Last updated on July 5, 2022
Consensus protocols are a term used to describe the process of achieving validity on a decentralized network. These systems are what confirm new transactions and maintain records of the past. As such, they are a crucial component of every blockchain network.
There have been a lot of changes in the way decentralized networks remain secure since Bitcoin first introduced the world to blockchain technology 13 years ago. At that time, the Proof-of-Work consensus mechanism was revolutionary for many reasons. It was the first currency system in the world to solve the notorious double-spend issue.
Double Spend Conundrum
The double-spend issue refers to a hacking technique in which a person sends two transactions using the same coins at nearly the same time. The goal of the attack is to have the second transaction process before the first has been confirmed.
Notably, Bitcoin solved this problem by adding a timestamp to its PoW hashing algorithm. The addition of the timestamp made it impossible to fool the system because there would always be a slight delay in transaction times.
Since then, developers have conceived many new ways to provide security against these and other attacks. Notably, one of the main reasons that the blockchain sector has matured so quickly is the introduction of new and more efficient consensus protocols. Here are some of the top consensus mechanisms in use today.
Proof-of-Work (PoW)
The PoW consensus algorithm was the first and most widely used consensus protocol. This system requires network nodes, also known as miners, to validate the state of the network. To accomplish this task, they continually monitor the state of the blockchain, seeking out new transactions to validate. These transactions are placed into blocks and then added to the blockchain.
Notably, every node validates the network state, but only one gets to add the next block of transactions to the blockchain and receive the reward. To be chosen as the recipient of the PoW reward in the Bitcoin network, you must be the first miner to solve a complex mathematical equation.
SHA-256
This equation is so difficult that your computer deduces that it’s faster to make random guesses than compute the equation. In Bitcoin’s blockchain, this mathematical equation is called SHA-256. The SHA stands for Secure Hashing Algorithm.
The answer to the SHA equation must begin with four zeros to be valid. Notably, whenever the network seeks to increase the mining difficulty, the equation will simply require more zeros at the front of the SHA-256 equation’s answer. This strategy makes it easy to keep the network’s block approval times at around 10 minutes per block.
Disadvantages of PoW Networks
It’s vital to understand that there is no perfect consensus algorithm. Each protocol has its advantages and disadvantages. In the case of PoW networks, some concerns should be discussed. These networks are notoriously power-hungry. For example, Bitcoin’s network uses more electricity than some of the world’s most industrialized nations.
This power consumption has led to some public backlash from ecologists and others concerned with the excessive use of resources. Bitcoiners responded by focusing more efforts on renewable energies. Currently, around 65% of the networks energy comes from renewable sources.
At one point the debate got so heated that Elon Musk, the CEO of TESLA motors labeled Bitcoin’s energy consumption level as “insane.” Today, politicians continue to use Bitcoin’s energy consumption as a point of concern when discussing cryptocurrencies.
Slow
Another reason that PoW networks have seen competition gain ground is that they are slow. These systems require a lot of nodes to complete a multitude of processes to validate transactions. The entire process can be slowed further when the network becomes congested.
There was one point in Bitcoin’s 2017 break-out Bull Run when the network experienced so much congestion that it took over 24-hours for transactions to complete. The backlash from these delays resulted in many merchants no longer accepting cryptocurrency as payment. It also led to the development of the Lightning Network and the integration of the SegWit protocol as a way to prevent the same issue from becoming a problem in the future.
51% Hacks
Another problem that smaller PoW networks must watch out for is 51% hacks. The technical structure of a PoW network means that at least 51% of the network hashing power must remain accurate to keep the blockchain valid. In large networks like Bitcoin, there are enough nodes to ensure this remains the case.
However, in smaller networks, groups can take over the network hashing power and alter the blockchain if there aren’t enough nodes to make the process improbable. The Ethereum classic blockchain suffered an attack of this nature as it was significantly weakened following the Ethereum hardfork.
It’s very expensive to participate in the most popular PoW networks today. Take Bitcoin for example. The introduction of high-powered ASIC (application-specific integrated circuit) miners changed everything. These devices are thousands of times more powerful than GPU card-based miners. They are also much more expensive. Consequently, it’s now more costly than ever to mine PoW cryptos like Bitcoin.
