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Beginner’s guide: Blockchain Consensus Mechanisms

By Tokenize Xchange
May 28, 2021

In this short series of articles, we’ll dive deeper into the intricacies of Blockchain, break down some of those much-feared short forms, and translate that fancy ASDFGHJKL jargon into everyday examples. We’re here to uncomplicate the complicated. Let’s explore an easy guide on Blockchain Consensus Mechanisms with Tokenize Blog!

Blockchain consensus mechanisms

Last week, we gave our readers a simplified explanation of Blockchain – a decentralized digital system that enables transactions to be made without an intermediary. Easy peasy! But Blockchain IS a complicated technology. It’s a constantly evolving landscape with endless possibilities. Add a sprinkling of cryptocurrencies, NFTs (non-fungible tokens), and Defi (decentralized finance) into the mix and you’ll fall into a rabbit hole. Ciao!

>>>Read more: Beginner’s guide: What is Cryptocurrency?<<<

But don’t sweat! We’re here to guide you along every step of the way. In centralized systems, there’s a decision-maker constantly regulating, authenticating, and maintaining the transactions/records. Think banks, government agencies, etc. Hence its ‘centralized’ nature. But how do we agree that a transaction is actually legitimate in a self-regulating and decentralized system without a central authority?

Blockchain consensus explain

We’re here to uncomplicate the complicate

Blockchain Consensus Mechanisms

KPMG defines it as “ a method of authenticating and validating a value or transaction on a blockchain or a distributed ledger without the need or trust to rely on a central authority.”

These Blockchain consensus mechanisms (sometimes known as consensus protocols or algorithms) are critical measures that guarantee the synchronization of the nodes (the devices connected to a blockchain like supercomputers) and the legitimacy of the transfers in that network.

Simply put, before a transaction can be added to the blockchain, it has to be authenticated first. But in a decentralized system with no central authority, the only way to do it is by coming to a consensus, or the nodes in the network ‘agreeing’ that a transfer is valid.

Think of it as a form of digital governance that replaces an intermediary’s responsibility of authenticating a transfer.

>>>Read more: Cryptocurrency Market Cap<<<

Consensus protocols enable transactions to be validated in a decentralized system. Let’s uncomplicate and breakdown three of the most common Blockchain consensus mechanisms:

Consensus mechanism Blockchain explained

Consensus protocols enable transactions to be validated in a decentralized system

1. Proof of Work (PoW)

  • The very first blockchain consensus mechanism and hence adopted by Bitcoin — the very first cryptocurrency.
  • When there’s a transfer that needs to be validated, nodes (supercomputers) submit a “proof of work” by solving a complex mathematical equation to verify it so that it can be added to a block in the chain (This is also known as ‘mining’). Miners (people behind the supercomputers) are then rewarded with cryptocurrency for their work.
  • Unfortunately, it takes a HUGE amount of electrical energy to solve the mathematical problem — Bitcoin consumes more energy than the UAE, which brings us to our next consensus mechanism.

2. Proof of Stake (PoS)

  • This mechanism addresses the PoW energy consumption problem by eliminating the need to solve complex equations.
  • Rather, validators (no more mining)are randomly chosen to validate transfers as long as they have a stake (They need to own an amount of that cryptocurrency) hence the term “proof of stake”. Validators then earn a cut of the transaction fee.
  • It’s said to be a ‘greener’ mechanism.

3. Delegated Proof of Stake (DPoS)

  • Essentially the same as PoS but in a way more ‘democratic’
  • Instead of a random selection, users (stakeholders) can vote for the delegates they want to validate the transactions.

Still mind blown? So are we! But check out this simple infographic by Euromoney Learning.

Proof of Stake Blockchain

These are simplified explanations of just three Blockchain consensus mechanisms. Remember, Blockchain is an emerging technology so new things are popping up every day. But hopefully, you’re a little less confused about how transfers are authenticated in a decentralized network. See you in the next article on Tokenize Exchange Beginner’s guide!

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Disclaimer

Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk.

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Beginner's guide