Imagine the blockchain as a story building with floors that represent the different layers that make it up; transaction validation will not take place without it.
Unlike in centralized systems where a central administrator maintains and updates the database, decentralized systems disperse this role to different nodes which must reach the same conclusion and agree on the legitimacy of transactions hence the name consensus.
In this article, we will look at types of consensus mechanisms besides proof of work (PoW) and proof of stake (PoS).
Read: Proof of Work vs Proof of Stake: What’s the Difference?
1. Proof of Activity
Proof of Activity merges the two mechanisms of proof of work and Proof of Stake algorithms. The mechanism goes through two phases before a completely new block is ready for the blockchain.
In the first phase, miners compete against each other with their computing power to generate or mine a new block for the blockchain. The generated block is still incomplete and does not include transactions — they are embedded with the block reward address and the transaction title.
Then the system switches to Proof of Stake — a random group of validators is selected to validate the new block; the more coins a validator owns, the more chances of being selected.
Once all the selected validators have signed the block it can be completed and be attached to the blockchain.
This method is secure but still requires a lot of energy in its PoW phase. In the PoS phase the wealthy are more favored in that they have a higher chance of being selected as validators.
2. Proof of Authority
Proof of Authority which unlike PoS and PoW is geared toward private organizations who want to build their own chains that don’t require participation from general users.
PoA utilizes a reputation-based model to help validate transactions and generate new blocks whereby instead of validators placing their coins on the line like in Proof of Stake, they place their reputation.
The system’s validators are pre-selected and approved by other network participants to act as moderators. This forces them to confirm their real identities on top of going through a tough selection process which is meant to reduce the risks of selecting questionable validators and incentivize a long-term commitment.
This consensus mechanism is relatively centralized since Proof of Authority blockchains limit the number of validators. This makes the systems highly scalable however. Regardless, it is commonly criticized for revealing the identities of validators as it could potentially lead to third-party manipulation.
VeChain (VET) is an example that uses the PoA algorithm.
3. Proof of Burn
Proof of Burn, is another alternative of PoW that tries to be more sustainable. In Proof of Burn, miners gain the power to mine a block by intentionally and permanently destroying tokens.
The more tokens a miner burns the higher the chance that they will be selected as the next block validator.
The idea here is to encourage long-term commitment from miners by demanding that they sacrifice short-term wealth through the burning of their tokens to gain the lifetime privilege to create new blocks.
Burning has other perks like making the coin scarce hence ideally driving up its value and limiting inflation.
The consensus mechanism also uses far less energy than classic Proof of Work systems. Rather than investing in powerful mining hardware, the system incentivizes miners to demonstrate their dedication to the network through intentional token destruction.
4. Proof of Capacity
Proof of Capacity bases its mining algorithm on the amount of space available in a miner’s hard drive. PoC stores a list of possible solutions on the mining device’s hard drive before mining starts and so the larger the hard drive the higher the capacity to store more solutions.
This means that miners with more storage space have a higher chance to match the required hash value from their list resulting in more chances to win the mining reward.
PoC can use any regular hard drives, therefore, opening the door for regular users to participate making it more decentralized. However not many developers have chosen to adopt the system. Also there have been concerns about the effect of malware attacks on mining activities.
Cryptocurrencies like Chia (XCH) and Signum (SIGNA) use the PoC system.
5. Proof of History
Proof of History allows for timestamps to be built into the blockchain per se to prove that a block was created at a certain time — you basically create a historical record that proves an event took place at a specific time.
This mechanism is enabled by what is known as a “sequential-hashing verifiable delay function” by taking the output of a transaction and using it as input for the next hash enabling everyone to clearly see which event took place in a particular sequence.
The only downside is that validators’ hardware needs to meet certain specifications otherwise they are excluded — the consensus has to sacrifice decentralization for speed.
Solana (SOL) uses the Proof of History system.
6. Proof of Importance
Proof of Importance is a mechanism that aims to solve Proof of Stake’s problem of inherently favoring the rich. PoI incorporates additional factors when weighing each node’s level of on-chain influence. A score is given based on a variety of factors that include but are not limited to the number and size of transactions in a given period.
Since Proof of Importance integrates additional metrics the nodes are picked based on the overall support of the network rather than simply the amount staked.
NEM (XEM) is a blockchain launched in 2015 that pioneered the Proof of Importance mechanism to prevent the hoarding of tokens and prioritize users that support the network.
7. Delegated Proof of Stake
Delegated Proof of Stake is one of the evolutions of the proof of stake concept whereby users of the network vote and elect delegates to validate the next block.
For example a crypto user might decide to vote on a certain delegate of her choice by pooling her tokens into a staking pool and linking them to the delegate.
DPoS allows 20 to 100 delegates to be chosen for each block and the delegates verifying transactions on one block might not be the delegates for the next.
After successfully validating a block, elected delegates receive transaction fees from the validated block and the reward is then shared with users who pooled their tokens depending on the amount they staked.
DPoS is not only fairer through democracy but is also quicker since there are a limited number of delegates.
EOS (EOS) and Tron (TRX) use the DPoS consensus mechanism.
Final Thoughts
It is clear that there is no one-size-fits-all when it comes to verifying decentralized systems. PoW and PoS are certainly the most widespread and adopted consensus mechanisms but more of them will surely pop up to try to improve upon the preceding ones.
Frequently Asked Questions (FAQs)
According to Ethereum.org the term consensus mechanism refers to the entire stack of protocols, incentives and ideas that allow a network of nodes to agree on the state of a blockchain.
They influence how transactions are verified – how much energy is used – network fees – transaction speed and other details for the currency and network applications.
There is no one-size-fits-all when it comes to verifying decentralized systems. The best consensus for certain blockchains depends on its specific needs.