Blockchain Consensus Protocols that You Need to Know

In order to keep the environment decentralized, a blockchain needs to have a certain protocol. When it comes to the decision-making process, what are the types of protocols that you need to know?

Cryptocurrency may be the future of money, but to be that mainstream, the users must understand how crypto works and the technology behind it. Blockchain is the digital platform that stores and supports all transactions and activities related to cryptocurrencies like Bitcoin, Ethereum, etc. It was designed to create faster and efficient ways to send, receive, and track orders by using secure data.

Blockchain may seem complicated, but its core concept is actually pretty simple. In nature, blockchain is operated in a decentralized manner. There is no single entity that has the right to own or control the blockchain. Even the famous yet mysterious Bitcoin founder Satoshi Nakamoto has no power over the community. This is why a consensus among all participants in the network is highly essential in the decision-making process. It can ensure that all participants abide by the rules of the network and that no one can take control of the entire system.

If you want to dig deeper into how blockchain operates, you need to understand the various protocols and how they can affect network performance. The differences between blockchain protocols are rather significant, so each protocol will offer specific benefits and downsides that you will need to consider.

Brief Introduction to Blockchain Protocol

A protocol is a set of rules. In computing, protocols define how data must be structured to be accepted into a system and how the data is to be transferred between different computer systems. In practice, protocols have been used for a long time, even before the World Wide Web was ever invented. They are fundamental to how the internet works, governing the transmission of data from one computer to another. Bitcoin protocols are similar because they enable server nodes to exchange information over the internet so that all systems in the network can work properly.

The blockchain consensus protocol can ensure the validity of online transactions, eliminate the possibility of double waste, and ensure that no participant cheats. Simply put, the protocol can prove that digital money could be exchanged safely on the internet. Following Bitcoin, thousands of new digital currencies have emerged with their own protocols.

1. Proof of Work (PoW)

Proof of Work is the oldest blockchain protocol, so it is often used as the prototype for other modern consensus protocols. It is perhaps the most commonly known protocol because it is used by leading cryptocurrencies like Bitcoin, Ethereum, and Litecoin.

Proof of work is necessary to add new blocks to the network. The players who execute this system are called miners. A new block is created each time a miner comes up with a winning proof of work, usually every 10 minutes.

To create a new block, miners must do a particular task and prove it. To be precise, they must guess a matching computation, which involves finding a hash that matches certain requirements. The more computations they solve, the more coin they are likely to get. The first person to solve it will get the opportunity to add a block to the chain. Whoever wins will be rewarded with cryptos. Then the blockchain creates a new value that miners must hash, and the race starts all over again.

Proof of work is an excellent system because anyone can join the network and participate. It is also applicable in an environment where participants do not trust each other. However, finding the winning proof of work is difficult and can only be done using a specialized computer, which consumes quite a lot of power. Therefore, the cost of computing resources can be expensive.

2. Proof of Stake (PoS)

Proof of stake is another pioneer of blockchain protocols. It emerged as an alternative to the existing proof of work as it requires less energy and offers higher efficiency, though there's debate about this.

The technical feature of this system is the absence of complex calculations. Instead of making it a competition among participants, the system makes the participant pledge their crypto assets and wait to be ed to create a new block. The participants in proof of stake are called validators. Validators should tie up some of their coins so that they can't use them when participating in the proof of stake process. Similar to miners in proof-of-work, they will also be rewarded for taking part in this system.

To add a new block, the algorithm will one validator, based on the amount of stake that they have. Therefore, the more money they have, the higher the chance to win additional blocks and get the rewards. The idea is that the higher the digital money they own, the less interest they have in manipulating the validation process. Some of the blockchains that use proof-of-stake are NXT, Tezos, and soon Ethereum.

The advantage of proof of stake is that transactions are relatively fast compared to transactions on the Bitcoin network, but some people are still skeptical of this system. They point out that validators with high stakes are more likely to be chosen, so it can create an oligopoly among participants. It can also be said that the rich are getting richer and they will have more control in the blockchain, which would potentially steer blockchains back to the centralized system.

3. Delegated Proof of Stake (DPoS)

Delegated proof of stake is a popular evolution to the regular proof of stake system. The base concept is basically similar to the proof of stake where blocks are validated by ed validators or delegates. However, in DPoS, the delegates are chosen based on votes instead of algorithms. The blockchain community can vote on delegates by pooling their tokens into a staking pool and linking it to a particular delegate. The value or weight of each vote is determined by the sum of the assets of the voters.

