The Beginner's Guide to Consensus Mechanisms

What are consensus mechanisms?

Blockchain consensus mechanisms are the cornerstone of an emerging decentralized society of Web3, finance and governance. However, the architects of this new world have long debated over the design of these mechanisms. And in a quest for a perfect balance between scalability, security and decentralization, they have created a never-ending list of options.

So anyone wanting to build on or compare blockchains and their corresponding ecosystems must comb through the history of trade-offs. Here is what you need to know to help catch you up to speed.

Takeaways:

A consensus mechanism is a gamified system of protocols that enables a decentralized computer network to agree on a blockchain state. They aim to provide a balance of security, scalability and decentralization to the network.
The industry has settled mainly on the proof of work (PoW) and proof of stake (PoS) consensus mechanisms.
User adoption and application development around the most popular blockchains have made it difficult for alternative consensus mechanisms to disrupt the industry.
But Ethereum’s recent transition from PoW to PoS demonstrated that disruption is possible.

This guide will explain how consensus mechanisms work and the critical differences between the most prominent types.

How consensus mechanisms work

To understand how consensus mechanisms work, it’s important to first recognize that the end goal is to maintain a secure and public record of all interactions and transactions of network participants. Miners or validator nodes manage all updates and changes to that record. In such a system, it’s crucial to establish a trusted way to ensure that no peer tries to cheat other participants and that they add honest transactions to the ledger. For example, users should not be able to double-spend assets they own or manipulate the system to hold more coins than they originally had.

A consensus mechanism provides the set of protocols and rules a blockchain ledger uses to protect itself against such potentially malicious transactions. In most cases, the protocol achieves this through cryptographic challenges and reward incentives that allow network leaders ( miners or validators) to verify the authenticity of each transaction users try to execute. Once validators reach an agreement (consensus) on the legitimacy of a transaction, the protocol adds it to the immutable blockchain record.

Consensus mechanisms use incentives and rewards, usually new coins, to encourage network leaders to propose only legitimate transactions to peers. This makes it difficult and expensive for anyone trying to cheat the system. In most protocols, users must control over 51% of the network’s computing power simultaneously or acquire a significant portion of the underlying network’s currency.

Why are there different types?

Blockchain architects designed different types of consensus mechanisms for various blockchain use cases and network conditions. They also provide multiple ways for projects to address the famous blockchain trilemma.

The trilemma proposes that distributed systems can only achieve two of the three requirements: scalability, decentralization and security. Thus, blockchains must make a trade-off based on their specific objective.

In a real-world example, Bitcoin’s proof of work (PoW) favors decentralization and security, while Ethereum’s proof of stake (PoS) model leans more on scalability to power decentralized applications (dapps). However, this example is an oversimplification, as the debate on protocol security and decentralization is complex and nuanced.

Moreover, other blockchain consensus mechanisms implement a modified version of PoW or PoS depending on the degree of speed, security or decentralization they wish to achieve.

Blockchain consensus mechanisms

Bitcoin’s creator introduced the world to a new way for peers on a computer network to reach a consensus on the ledger’s state in a decentralized fashion. Since then, technologists have experimented with other consensus models, making the trade-offs mentioned above.

Proof of work (PoW)

The fist consensus mechanism, Proof of Work was invented by Bitcoin creator Satoshi Nakamoto. Other blockchain networks, including Litecoin and Dogecoin, also adopted it. The model requires network leaders called miners to expend computing power to solve an extremely complex cryptographic puzzle. Being the first to complete the puzzle and submitting this “proof of work” to other peers qualifies the miner to add a new block to the blockchain and receive the associated coin rewards.

Read more: What is Proof-of-Work?

The security of the PoW model lies in the vast amount of computing power miners expend in the never-ending race to solve the following proof of work. With several miners acting in the network’s best interest, the economic cost to attack the system grows significantly to the point that it becomes impractical for a malicious actor to try otherwise.

PoW makes Bitcoin the most secure computing network on the planet. However, many have misconceptions about the network’s energy usage addressed in our in-depth guide to PoW blockchains.