Other Top PoW Networks
There are many popular PoW networks in use today. Bitcoin is still the most popular and valuable PoW network in operation. This project remains an innovative force in the market. Developers and users continue to expand its use case scenarios and improve its capabilities via second-layer protocols like the Lightning Network. Here are some other top-performing PoW networks every trader should know in 2022.
Ethereum
The second-largest PoW network in operation today is Ethereum. Ethereum made some alterations to its PoW mechanism to improve scalability and to account for the network’s programmability versus Bitcoin. Unlike Bitcoin, which was built to operate as a currency, Ethereum is a programmable decentralized ecosystem.
Develops can create immersive Dapps to empower users. These applications operate via smart contracts. Smart contracts are protocols that execute automatically when certain criteria are met. They enable blockchain networks to function autonomously and without human intervention.
Ethereum was the first network to make smart contract programmability a standard feature. It is generally considered the first second-generation cryptocurrency as a result of its innovative approach that changed the market forever. Today, nearly all blockchains provide smart contract programmability thanks to the success of Ethereum.
Notably, Ethereum is still the largest Dapp and DeFi network in the market. However, this growth has not come without a cost. The network currently suffers from high gas fees due to congestion. As a result, it’s become more expensive to use Ethereum. This scenario has led the network to start migrating over to a PoS system.
Dogecoin
Dogecoin is a fun project that launched as a joke between Redditors. The protocol features a cute Shiba Inu meme that was popular at the time. The developers behind the project never expected it to take flight and become a major force in the market. They simply wanted to make a light-hearted version of Bitcoin to share with friends.
Dogecoin may have started as a joke but today it’s a viable project that has received support from some of the most well-known tech entrepreneurs in the world. When asked about the creation process, the developers stated that it only took three hours to make Dogecoin. They went through Bitcoin’s coding and converted instances of Bitcoin to Dogecoin.
Miner Changes
They also altered the name of miners to diggers. One important change that they made to Dogecoin was to shift the PoW algorithm. This maneuver was made to prevent powerful ASIC miners from centralizing the project like Bitcoin. The maneuver was a success at first. However, it wasn’t long before ASIC Dogecoin mining rigs entered the market.
One of the coolest things about Dogecoin is its humanitarian efforts. The project has grown from a light-hearted joke to a real source of good. The network participated in some amazing fundraising events. For example, they funded a clean water initiative in Kenya and an autistic support animal project. They even sent the Jamaican bobsled team to the Olympics one year.
Dogecoin is a project that experienced rapid growth at times. The protocol recently got some love shown to it from Elon Musk, one of the richest men in the world. He even stated that his name would now be the “Doge Father” in a now-famous tweet that sent the coin’s value skyrocketing.
Litecoin
Litecoin is one of the oldest projects in the crypto space. The coin came out shortly after Bitcoin entered the market. Its creator wanted to make a “silver to Bitcoin’s gold.” For many years, Litecoin fulfilled this role perfectly. It was cheaper and faster than Bitcoin.
Interestingly, Litecoin also served a vital role in the implementation of new technologies. Many people are surprised to learn that Litecoin was the first network to integrate the SegWit protocol. This system separates the transactions ID from other data during the computational process. This strategy improves scalability.
It also led to the Lightning Network integration, which was first deployed on Litecoin’s blockchain. The Lightning Network is a second layer protocol that expands Bitcoin functionality and scalability considerably. The protocol integrates private payment portals to remove transactions from the mainnet.
Users can conduct unlimited transactions within these portals for much cheaper than on the Bitcoin blockchain. When they close the channels, all the transaction data is posted to the blockchain which reduces data transfer.
Proof of Stake
The Proof-of-Stake consensus mechanism is the second most common type of network validation in use within the blockchain sector. The PoS mechanism was built to overcome some of the shortcomings of PoW systems. For one, it does away with the use of miners. This removes the need to compute large equations, which reduces the network’s electricity demands and overall carbon footprint.