One of the benefits of this protocol is that it's very flexible as coin holders can vote for delegates at any time. It also makes the transaction incredibly fast; new blocks would appear every 1-2 seconds. It is also relatively fairer since the chosen delegate shares tokens with its voters. EOS and Bitshares are examples of blockchain that use this system.

4. Proof of Activity

Proof of activity basically combines PoW and PoS protocols. It means that participants can either mine or lay down a share to validate the blocks. Therefore, this protocol can balance out the miners and the ordinary members of the network. Decred is an example of a blockchain that uses this system.

5. Proof of Location

Proof of location requires users to secure a certain GPS location to authenticate themselves on the network. What's great about it is that this protocol relies on BFT beacons, which are able to record geolocation and time markers in the network. It prevents disturbance and scams in the system. FOAM and Platin blockchains use this type of protocol.

6. Proof of Importance

Essentially, this protocol uses a similar algorithm as PoS. What makes it unique is it uses different metrics to evaluate nodes. Said metrics include the number of tokens in the account, account operations activity, and the time spent by the account holder on the blockchain network. The first metric plays a vital role in the rating for verifying transactions, while the second and third parameters merely help to determine the "value" of the account. NEM blockchain is an example of this system.

7. Proof of Elapsed Time

This protocol is more or less similar to PoW but uses less electricity to operate. Instead of asking miners to solve a cryptographic puzzle, the algorithm works in a Trusted Execution Environment (TEE), such as Intel Software Guard Extensions (SGX). The system guarantees that the blocks are generated randomly and without any necessary efforts.

8. Proof of Authority

This protocol is similar to PoS and DPoS, which means that validators can secure the blockchain and produce new blocks. New blocks are created only when a supermajority is reached by the validators. By identifying pre-ed authorities, this system becomes centralized. Thus, it suits private blockchains and consortiums like banking or insurance companies. Here, the identity of validators is shown publicly, so with their identity at stake, they will more likely to act in the best interest of the network. This system is used in several blockchains like Kovan, Rinkeby, Giveth, TomoChain, Rublix, Swarm City, Colony, and Go Chain.

9. Proof of Burn

In this system, miners would have to send coins to an unspendable address and eventually "burn" them as they can no longer be accessed and spent again. The more coins burnt, the higher the chance to mine the next block. Because all transactions are written in the blockchain, there's valid proof that the coins are entirely inaccessible. The miner is considered reliable as they are willing to sacrifice a number of coins for a lifetime privilege to mine in the system. Slimcoin and Counterparty are some instances of this protocol's users.

10. Proof of Capacity or Proof of Space

This system is somewhat similar to PoW but with several differences. Instead of doing certain tasks to verify a new block, the work is done through a process called plotting. Plotting involves the act of producing special files called "plot files" which store a large number of precomputed hashes. The result of this process is later used to verify the block.

11. Proof of Stake Time

What's great about this protocol is that it can provide an almost instant and free transaction from all across the globe. It basically has the efficiencies of PoS and is able to increase the distribution and security with a certain chance to find proof and receive a reward. This can be achieved through a cyclic time-acceptance function that is equivalent to the coins held and corresponding to network strength. You can find this system in VeriCoin Blockchain Explorer.

12. Proof of Brain

Proof of brain is a scalable blockchain protocol for openly accessible and immutable content accompanying a fast and free digital token called STEEM, which helps people earn money by using their brains. STEEM is a way for creating unceasingly growing communities where the members can add value through the built-in rewards structure. This system is used in a public publishing platform called Steemit from which any internet application can share data and reward those who have contributed.

13. Proof of Physical Address or Proof of Bank Account

Proof of physical address is a dApp that essentially connects a real-life physical element with blockchain technology. The goal is to verify an individual's identity. To put it simply, the system connects a person's physical address with their wallet address. So every time a user verifies their card in the dApp, the protocol will refresh its record and use the ERC780 congenial contract to add the new information. This protocol is used in ConsenSys and POA Network.

To sum up, all participants in a blockchain network need to reach a consensus in order to verify transactions. Consensus protocols are crucial in a blockchain network as they can ensure that all transactions in the blockchain are valid and that everyone complies with the rules. It creates a transparent environment in the decentralized network of a blockchain. Each protocol is unique so it may not be suitable for all projects. Therefore, it is important to learn about these various protocols to know the pros and cons of each type before you decide to participate.