Proof of stake (PoS)

Proof of stake emerged in 2012 as an alternative to Bitcoin’s PoW. The model replaced miners with validators, requiring that interested entities stake a significant portion of the underlying network’s currency for a right to propose and add new blocks to the blockchain. The network derives its security from aligning incentives, because having a significant stake naturally requires validators to act in good faith.

Ethereum became the largest PoS network after the historic switch from PoW in 2022. Although PoS coins represent only 29% of the entire crypto market value, the consensus mechanism is the most widely used. Other popular blockchains such as BNB Chain and Cardano implement the model, despite its widely known security trade-offs explained in Blockworks’ proof of stake guide.

Read more: Proof of Work vs. Proof of Stake

Delegated proof of stake (DPoS)

The delegated proof of stake (DPoS) consensus mechanism is a modified version of PoS, generally considered more democratic. Under this model, users stake tokens to vote for delegates who will validate transactions on the network. The more tokens delegated to a validator, the greater chance they have to produce blocks on the network and earn rewards that they share with stakers. Examples of leading blockchain networks running the DPoS model include Solana, Tron, EOS and Tezos.

Proof of authority (PoA)

Proof of authority (PoA) is a consensus model whereby network validators consist of pre-approved participants selected based on their reputation. It is usually ideal for private blockchains or specific organizational use cases where only a limited set of validators are needed to update the ledger. The few validators required for a PoA system make them highly scalable but centralized. Vechain and Blockstream’s Liquid sidechain are the most famous examples of public blockchains using a PoA implementation.

Proof of activity (PoA)

Proof of activity (PoA) is a hybrid consensus model that implements aspects of PoW and PoS. The process initially begins with miners solving a cryptographic puzzle to propose a new block, which is, in turn, signed by validators before it is added to the blockchain. Miners and validators receive a portion of block rewards for their contributions to the network’s security. Decred is the foremost example of a blockchain project running on proof of authority.

Proof of burn (PoB)

The proof of burn (PoB) consensus mechanism implements a novel approach to reduce the heavy energy requirements of PoW systems. Under this modified model, miners burn a portion of their coin holdings to receive virtual mining machines, which grant them the right to propose and mine new blocks. Miners transfer funds to verifiably unspendable addresses and focus on growing their virtual mining rigs to maximize profitability. Slimcoin, launched in 2014, implements the PoB consensus model, as does modular blockchain Koinos, which was launched in 2022.

Proof of capacity (PoC)

Proof of capacity (PoC) is another consensus model that attempts to lower the high energy demands of PoW. Blockchains that utilize this model require miners to use available hard drive space on their computers to provide solutions to a less complicated cryptographic puzzle. The answer to the dilemma is pre-stored when the user becomes a node, with a larger hard-drive space increasing a miner’s chances of winning block rewards. First-generation blockchains such as Chia, SpaceMint and Storj implement a PoC model.

Proof of elapsed time (PoET)

Proof of elapsed time (PoET) is a consensus algorithm developed by Intel Corporation and primarily utilized by permissioned blockchain networks. It implements a lottery-like model to choose a validator for the next block. Using immutable and openly verifiable code ensures that all participants have equal chances of being selected as validators. Notably, there are usually no economic rewards for PoET participants as this model is primarily used for organizations and corporations. The enterprise-focused distributed ledger solution Hyperledger Sawtooth implements the PoET model.

Proof of history (PoH)

Proof of history is a time-based consensus model pioneered by the Solana blockchain. It addresses a flaw in PoW systems: resources spent by validators to agree on the time and ordering of transactions. PoH implements an internal clock functionality based on cryptographic proof to enable near-instant processing and transaction finality. Solana is the only known public blockchain that utilizes this consensus model, although the project supplements it with PoS and other technologies to ensure scalability.

What this means for investors

Consensus models provide a metric for evaluating a project’s long-term potential. The most viable networks ideally have a clear path to sustainability and scalability while maintaining a reasonable level of decentralization. Although newer consensus models may emerge, the most widely-adopted implementations will continue to play a vital role as the industry advances toward mainstream adoption.

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Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

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