Consensus mechanism is considered to be a vital part in all cryptocurrencies.
And that’s because it’s responsible to make sure that the data stored inside the blockchain are reliable and completely accurate.
This means that without it, cryptocurrencies wouldn’t be able to function as money and their value will be zero!
So, what exactly is this mechanism and how does it work in order to allow cryptocurrencies to run?
Consensus mechanism is an algorithm used to ensure that the data from every financial transaction are secure and accurate and this is what gives value to cryptocurrencies.
At this point it is becoming pretty obvious that when someone wants to invest in cryptocurrency it is a necessity to learn and understand the idea behind the consensus mechanism.
But you shouldn’t worry because this post is not getting technical at all.
On the contrary, highlights the key points you need in order to understand such a complex concept with very little effort!
If you wish to take a more thorough look about consensus algorithms you should read about the Proof of Work and Proof of Stake which are the best consensus algorithms right now.
Consensus mechanism in cryptocurrency explained
Cryptocurrencies are records of transactions which are kept in the form of digital data.
This also happens in the case of banks, in which payment records on bank accounts can play the role of a currency, which is called a deposit currency.
As a result, digital data are able to be considered currencies if the records meet the necessary condition to be accurate and reliable.
In case of deposit currency, the accuracy and reliability comes centrally by the bank.
Many bank employees dedicate a significant amount of time and effort just to maintain the integrity of transaction records and that’s why those records can be trusted.
On the other side, cryptocurrencies keep the integrity of those records using a computer mechanism.
This mechanism involves a large number of people in a decentralized manner and is running on the internet.
The difficulty in this case lies in how to keep payment/receipt records between accounts, how to link one account to another and how all that digital data will stay secure, accurate and reliable.
Blockchain technology makes this possible by utilizing an algorithm which is called consensus mechanism or consensus algorithm.
But how does consensus mechanism assure that the data are reliable?
The digital data is kept in many different and independent computers throughout the world.
Every one of those computers keeps the full record of transactions.
If all those computers are able to be in consensus with each other, then there is no doubt that their data will be accurate since we are talking about thousands of computers.
Now, if there is a problem in which a computer has different data than all the others, then the other computers will come to a consensus and will prove that the computer that has different data is wrong.
The way in which the computers come into consensus depends on the different architectures that every cryptocurrency choses to use.
What are different types of consensus mechanisms?
In blockchain networks the two most prevalent mechanisms to come in consensus are the Proof of Work and Proof of Stake.
In Proof of Work, the algorithm that operates the system rewards miners (the computers) who solve mathematical problems.
When new transactions happen, their data is sent from the crypto wallets to all the computers on the network.
Some of the cryptocurrencies that use this algorithm are: Bitcoin, Dogecoin, Litecoin and many others.
If you want to learn more about Proof of Work click here.
In Proof of Stake, the consensus algorithm is based on owning cryptos in the network.
In Proof of Stake architecture, the creator of a new block is chosen by some criteria, like the total coins owned, the period of time someone participates on the network etc.
Some of the most famous crypto using Proof of Stake is the Ethereum 2.0, the MATIC (Polygon), Solana and Cardano.
If you want to learn more about Proof of Stake click here and here.
Why do we need different consensus mechanisms?
This is a very good question that has a reasonable answer.
This is happening because every consensus mechanism has its advantages and disadvantages.
Proof of Work, which was the first consensus mechanism ever used in crypto, is considered to be very secure and also has already been proven that works fine at large scale.
On the contrary, the supporters of Proof of Stake, which by the way is relatively new in the cryptocurrency environment, support it because speeds up the transactions process and at the same time is planet friendly.
Which is the best consensus mechanism?
Proof of Work is at this moment the most used consensus mechanism by cryptocurrencies.
However, there are some drawbacks to it and that’s why people are experimenting with different types of consensus algorithms.
As mentioned above, we haven’t yet seen the capabilities that Proof of Stake has to offer since it hasn’t been tested in every possible situation.
As a result we can say that it is not possible to know at this moment which consensus mechanism is the best, since the cryptocurrency technology itself is yet on a premature level.
So we just have to wait and see if one will prevail or not.
Conclusion
Consensus mechanism is considered to be the backbone of any cryptocurrency.
And this is happening because it completes the gaps needed in order for any cryptocurrency to be able to be used as money.
Image source: Jorge Franganillo
