are regularly verified. Every blockchain network cannot use the same consensus mechanism as different outcomes are desirable with different applications. Organizations and blockchain developers must make informed decisions while choosing a blockchain consensus mechanism. Hence, blockchain and business leaders can work backwards from the desired results to a suitable consensus mechanism.
Types of Blockchain Consensus Mechanisms
Blockchain consensus mechanisms can be divided into 8 types:
1. Proof of Work
Proof of Work (POW) process is also called mining and the miners are known as nodes. Miners solve complicated mathematical puzzles that require extensive computational power. For this purpose, miners utilize multiple mining methods like CPU mining, GPU mining, FPGA mining, mining pools, ASIC mining, and many more. After solving mathematical puzzles, a miner receives a block as reward if they are the first one to find the solution. Additionally, the puzzles can only be solved with trial and error. Hence, miners require an increasing amount of computational power for finding solutions quickly.
The level of difficulty for the puzzles changes according to the speed at which the blocks are being mined. In case the blocks are created quickly, then the puzzles would get more difficult and vice versa. Therefore, new blocks have to be created within a particular time frame to carefully adjust the difficulty level of puzzles. Several popular cryptocurrencies like Bitcoin utilize Proof of Work process. However, Proof of Work consensus mechanism consumes resources at a staggering rate. According to sources, Bitcoin’s current estimated annual power consumption is 51.13 TWh. Hence, this approach can be expensive.
2. Proof of Stake
Proof of Stake (POS) uses a randomized process to figure out who gets a chance to produce the next block. Blockchain users can lock up their tokens for a certain time for becoming a validator. After becoming a validator, users can be able to produce blocks. Validators can also be selected based on the design of blockchain. Generally, the user who owns the biggest stake or owns coins for the longest period of time has better odds of creating a new block. Validators usually get rewarded for their work with all or part of transaction fees of all the transactions carried out in the block they created. Alternatively, validators may receive a specific amount of coins due to inflation. With this approach, Proof of Stake method offers incentives to validators for maintaining the blockchain network. Proof of Stake is more energy efficient compared to other blockchain consensus mechanisms like Proof of Work.
3. Delegated Proof of Stake
In Delegated Proof of Stake process, users can stake their coins and vote for a particular number of delegates. The weight of a user’s vote is based on their stake. For instance, if a user ‘X’ stakes 20 coins for a delegate and another user ‘Y’ stakes 2, then X’s vote will have more weight compared to that of Y. The delegate that receives the highest number of votes gets a chance to produce new blocks. Delegates get rewarded with transaction fees or a specific amount of coins just like other blockchain consensus mechanisms such as Proof of Stake. Delegated Proof of Stake (DPOS) mechanism is one of the fastest blockchain consensus mechanisms. This mechanism can handle a higher number of transactions compared to Proof of Work mechanism. Due to its stake-weighted voting system, DPOS is often considered as a digital democracy.
4. Proof of Capacity
In Proof of Capacity method, solutions to complex mathematical puzzles are stored in digital storages such as hard disks. This entire process is called plotting. After a storage device is filled with solutions for mathematical puzzles, users can utilize it for producing blocks. Users who are fastest in finding the solutions get a chance to create a new block. Hence, users with the highest storage capacity will have to higher chances of producing a new block.
5. Proof of Elapsed Time
Proof of Elapsed Time process randomly and fairly decides the producer of a new block based on the time they have spent waiting. For this purpose, the mechanism provides a random wait time for each user and the user whose wait time finishes the earliest will produce a new block. This consensus mechanism only works if the system can verify that no users can run multiple nodes and the wait time is truly random.
6. Proof of Identity
Proof of Identity compares the private key of a user with an authorized identity. Basically, Proof of Identity is a piece of cryptographic evidence for a user’s private key that is cryptographically attached to a specific transaction. Any identified user from a blockchain network can create a block of data that can be presented to anyone in the network. Proof of Identity ensures integrity and authenticity of created data. Additionally, smart cities can use blockchain consensus mechanisms like Proof of Identity to verify the identity of their citizens.
7. Proof of Authority
Proof of Authority mechanism is a modified version of Proof of Stake where the identities of validators in the network are at stake. In this scenario, the identity is the correspondence between validators’ personal identification and their official documentation to help verify their identity. These validators stake their reputation on the network. In Proof of Authority, the nodes that become validators are the only ones allowed to produce new blocks. Validators whose identity is at stake are incentivized to secure and preserve the blockchain network. Also, the number of validators is fairly small (i.e. 25 or less).
8. Proof of Activity
Proof of Activity mechanism is the combination of Proof of Work and Proof of Stake. In Proof of Activity, miners try to find the solution to a puzzle and claim their reward. However, the blocks created in Proof of Activity mechanism are simple templates with mining reward address and header information. The header information is then used to choose a random group of validators for signing a block. The validators with larger stakes will have greater odds of being selected to sign a new block. Once the selected validators sign a new block, it becomes a part of the network. In case the block stays unsigned by some validators, it gets discarded and a new block is utilized. The network fees generated in the process are distributed between the winning miner and the validators.
Despite having similar goals, various blockchain consensus mechanisms ensure consensus with a varying approach. A single reliable consensus mechanism does not exist yet but the existing ones have evolved over time to meet the needs of blockchain technology. Additionally, predicting the type of blockchain consensus mechanism that will be popular and useful in the long run can be increasingly complex as the underlying technology is fairly new. Hence, business leaders who wish to introduce blockchain technology in their organization must be well informed about the various blockchain consensus mechanisms.
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