PoS networks place the validity of the system in the hands of regular users. In a PoS network, users stake their tokens in network wallets to keep the network valid. Staking is a term that refers to locking your cryptocurrency into a smart contract. This approach democratizes the security of the network because it eliminates the need to purchase expensive mining rigs.
Network Participants
In most PoS networks, you need to meet minimum staking requirements in terms of total coins staked and time-locked to be eligible to secure the platform. The strategy ensures that only those with a vested interest in the network handle its security. Think about it, to corrupt a PoS network, you would need to purchase a majority of the project’s coins first. At that point, you would lose the most.
Notably, PoS networks include NXT and NEO. Ethereum, the world’s second-largest PoW blockchain is converting to a PoS mechanism. This update will provide the network with more scalability and faster responsiveness.
Disadvantages of PoS Networks
PoS networks bring some disadvantages as well. One of the biggest issues that people have with PoS networks is their minimum staking requirements. For example, if you plan to stake on the Ethereum 2.0 protocol, you will need to lock up 32 ETH. That’s a lot of money that the average trader will be unable to obtain for many years. The alternative is to leverage a staking pool, but that leads to centralization which can weaken the network’s security.
Another issue that you should be aware of is that PoS networks are not as proven as PoW systems. Bitcoin has functioned for 13 years without major incidents. PoS networks are much smaller and have been in operation for fewer years. The extra years could reveal unforeseen issues or weaknesses in these networks. However, it should be noted that PoS networks have been very secure to date.
Centralization
Another problem to notice in PoS networks is centralization within the community. Large stakers can influence community decisions and protocol upgrades. This situation becomes a major problem when discussing staking-based community governance systems. Developers and other whales can leverage their added tokens to pass measures that the community may not agree with for whatever reason.
Lock-ups are a big issue for many people as well. When you stake your tokens, you lock them into a smart contract for an agreed time. During this time, you can’t use these tokens, or unlock these funds without penalties.
In many networks, you lose all of your rewards and secure additional fees. In some networks, you can’t access your staked coins until the period ends. This approach makes staking better for those who want to put their tokens to work for them.
Top PoS Networks
The rise of PoS networks has changed the market forever. These protocols are more flexible and scalable than PoW networks. Here are some of the PoS networks every trader should know in 2022.
Binance Coin (BNB)
The Binance Coin project began in 2017. It was one of the first exchange tokens to become popular. Binance didn’t stop there and they have continually expanded the token’s capabilities and even network. The world’s largest exchange introduced the Binance Smart Chain as part of its strategy to support DeFi capabilities.
The launch of the BSC provided the Binance Coin with a host of new functionalities and capabilities. This new version of BNB was faster and had lower transaction fees. It was specially built to support the Binance DEX and other next-gen features like staking and farming protocols.
Cardano (ADA)
Cardano is another popular PoS network that continues to see growing adoption. It was one of the very first PoS networks to launch in the market. Notably, one of Ethereum’s co-founders spearheaded Cardano’s creation.
Like Ethereum, Cardano supports full smart contract programmability. It provides lower fees than Ethereum and faster network response times. As such, it continues to be a popular alternative. Cardano differs from other networks because it leveraged an academic approach to blockchain creation.
The network was built utilizing processes like peer review. This research-reliant approach makes the network very secure. It has also helped the project garner a lot of adoption from the academic and research sectors. Today, Cardano supports a selection of decentralized applications,
Avalanche (AVAX)
Avalanche is another programmable blockchain ecosystem that uses the PoS consensus algorithm, to remain valid. Avalanche differs in the fact that it leverages multiple blockchains as part of its approach. There is the main blockchain for validation, a programmable and Dapp layer, and an Ethereum compatible onboarding chain. Together these chains provide improved capabilities.
The concept of using multilayered blockchains is a popular one. By separating the smart contracts from the validation process, a blockchain can avoid most scalability concerns. As such Avalanche is very scalable and secure. The protocol continues to see growing migration from Ethereum, as it supports the full Ethereum toolset and can seamlessly run EVM instances with fewer fees.
