Consensus mechanisms are the rules that determine the parameters for participation in a program or institution; this is necessary in order to maintain agreement on the state of the system. Consensus mechanisms are particularly important for decentralized networks; such as cryptocurrencies, that rely on blockchain platforms. To achieve agreement on both a single data value, as well as a single state of the network, consensus is necessary.

In order for a system that values decentralized authority to be reliable, there must be a means of achieving agreement among the distributed processes and multi-agent systems. A blockchain could not be maintained if every programmer set their own rules. While a centralized system typically has an individual authority, a decentralized system does not.

However, it is paramount to the success of a decentralized platform for all of the networks to understand and agree with the parameters of the program. In order for the system to have value as a currency and validity as a program, the participating nodes must collectively agree to the consensus rules of the blockchain. So, consensus mechanisms are essential to maintaining the accuracy of the records on any decentralized network.

Basic Concepts

The public ledgers of blockchains operate by relying on multiple networks. The individual nodes have the responsibility to confirm or deny the validity of the information that someone is trying to add to the immutable blockchain. Self-regulating systems work by involving hundreds of thousands of participants to work on verification and authentication of transactions occurring on the blockchain. The same goes for the process of mining blocks on a given chain.

Conversely, institutionalized authorities such as governments or hospitals use centralized systems. Such institutions have sole authority to maintain and change their database. Record maintenance is performed by an internal authority. Siloed information is one of the many problems with centralized systems.

The result of a centralized system is that access to information limited. Moreover, the insulated design of centralized authority is much more prone to error and attack. This is primarily because there are only a few people charged with record maintenance, and individuals make mistakes.

On the other hand, with a larger peer-reviewed system that relies on a strict programming code, error is significantly reduced, if not eliminated altogether.

The challenge of a decentralized authority is that it requires security mechanisms to ensure that all the transactions occurring on the network are genuine. It also needs all participants to come to an agreement on the status of the ledger. This is the mandate of a consensus mechanism. Essentially a consensus mandate is a set of rules which decides on the validity of contributions by the various participants of the blockchain.

Proof of Work (POW)

PoW means that all participant nodes must prove that the work they have done, that is the effort to mine new coins and approve transactions, qualifies them the right to add new transactions to the blockchain. While PoW is currently the most popular consensus model, it also consumes a large amount of energy and in general, requires longer processing time.

The Proof-Of-Work protocol is used to prevent general spam and abuse of the resources of the network as well as attacks like a Denial of service attack while still being economical for honest participants or users.

Proof of Stake (POW)

Proof of stake (PoS) is another common consensus algorithm that evolved as a low-cost, low-energy alternative to PoW algorithm.

PoS allocates responsibility for maintaining the public ledger at a proportional rate to the number of currency tokens held by that node.

New blocks can only be added to the blockchain if their hash is at least as challenging as a difficulty value set by the most current consensus protocol. In some sense, the protocol does change, because the program adjusts itself so that the difficulty of solving for a hash is consistent.