Consensus Mechanisms

  • admin
  • March 19, 2021
  • No Comments

The tolerance of failure to effect survival

At the rate things are going in the digital space, we can say that blockchain technology can claim to be the core of disruption. Its distributed ledger technology (DLT) caused a seismic shift in the way traditional systems are done especially in the field of finance. Bitcoin and other cryptocurrencies are use cases that cemented blockchain’s firm hold as the centrifugal force in the digital migration of so many industries and asset classes and the creation of novel services that vastly improved the conduct of business across borders.

Consensus Mechanisms

Among the successful initiatives that blockchain brought to the fore was the creation of consensus mechanisms whose applications were reasons for the proliferation of fintechs, DeFis, coins, tokens, and other crypto-based digital platforms. Three consensus mechanisms stand out as most commonly used among blockchain projects: Proof-of-Work (PoW), Proof-of-Stake (PoS), and Delegated Proof-of-Stake (DPoS). These mechanisms dispose off the problematic single point of failure and solve it by using the DLT in their systems so that all participating nodes get hold of the same database files updated simultaneously in real-time.

Proof-of-Work (PoW)

This consensus mechanism is behind Bitcoin. Miners in the network needed to show proof of their efforts as they are the computing power sources that maintain the blockchain and the verification of transactions. They also make the system immune against hacks or an attempt of a 51% attack. Bitcoin mining involves a competition wherein miners try to be the first to solve complex mathematical puzzles to verify transactions. Once it is correctly mined, the transaction is attached and chained to blocks of transactions complete with hash functions, thereby making all transactions immutable as it is transparent. The only thing about PoW is that it consumes a lot of electric and computing power to arrive at a consensus.

Proof-of-Stake (PoS)

This alternative mechanism works in a way that the miner has voting power according to the token percentage one holds. The more token value a miner has (stake), the greater chance that the miner will get to mine the next block. The PoS mechanism, though, allows a fair share of the mining activity by a random algorithm and several other factors in selecting the next miner. In general, the PoS ensures that miners are responsible for the project by staking their claims for the long term. Though low-energy consuming, the drawback of this mechanism is that it will spur the miners to keep the tokens and accumulate them instead of spending them to generate a healthy circulation.

Delegated Proof-of-Stake (DPoS)

This third type of consensus mechanism innovates the PoW wherein all token owners are empowered to select a group of validators to verify transactions on their behalf. This mechanism keeps the system healthy and decentralized as owners needed only to stake their claims. A centralized DPoS promotes high scalability with faster verifications and transactions. The downside of this mechanism is that holders may only contribute small stakes as their voting power may not necessarily be overrun by large stakeholders.

Conclusion

From the underlying protocol that gained Bitcoin the popularity and trust that it is enjoying today, many other consensus mechanisms and distributed ledger technologies are emerging to perform specific tasks for different projects. The acceleration of innovations brought about largely by the pandemic means that industries will inevitably seek the digitalization of their systems for seamless migration into the digital space. The fact that legacy financial firms, venture capital entities, major banks, and other technology companies invest huge amounts of money, resources, and personnel expertise into blockchains and DLTs that require consensus mechanisms is a testament that we are already knocking at the door of the future. These technologies have proven their disruptive concepts executable in countless efficient and effective ways beyond the outputs traditional systems can.

eQapital is relevant now more than ever in catering to the currently evolving needs of the digital investor. Financial services from Trust, Custody, Exchange, Transfer, to Asset Management needs are strategized on blockchain infrastructure to empower you to control your funds, whether fiat or crypto. Security is in place with AML/KYC/CFT procedures. Our friendly eQapital Team is always ready to assist you 24/7. Contact us now and let us be partners towards your progressive financial health goals.

Leave a Reply

Your email address will not be published. Required fields are marked *