Since their inception in the late 2000s, cryptocurrency and blockchain have made a big splash. Suppose you thought a decentralized authority was the stuff of ancient civilizations or present-day idealists. In that case, you only have to look at blockchain and how it functions in the digital world. The blockchain makes light work of the thorny subject of decentralization.
But how does it achieve such excellent results with minimal effort from an actor in the system? The answer is "consensus", which means an agreement between users on what changes are made to the network and what new coins are valid. These are the unwritten rules of the digital social contract, but to achieve a result, a protocol is needed.
In this article, you will find out more about the idea of consensus and how it is used in the blockchain to create a self-regulating network of digital and monetary transactions. Broadly speaking, consensus is vital for the blockchain because that's what makes it work.
Traditionally, organizations and systems are arranged around a central authority; this might mean a leader or a CEO, usually someone who can take a final decision on outcomes. It's how much of our human processes have been conducted for many years.
It might seem like the fairest and most efficient way of doing things initially, but other models exist. These are called decentralized authorities, which operate based on consensus. While these models are not as popular in the outside world, the digital world has found good use for them – and blockchain is a perfect example.
The blockchain doesn't have any central authority to determine its operations; instead, decisions are made collectively through peer-to-peer interactions or consensus mechanisms. So what does this mean, and how do they work? Firstly, it means that decisions are taken as a group, with individuals choosing to support the whole or not.
Consensus-based decision-making is defined as a choice in favor of the collective, even if it doesn't benefit the individual directly. According to the Merriam-Webster dictionary, consensus is first a general agreement and second a group solidarity around a belief or an idea.
Although these different models of consensus and organization have existed for thousands of years, they have never manifested in the digital world before. The blockchain is the first time a system of this kind has been seen to work successfully. In short, it is a new approach to data and organization.
In fact, the blockchain is as much about the organization as it is about consensus. The blockchain stores the history of data it has interacted with and notes every change that has occurred. The data held is arranged in blocks which differs significantly from the processes you find in the accounting system.
From this vantage, it's clear that the blockchain is not a decentralized authority. It is only the infrastructure that provides a secure medium to organize trustless relationships. Only when consensus is applied to the blockchain will you start to see the decentralized authority of blockchain. This is a flexible and secure solution.
So the blockchain is not in itself a decentralized authority. It is only a block-structured way of organizing and storing vast amounts of data and the changes to that data. If you want this infrastructure to operate as a decentralized authority, you need peer consensus in a trustless context.
To answer why consensus is necessary for the blockchain, it's essential to go through a few examples of what can happen when attempting to organize peer-to-peer interactions. An excellent analogy to start with is the Byzantine Generals problem which gives an account of some fundamental problems.
There is a group of Byzantine Generals who want to attack a city. They have one army to the west and one army to the east. Because the armies are so far apart, there is no centralized authority between them; this makes a coordinated attack much harder to organize and implement. Let's say the West army wants to attack on Wednesday, so they send a messenger to tell the east army of the plan. But the east military intends to strike on Friday, so they send the messenger back. But then the messenger disappears, and the information is lost. The result is an uncoordinated attack and defeat.
This example is relevant to the blockchain's consensus because the chain is a vast network, and there's no way to know if the crypto coin you send to someone will reach them without tampering. What both the armies and blockchain need is a consensus mechanism. Some of these consensus mechanisms are outlined below.
Not all blockchains use a proof of work consensus model, but many major ones like Bitcoin, Litecoin, Ethereum favor this protocol. The proof of work consensus also determines how tokens are created, thus adding a higher level of security to the networks. Miners are creating these new tokens.
The new coins are created by telling miners to confirm recent transactions and create new blocks. This is done by way of complex calculations and mathematical puzzles. When a miner or computer gets the answer correct, they are awarded coins. Solutions need to be submitted in the shortest time and be equal to the answers on the servers.
Proof of work also increases the complexity of the mathematical puzzle to be solved, continually challenging miners band computers. For some time, CPUs were able to crack the codes for proof of work, but as the complexity increased, another approach was needed. Application Specific Integrated Circuit (ASIC miners) were introduced.
There are some issues with the proof of work method of consensus. If a controlling entity owns more than 51% of nodes doing the calculations, it could corrupt the equality of the blockchain. It is also time-consuming as miners must check many values to solve the problems. There is also a vast amount of computational power needed, which is not environmentally healthy.
