Cryptocurrency Consensus Mechanisms Explained

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A key aspect of cryptocurrency is that each transaction must be verified by a number of independent third-parties that must reach a consensus on before it can be added to the blockchain. The variety of mechanisms these various blockchains use has grown in recent years, to the point where a new one seems to be coming out every month. In this article we break down the most common ones so you can catch up with this ever-expanding field.

Proof-of-Work (PoW)

The original consensus method, as set out in the Bitcoin whitepaper in 2008. This verification method involves miners using hardware to verify each transaction and getting rewarded for doing so. PoW is expensive, requires a physical mine and is not good for the environment.
Examples: Bitcoin, Monero

Proof-of-Stake (PoS)

PoS involves investors ‘staking’ a number of coins in the project’s wallet and leaving the wallet running. The computer the wallet is running on helps verify transactions and gets a reward for doing so. The investor can un-stake and sell these coins whenever they like.
Proof-of-Stake is much less energy intensive and requires nothing more than a device and an internet connection, but it requires locking up coins and needs the device to be left on 24/7 for maximum benefit. Running a masternode, which involves locking up a larger number of coins, increases your reward.
Examples: Decred, Ethereum (coming)

Delegated Proof-of-Stake (DPoS)

DPoS involves investors voting on who gets to validate the blocks, with generally around 21-100 elected delegates active at one time. Delegates can get voted out if they don’t deliver blocks on time. Unlike with PoW and PoS, block creation is a collaborative rather than a competitive act, with production coordinated and timed between the delegates. This partial centralization allows for very quick block creation, but angers purists who favor full decentralization.
Examples: EOS, BitShares

Proof-of-Authority (PoA)

PoA involves only approved accounts verifying transactions. Other lower nodes refer to these authority nodes for the ‘truth’ of the transactions. This results in a fast but highly centralized system that is best suited to private blockchains.
Examples: VeChain, POA.Network

Proof-of-Weight (PoWeight)

The ‘Weight’ aspect in PoWeight relates to a value other than your stake to determine your odds of receiving the next block reward. This is usually directly related to the project in question and varies from project to project, although the principle is the same as PoS.

Directed Acyclic Graphs (DAGs)

These bad boys are said to be the blockchain killers before it’s even come to life. Including Tangle (IOTA’s blockchain), Hashgraph, Block-lattice (Nano’s blockchain), and SPECTRE, these superfast protocols handle transactions mostly asynchronously, meaning a theoretically infinite number of transactions per second, hence the buzz about them. However, IOTA has been slated by security experts due to systemic flaws in its design, and this is a mostly untested technology that is a decade behind PoW in its real-life use.

You Pay Your Money…

There is no right and wrong consensus algorithm, as each has positive and negatives, and each project must decide for themselves what fits their long-term goals. Ethereum’s’ switch from PoW to PoS indicates that PoW may be slowly drifting out of favor, but as long as Bitcoin is around it probably won’t be going anywhere. DAGs may steal the show, but they have months of testing ahead before they’re truly ready.
In the end it comes down to what you want out of a cryptocurrency – some will be bothered by the consensus protocol a certain coin employs, and some won’t.