What Is a Consensus Algorithm and How Does It Work?
What Is a Consensus Algorithm?
A consensus algorithm is a mechanism that ensures all participants in a network agree (reach consensus) on the state of the blockchain, without the need for a central authority. Consensus algorithms make blockchain technology function.
A blockchain is a chain of information in which transactions are stored. When new transactions occur, a new block is added to the blockchain. This way, all information is recorded and can no longer be changed afterward. The consensus algorithm of a blockchain determines how nodes reach agreement so that the new block can be added reliably.
Thanks to consensus algorithms, blockchains function and remain secure. These algorithms ensure that all nodes in the network agree on the order of transactions, preventing double spending or fraudulent actions.
Key Takeaways
- Consensus algorithms establish agreement between participants on the blockchain.
- They prevent double spending and fraud by ensuring agreement on transaction order.
- There are different types of consensus algorithms, each with its own advantages and disadvantages.
How Does a Consensus Algorithm Work?
Consensus algorithms work through a cryptographic process in which nodes validate the legitimacy of a transaction or a block of transactions and must agree on the order in which these new blocks are added to the blockchain. The node that is ultimately allowed to add the block with new information is called the validator and receives a reward in the form of cryptocurrency. This process often happens automatically and does not require a central authority to oversee it.
Consensus algorithms ensure that all nodes in a blockchain network agree on the validity of transactions. Through cryptographic methods, nodes validate new transactions or blocks and coordinate which block is added to the blockchain. The node that ultimately adds a block (which you can see as the winner) is called the validator (in Proof of Stake) or miner (in Proof of Work). This node receives a reward in the form of cryptocurrency (in Bitcoin’s case, a Bitcoin reward). This entire process operates without a central party— the network handles the verification and approval itself.
Let’s explain the process of consensus algorithms using a Formula 1 race as an example:
Imagine a Formula 1 race: multiple drivers race around a circuit aiming to be the first to cross the finish line. From start to finish, they can’t just do anything they want, as there are strict rules set by the FIA (the international motorsport association) to ensure fairness and safety. Think of rules regarding tire choices or that drivers can’t simply cut corners.
During the race, everything is monitored by race officials (like referees) and sensors on the cars. Constant checks are made to ensure drivers follow the rules. If a driver breaks the rules, they get a warning, time penalty, or even disqualification.
A blockchain operates in a similar way through its consensus algorithm. Instead of drivers, you have nodes that all try to process (race) and verify (follow rules) transactions. But there’s one major difference: instead of one central referee like the FIA, the nodes monitor each other. They ensure the blockchain is updated correctly. If a node breaks the rules, such as approving double spending, other nodes can ignore or even punish it.
Ultimately, consensus is reached among all participants via the algorithm about which transactions are valid. The process resembles a Formula 1 race—but fully decentralized.
What Are the Different Types of Consensus Algorithms?
There are various types of consensus algorithms used to help networks of nodes reach agreement on a blockchain. Each mechanism has its own rules, benefits, and limitations.
Proof of Work (PoW)
This is the oldest and most well-known consensus algorithm, introduced by Bitcoin. It is known for its high energy consumption because nodes must solve complex mathematical puzzles, which require a lot of computing power. Proof of Work is highly secure but faces scalability issues.
Popular Proof of Work blockchains: Bitcoin and Litecoin
Proof of Stake (PoS)
Proof of Stake is a consensus algorithm where participants are selected based on the number of tokens they stake. Proof of Stake is more energy-efficient than Proof of Work because it doesn’t require intensive computational power. In 2022, Ethereum switched from Proof of Work to Proof of Stake to improve energy efficiency.
Popular Proof of Stake blockchains: Ethereum, Cardano, and Tezos
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake is a variation of Proof of Stake and is designed to be faster and more efficient. It uses a small number of elected representatives to add new blocks to the blockchain. This improves network speed but reduces the level of decentralization.
Popular Delegated Proof of Stake blockchains: Tron
Proof of Authority (PoA)
In Proof of Authority, the network has so-called "validators," a limited and trusted group of participants who are allowed to add blocks to the blockchain. This makes the network fast and efficient but less decentralized than Proof of Work or Proof of Stake. Proof of Authority is often used by private blockchains.
Popular Proof of Authority blockchains: VeChain
Proof of History (PoH)
Proof of History is a relatively new and innovative consensus algorithm, made famous by the Solana blockchain. Instead of reaching consensus on the order of transactions through communication, transactions are cryptographically timestamped. Every event in the network gets a unique timestamp before being sent to the network, allowing nodes to know the order in which events occurred. This eliminates the need for coordination between nodes. As a result, these blockchains can operate extremely fast and efficiently, with low costs.
Popular Proof of History blockchains: Solana
Other Consensus Algorithms
- Proof of Burn
- Proof of Capacity
- Proof of Participation
- Proof of Elapsed Time
- Delayed Proof of Work
- Effective Proof of Stake
- Pure Proof of Stake
- Bonded Proof of Stake
- Nominated Proof of Stake
- Proof of Stake Time
- Leased Proof of Stake
- Anonymous Proof of Stake
- Hybrid Proof of Stake
- Delegated Proof of Contribution
- Secure Proof of Stake
- Thresholded Proof of Stake
- Roll Delegated Proof of Stake
- Proof of Coverage
- Proof of Importance
- Delegated Proof of Broker
- Proof of Transfer
- Proof of Storage
- Proof of Activity
Final thoughts
Consensus algorithms ensure that blockchains function reliably, securely, and in a decentralized way by enabling agreement between all nodes in the network about the validity and order of transactions. Without a central authority, blockchains can continue operating as transparent networks that prevent fraud and eliminate double spending. Each type of consensus algorithm has its own characteristics, advantages, and limitations, making them suitable for different use cases in the crypto world.