Delegated PoS (DPoS)
The Delegated Proof-of-Stake (DPoS) consensus mechanism is the natural evolution of the PoS approach. This form of consensus was developed by Daniel Larimer in 2014. A DPoS system takes the best aspects of a PoS network and improves on them in a way that reduces energy consumption and improves transaction throughput.
Delegated PoS is similar to PoS networks in that it doesn’t require miners. This means that the network has a small carbon footprint which adds to its overall sustainability. When compared to PoW networks and even PoS networks, DPoS systems are more efficient. To accomplish this task, DPoS networks limit the validation processes to special nodes called validators.
Depending on the system, validators are nominated, voted, or chosen. The most common version of a DPoS enables users to delegate their tokens to a particular person who they feel would be a great validator. The validators can then vote on behalf of those who delegated their tokens.
Additionally, Validators earn rewards for securing the network. These rewards are then split between the delegators based on their percentage of contributions to the stake. To become a validator, you need to meet certain criteria. In most instances, there are minimum staking requirements as well as a reliable data connection and uptimes.
Disadvantages of DPoS
One of the biggest complaints about DPoS blockchains is that they are more exclusive. Some of these protocols have a very limited class of validators. This strategy means that it could be very difficult or even impossible for you to ever become a validator directly. However, you can still earn returns by delegating your tokens to validators.
Top Delegated PoS Networks
DPoS networks are usually more advanced than PoW networks. These systems have found extensive use in DeFi communities. DPoS provides the right balance of scalability and efficiency to provide DeFi ecosystems with the features required. Here are some of the top DPoS networks making waves in 2022.
META 1
The META 1 stable coin is a perfect example of a next-gen DPoS network in action. The METANOMICs DeFi ecosystem is an all-inclusive protocol that includes a highly responsive DEX. This non-custodial trading protocol supports transactions throughput on par with NASDAQ. To accomplish this task, the DEX leverages the scalability of the fourth-generation DPoS META 1 blockchain.
META 1 differs from other stablecoins in that it derives value from a basket of gold-related assets. This technical structure gives it more stability and helps users to avoid the current inflationary woes plaguing fiat pegged projects. The META 1 stablecoin also employs value-locking smart contracts to protect traders from pump and dump schemes.
There are multiple ways to secure returns when using the META 1 coin. You can stake your tokens and secure low-risk returns. The EMTA VAULT feature pays out 10% APY on all savings which is more than your local bank has ever offered. Notably, these rewards are paid out in META 1 coins that can be added to your savings to produce future returns.
META 1 users enjoy an easy onboarding process as the network supports direct fiat to META 1 coin transfers via the Onramper portal. Once you have META 1, there are a lot of features to help you generate wealth. You can even spend your crypto like fiat currency anywhere that accepts VISA using the network’s debit card service.
EOS
EOS is another Ethereum competitor that has seen continual adoption since its launch. The network raised eyebrows during its 2017 launch. The blockchain is unique in that it had the support of the blockchain incubation and investment firm Block.One. The firm continuously develops the EOSIO network and EOS. This support helped the project secure funding and technical skills from reputable parties in the market.
EOS leverages a DPoS consensus mechanism to provide some huge advantages to the market. For one, the system offers users zero gas fee transactions. Free transaction capabilities make EOS one of the best options for developers today. According to company documentation, EOS is capable of 10,000 transactions per second.
The network is scalable and secure. It was designed to improve on many of the shortcomings of Ethereum. As such, it includes more developer tools, flexibility, ad lower fees. The network supports ICOs (initial coin offerings) and other token launch strategies. It’s also self-sustaining with the network utilizing very little electricity compared to its competitors.
Hybrid PoW/PoS
Recently, there has been the introduction of hybrid consensus mechanisms. The goal of these protocols is to combine the superior security of PoW systems with the scalability and responsiveness of PoS networks. In most instances, these protocols introduce a special node that handles the final approval of transactions via a PoW mechanism.
