Crypto 101: What is a consensus mechanism?

A blockchain consensus mechanism is a type of automated system that aims to achieve two goals:

Provide a distributed, leaderless way to unanimously agree on data stored in a blockchain ledger. Make sure that all network validators follow the rules of the protocol and perform their duties honestly.

While it can be tempting to entrust a single individual or entity with the role of making sure everyone plays by the rules, hierarchical systems have definite shortcomings. That is why Bitcoin uses a consensus mechanism.

Bitcoin’s use of consensus mechanisms created a true peer-to-peer electronic cash system. This system offset the need for centralized intermediaries, such as banks and governments, and changed the concept of financial freedom for all.

What does this mean in practice? It means that bitcoin is the first currency not controlled by a central bank. The resulting freedom, in theory, allows us to explore some very interesting questions about the nature of trust and consensus.

What is the problem of the Byzantine generals?

One of the most important things that Bitcoin did was to solve the problem of the Byzantine generals. Imagine that you are the commander of an army made up of several squads of soldiers, each located in a different place on the battlefield. You plan to attack a single fortified area at a specific time. To do this, you need to coordinate with each of your squads to make sure everyone knows the correct time, location, and plan of action.

But what if one or more platoons don’t get the orders? What if they attack too soon? What if they get to the wrong place? What if there are traitors in a squad trying to sabotage the plan?

In other words, until Bitcoin there was no secure way to reach a consensus between the various parties in an environment of implicit lack of trust.

This problem first appeared in a 1982 academic paper exploring how a distributed network could reach agreement in a decentralized manner. The answer, as Satoshi Nakamoto put it in the bitcoin white paper, was a consensus mechanism.

This algorithm allows all nodes in the network to agree on a single version of the truth, even if some of the nodes act maliciously or simply fail. The consensus mechanism works by having each network node transmit and validate all transactions to the network. Once a node validates a transaction, all other nodes add a record to their copy of an append-only ledger. “Add only” means that the ledger can only receive new records and no one can change old records. This is called a blockchain.

Returning to the problem of the Byzantine generals, each platoon would individually confirm and store orders and consult with other platoones. If one of them claims the attack was called off, for example, further checking with nearby platoons would prove a leader was lying. This ensures that all nodes on the network have the same version of the truth. It also means that malicious nodes cannot manipulate network data on their own.

How do consensus mechanisms work?

There are many different methods employed by various blockchains and cryptocurrency protocols to achieve consensus. However, the two most popular are known as the Proof-of-Work (PoW) and Proof-of-Stake (PoS) consensus mechanisms.

Proof of Work (PoW)

Computer scientists Cynthia Dwork and Moni Naor first developed PoW in 1993 as a means of preventing spam. The creator of Bitcoin then took the concept and adapted it for use in a decentralized monetary system.

Through the bitcoin mining process, network validators (called miners) use specialized computer equipment to win a cryptography-based competition that repeats every ten minutes.

You can learn more about this concept in our Learning Center article How Do Cryptocurrencies Use Cryptography?

PoW makes use of computational resources to ensure that “work” has been dedicated to “proving” that newly proposed transactions are valid and comply with the rules of the protocol.

The work implies electricity, maintenance and initial outlay costs that each miner must cover himself. This cost is important because it helps deter bad actors from joining the network and trying to corrupt it with spam or fraudulent transactions. After all, you’re less likely to want to corrupt something when you’ve invested your own money in it.

Proof of Stake (PoS)

PoS is a relatively new type of consensus mechanism started by Sunny King and Scott Nadal in 2012.

Like proof of work, PoS accomplishes the same key objectives of a consensus mechanism, but in a unique and different way.

Instead of competing with other validators on the network to win a crypto-based competition first, PoS requires network participants to “stake” or lock up their assets to become validators.

PoS uses a reward and penalty incentive system to ensure that transactions are validated and added to the blockchain in an honest manner. Those who are willing to save a larger amount of cryptocurrency get a higher opportunity to propose new blocks and earn rewards. But, if validators break the rules of the protocol, your staked assets risk being automatically forfeited in a process known as “slashing.”

What is the best blockchain consensus mechanism?

The debate over which consensus mechanism is “best” will probably never be resolved. There are too many factors regarding the specific use case of each blockchain to draw a definitive conclusion.

PoW is perceived by many to offer greater security against 51% attacks, but the process consumes a significant amount of energy. We have already debunked the myth that Bitcoin is destroying the environment in a previous blog post, but the perception remains.

While many PoS blockchains consume significantly less power than PoW chains, many feel that these blockchains are compromised. For example, they believe that PoS blockchains focus on decentralization in favor of security. You can learn more about this in our discussion on the Blockchain trilemma.

In short, PoW is generally perceived by experts to offer better guarantees of security and decentralization, while sacrificing some degree of scalability in the process. PoS is considered to offer better scalability, while sacrificing some degree of security and decentralization.

The best option ultimately depends on numerous factors, including the primary use case for a given blockchain.

Keep learning about crypto

Are you interested in learning more about the Byzantine generals problem and the various tradeoffs of different blockchain consensus mechanisms? The Kraken Learn Center is here to help!

Check out one of our latest articles, What is a Blockchain Consensus Mechanism?, to continue learning about the important role that consensus mechanisms play in blockchain and cryptographic technology.

These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some cryptographic markets and products are not regulated and you may not be protected by government compensation schemes and/or regulatory protection. The unpredictable nature of crypto asset markets can lead to loss of funds. Taxes may be payable on any returns and/or on any increase in the value of your crypto assets and you should seek independent advice on your tax position.