Blockchain – Consensus Mechanisms in Comparison
What are consensus mechanisms and why are they so important in a blockchain? We introduce three common consensus mechanisms and how they compare to each other.
What is a Distributed Ledger?
To understand why the consensus mechanism in a blockchain is so important, the term „distributed ledger“ must first be clarified.
Distributed ledgers emerged together with blockchains. These are tamper-proof databases that are stored redundantly in the form of a distributed ledger on all computers in a network. All transactions are backed up chronologically in this ledger. The distribution of this ledger across computers in the network is one reason why blockchain technology is considered secure, transparent, and immutable.
The consensus mechanism is used to verify (transaction) data uploaded to the blockchain in the form of new blocks. The verification requires the consent of the majority of all participants in the network, in other words, a consensus among the participants.
Proof of Work
The Proof of Work (PoW) consensus mechanism is used by the first cryptocurrency Bitcoin. The Consensus is achieved through the solving of cryptographic puzzles by so-called miners. The first miner who finds out the solution sends it to the network, where the other miners check the solution.
Once the majority agrees with the solution, the new block can be queued. The miners‘ work is compensated in the form of bitcoin. The share of computing capacity in the entire network is decisive for the probability of successfully „mining“ a block. Crypto mining is heavily criticized in various jurisdictions – among other things because of the high energy consumption required for mining.
| Security |
very safe The more miners and thus mining power there is, the more expensive it becomes to control 51% of the network and thus manipulate it. |
| Speed | slow |
| Costs |
high transaction costs high costs for hardware to perform mining |
| Energy Efficiency | Mining = very resource-intensive as a high computing capacity is required |
| Specific Benefits | well established, very well protected by hacking attacks |
| Specific Diasadvantages |
due to high energy consumption discussions about crypto mining bans in different jurisdictions danger of controlling large mining pools |
Proof of Stake
To achieve consensus in the network by means of the Proof of Stake (PoS) mechanism, the stake of the individual participants is crucial. The stake of a participant is the number of tokens that a validator holds in the network. The larger the proportion of „staked“ tokens, the higher the probability that this participant will be selected to validate the next block.
A significant difference to the proof of work mechanism is that the validator is picked by a random algorithm. The staked tokens can be thought of as winning tickets: The more tickets a validator has, the more likely it is to be chosen.
This consensus mechanism also rewards work in the form of tokens from the network. If the validator misbehaves, he is blasted („punished“) and consequently loses his stake.
| Security |
safe less secure than PoW due to the smaller number of computers that have control over network |
| Speed | transaction times much faster than PoW |
| Costs |
low transaction fees no special hardware needed allowing access to more people |
| Energy Efficiency | more resource-saving, because less power is needed to maintain the network (because fewer computers are required) |
| Specific Benefits |
No possibility of economics of scale since investments are always made directly in the network tokens and there is no volume discount and thus no advantage for large investors (compared to Proof of Work, where this possibility exists when purchasing many miners) |
| Specific Diasadvantages | risk of large node operators and oligopoly stake concentrations |
Delegated Proof of Stake
This consensus mechanism is a further development of Proof of Stake.
With the classic Proof of Stake, anyone who holds tokens in their wallet can be considered as a validator. With Delegated Proof of Stake, the possession of a token corresponds to a voting right. The more tokens, the more the voting right weighs.
Only a proportion of the participants receive the reward for their work in the form of network tokens. These additional rules in the selection process are intended to make the consensus mechanism more democratic.
Two roles are distinguished: validators and delegators. The validators take on the task of validating new blocks. In addition to the financial power of the witness (i.e., the share of the stake), what counts more is the trustworthy execution of the work. The delegators verify the security and correctness of the network.
However, one problem with this electoral system is participation: if there are many wallets with only a small number of tokens, it is difficult to carry out a representative vote unless a high voter turnout can be detected. Since there are no specific access restrictions in DPoS, there also exist many participants who do not have the technical knowledge or time to participate in the consensus.
These participants can give their votes to a trusted validator and are also rewarded proportionally in the form of rewards.
| Security |
safe lower access restrictions > more subscribers > more decentralisation > more security |
| Speed | transaction times much faster than PoW |
| Costs |
low transaction fees no special hardware needed allowing access to more people |
| Energy Efficiency | more resource-saving because less power is needed to maintain the network (because fewer computers are required) |
| Specific Benefits |
voting system provides more security and integrity lower entry requirements even for „small“ opportunities to participate in consensus strengthen integral validators and benefit from rewards |
| Specific Diasadvantages |
Risk of „validator cartels“ number of validators limited |
Conclusion
In addition to the consensus mechanisms mentioned above, there are also many more in the market, but PoW, PoS, and DPoS are the most represented.
The use and proliferation of PoS and DPoS in particular is likely to gain in importance in the coming years as criticism of PoW increases. The different consensus mechanisms each give a solution approach to make the underlying blockchain decentralized, secure and scalable.
Telekom MMS operates as an infrastructure provider for various public blockchain networks, supporting their decentralization, stability and security. The Deutsche Telekom subsidiary currently provides validators for twelve networks, including Ethereum, Polkadot, Celo, Flow, Q, Polygon, Energy Web, The Graph, Fetch.ai, Aleph Zero und MultiversX.