Decred’s Proof of Activity is a prime example of a hybrid consensus mechanism in action. This protocol combines multiple aspects of PoW and PoS uniquely. For one, the mining process is similar to PoW in that miners compete to add the next block of transactions to the blockchain. Once a transaction is validated, it’s broadcast across the network.
The system then takes these mined blocks and combines them with 3-5 randomly selected PoS participants. From there, the remaining PoS users vote on the validity of the blocks. The system is set up to not recognize a new block as valid until it includes at least 3 votes. Consequently, the PoS verification layer significantly boosts the network’s security and resistance to attacks.
The PoS nodes are also responsible for block voting, voting on changes to the consensus rules, and voting on project-level management. In the Decred network, this is done leveraging the Politeia Proposal System. This is just one example of some of the cool ways developers have managed to combine these systems.
Disadvantages of Hybrid PoW/PoS
There are some disadvantages to hybrid blockchains like all systems on this list. For one, these networks are still very new, and many can be complicated when compared to single consensus networks. Hybrid blockchain requires more interactions than single consensus systems as well. However, this scenario doesn’t mean that they cost more to operate.
Top Hybrid PoW/PoS Networks
There are a growing number of blockchains adopting hybrid consensus strategies. These strategies are as diverse as the market. Developers continue to come up with unique ways to blend varying consensus systems to provide scalability and security on the blockchain. Here are some top hybrid PoW/PoS networks.
Solana
Solana is an example of a hybrid PoS/PoS system that is in use today. The network leverages a PoW consensus system called the Proof-of-History to remain valid and improve security. It also uses a PoS system to execute smart contracts and operate Dapp transactions. Solana can process more transactions than its PoS competitors with reports demonstrating +65,00 transactions per second.
Solana charges lower fees for transactions and the creation of other tokens like NFTs (non-fungible tokens). The protocol operates as an open public blockchain alternative. Many of its features make it well-suited for day-to-day transactions, such as its ability to support micro-transactions and international money transfers.
Hcash
Hcash is another Hybrid network that provides scalability, sustainability, and security. The network operates as a decentralized, open-source, cross-chain protocol. The system leverages both miners and stakeholders during the block production process. Specifically, all PoW-generated blocks must be verified by PoS miners.
Proof-of-Authority
Proof-of-Authority is another consensus mechanism that was designed to improve on some of the issues of PoW networks. The system improves PoW networks in many ways. For one, it’s far less computational intensive which improves sustainability. Additionally, these networks have high fault tolerance and performance.
PoA networks are like DPoS networks in that only certain nodes get to validate transactions. In a PoA system, your position is based on identity as a stake. Using a reputation-based consensus algorithm makes sense for many applications where known and reputable validators are part of the network.
PoA systems are ideal for use in sidechains and second-layer protocols. They are commonly used in private chains as well, where the administrator requires more control over access. Also, OpenEthereum supports a Proof-of-Authority consensus engine to be used with EVM-based chains.
Azure
Azure is an enterprise-grade distributed ledger system and blockchain infrastructure provider. The protocol provides community governance and smart contract programmability to developers and businesses. The network is Microsoft’s venture into the blockchain space. As such, it has an incredible amount of support.
The Azure network uses the PoA algorithm to speed up transactions times while ensuring security. The Azure validation nodes are predetermined by Microsoft to ensure that they are top-notch operators. Today, Azure empowers businesses to improve supply chains, reduce fraud, and improve transaction finality.
Many More Consensus Mechanisms Today
These are just a few of the consensus mechanisms in use at this time. Some other noteworthy options include Leased Proof-of-Stake, Practical Byzantine Fault Tolerance (PBFT), Proof of Importance (PoI), Proof of Burn (PoB), Proof-of-Space, Proof-of-Capacity, and Proof-of-Authority. The list can go on forever as innovative developers seek the perfect balance between security and efficiency.
As you can see, the consensus sector continues to expand rapidly with new projects pushing the boundaries of this technology. Understanding what makes each different makes you a more informed trader and improves your ROI potential in the future. You can expect this sector to see more growth as new and more innovative networks enter service in the coming weeks. For now, there are quality projects that use every type of consensus mechanism on this list.