Consensus plays a key role in building trust among crypto coin traders worldwide. Due to the decentralised nature of the crypto world, it is essential to have complete transparency while trading a particular coin. This minimises the chances of a buyer becoming a victim of fraud.
If you are a beginner in crypto trading, you must know the vital details about consensus regarding blockchain.
So keep scrolling to know everything about consensus in the blockchain.
What Is The Meaning Of Consensus?
Generally, consensus means that the majority of a group has agreed in favour of a decision. When it comes to blockchain, reaching a consensus is important. At least 51% of the traders and miners associated with a particular coin must agree to finalise the next global status of the coin.
What Is A Consensus Mechanism?
In the blockchain, a consensus mechanism is a system that validates a transaction and marks it as authentic. This mechanism lists all valid transactions of a coin in a blockchain to build trust in the coin among traders. Several currencies, such as Bitcoin, Ethereum etc., use this system for security purposes.
How Does The Consensus Mechanism Work?
It achieves the agreement of most users on a single network. The consensus mechanism maintains the security of the blockchain by keeping a record of all legitimate transactions. Since crypto trading is a decentralised process, this becomes important to stop sellers from deliberately cheating a buyer.
To build trust for a blockchain, the consensus mechanism ensures that a transaction is reflected in the blockchain as soon as it gets validated. There are a variety of methodologies that are essential to ensure security and trust and achieve agreement across a blockchain network. Consensus mechanisms also ensure that all the transactions for a coin are rightly listed in the blockchain.
What Are The Types Of Consensus Mechanisms?
Several mechanisms are used as a consensus mechanism during coin trading. These mechanisms are as follows:
Proof of Work
‘Proof’ refers to the solution of a highly-complex problem, and ‘work’ refers to the process of solving the same. Crypto coin miners compete to solve the problem and gain the right to process the transaction. The fastest solver receives a mining fee from the traders of these coins.
This mechanism tracks and verifies the creation and transactions across blockchain networks. It enables miners by allowing them to validate new transactions and is extremely secure. However, it has several cons, such as high electricity requirements and difficulty for individual miners.
Proof of Stake
This mechanism randomly chooses a maximum coin owner to validate a transaction. It also allows the owner to create a block for the same coin. This mechanism requires comparatively less energy, transaction time and a lower fee. Coins like Etherium 2.0, Polkadot, Cosmos, Cardano, ThorChain, Nxt and Algorand use this mechanism extensively. There is a security risk as if an owner owns 51% or more coins of a particular coin, then that person will get sole ownership of its network.
Proof of Capacity
The PoC mechanism heavily relies on free space available in the hard drive. This is because there are many solutions to a coin's hash problem that a trader needs to store. It is highly efficient as compared to PoW and PoC mechanisms. Coins such as Burst, Storj, SpaceMint and Chia use these mechanisms.
Proof of Activity
This mechanism is a combination of both Proof of Work and Proof of Stake. It has been designed to combine the best features of PoW and PoS. In the beginning, the Proof-of-Activity mechanism functions like PoW. Once a new block is completed, it starts to function like a Proof-Of-Stake mechanism. Coins such as DCR (Decred) use this mechanism.
Proof of Authority
Different organisations and private companies created this unique mechanism. There are validators with approved accounts which authorise transactions and the creation of new blocks. These validators must disclose their true identity to get the right to validate a transaction.
Proof of Burn
PoB aims to improve the quality of blockchain so that it can be used easily and extensively as a tool for faster and more secured transactions. After PoW and PoS, PoB is designed to prevent fraud activities on a blockchain network. Cryptocurrencies such as Bitcoin use this mechanism to offer secure transactions to traders.
Proof of Elapsed Time
Intel Corporation created this mechanism to permit blockchain to decide the person who will create the next block. It uses a lottery system to decide the next block creator. Thus, it gives a fair chance to all traders to create the next block. It is an efficient process involving utilising lesser resources and low energy consumption.
What are the advantages of the consensus mechanism?
Consensus mechanisms offer several advantages, such as:
No barriers to participation
Any crypto trader or miner across the globe can participate in a consensus mechanism. There are few barriers to participation in a consensus for any crypto coin.
Builds trust among users
Traders and miners of a particular coin across the globe must agree to approve a decision. This, in turn, builds trust among the users.
Establishes security
Consensus mechanisms maintain the transparency of trading for all coins. Thus, traders can ensure that no fraud occurs during a transaction.
What are the disadvantages of the consensus mechanism?
The minor disadvantages of a consensus mechanism include:
Severe chances of hacking
There lies a chance of hacking known as 51% hack, which stands out as a potential attack on a consensus mechanism.
Excessive use of electricity
There is a heavy requirement for electricity for the PoW mechanism to function.
With very few associated disadvantages, the consensus mechanism is a great security tool for a decentralised form of trade. This allows traders and miners across the globe to establish a connection and trust among themselves and benefit from the mechanism.
The benefits in the case of traders are trade security and faster transactions. On the other hand, miners get several rewards for solving complex problems faster and gaining authority to validate a trade.