Another mode of consensus in the blockchain is the Proof of Stake protocol. With this consensus method, the protocol creates new tokens and coins and confirms transactions by placing tokens in specialized wallets. When owners stake a token, they earn a dividend each time, and a new block is awarded and attributed.
This protocol eliminates the need for a power or authority to confirm the transactions or to create new tokens. Once again, not every currency uses this protocol, but many do. The leading players in this field are Cardano, Polygon, Tezos, and Algorand. Ethereum is also aligning with this protocol and moving away from the proof of work method.
There have been some challenges associated with the Proof of Work protocol. These were outlined briefly in the section above. For these reasons, leading currencies like Ethereum have decided to switch to Proof of Stake, which delivers faster transactions, lower fees, and an eco-friendly coin.
Although more robust in many departments and offering a better form of consensus than proof of work, the proof of stake method has drawbacks. One example is the 51% attack. Any member of the blockchain that possesses 51% of the total coins can determine what happens within their network. They could, for instance, change the destination of coins sent by individuals.
The Stellar Consensus Protocol (SCP) is slightly different from the previous consensus methods but no less important or necessary. SCP is a consensus algorithm from the Stellar Network, which forms part of the Federated Byzantine Agreement (FBA). The Stellar Network implements fault tolerance mechanisms for financial networks.
The SCP model derbies from the Byzantine Agreements, which are aligned with the philosophy of a decentralized network based on peer-to-peer interactions and trustless relationships – the gold standard of blockchain consensus. It uses a process of quorums and quorum slices to create consensus; there is also a ballot and federated voting model.
The primary way the SCP model obtains consensus, however, is by using quorums. These are nodes that reach an agreement within the network. The nodes then communicate with each other when an updated state is valid. Once a set of nodes agree at a particular threshold, the state can be validated and updated.
The SCP is currently favored as the safest and most effective means of decentralized control and peerless consensus in the blockchain. It has low latency, flexible trust, and asymptomatic security. Unlike the consensus models that have come before, SCP delivers high levels in all areas with few weaknesses.
As with any consensus blockchain protocol, owners of the coins need to provide permissions for new coins to establish on the blockchain network. The protocol outlined above is helpful in different ways, and different coins have their preferred protocol. With Delegated Proof of Stake (DPoS), there is a slightly different approach to blockchain consensus.
Instead of a computational process to determine what coins are valid on the blockchain, this consensus mechanism gives you the autonomy to select delegates responsible for validation coins in the network. These delegates will have the final say on whether a coin is valid or not.
In most ways, the DPoS method is the same as the proof of stake protocol; they both require users to stake coins to participate in peerless consensus. The difference is that PoS coin holders personally participate in the validation process, but on a DPoS network, this is done by elected delegates.
Although it is an adaption of proof of stake and may not seem like a consensus model on its face, the DPoS model is quite effective. Not only that, it maintains a level of consensus as users must select the delegates. It is they who will confirm transactions and validate coins.
Proof of Authority is another form of delegated consensus that works well on the blockchain. Not surprisingly, this method is similar to the DPoS consensus method that assigned authority to a user in the network; they can then make decisions on translations and validation of coins on the blockchain.
When a set of validating machines generates a new block of transactions, a group of actors is chosen to validate those transactions for the network. The new blocks can be directly accepted without any verification or put to the vote. If the majority of users on the blockchain agree to the new blocks, a configuration is made.
This protocol is a variation of PoS and DPoS, sitting somewhere between the two. The process is underpinned by Vechain – an organizational structure. The structure has 101 Authority nodes set up to validate a new block and make decisions. Other qualifying nodes in the network vote on each node. A qualifying node must hold crypto coins to vote on nodes and to receive rewards.
Using the Proof of Authority method, users on the blockchain all have some say over the outcome of validations to the network. If users own a coin, they can update the nodes that make key decisions on permitting more new coins to be generated. Although it isn't as active as early protocols, it is still effective and secure.
There are several protocols available to create and maintain consensus on the blockchain. If you own a cryptocurrency, it makes sense to pay attention to the consensus algorithms and the protocols because they influence your investment.
All of these protocol exists for one reason only, to maintain consensus on the blockchain. This consensus is the digital form of the social contract. It creates agreements between nodes and keeps rule breakers off the network.
Consensus in the blockchain means that transactions can be made without the need for a centralized authority. The technology and protocol made available through blockchain make this possible, but the protocol above is required to ensure proper conduct and efficient transactions.