Consensus Protocols

Blockchain technology has revolutionized the way we think about the transfer of value and trust online. An essential part of any blockchain is its consensus protocol, which determines how agreement is reached on the state of the network and how information is validated and recorded on the ledger. Over the years, several consensus protocols have been developed, each with its own advantages and disadvantages. In this article, we will explore some of the consensus protocols used in the top 50 cryptocurrencies by market capitalization.

What is a consensus protocol?

A consensus protocol is a set of rules that govern how nodes in a blockchain network reach agreement on the state of the network and the validity of transactions. These protocols are crucial to ensure that all participants in the network agree on which transactions are valid and in what order they should be recorded in the ledger.

Most common consensus protocols:

1. Proof of Work (PoW)

• Used by: Bitcoin, Ethereum (formerly to Ethereum 2.0).
• How it works: Network nodes compete to solve complex mathematical problems. The first to solve it is entitled to add a block to the chain and is rewarded with new cryptocurrencies. This process is energy intensive.
• Advantages: Tested and secure, resistant to 51% attack.
• Disadvantages: Energy consumption, centralization of mining.

2. Participation Test (PoS)

• Used by: Ethereum 2.0, Cardano, Polkadot.
• How it works: Nodes validate transactions and create new blocks based on the amount of cryptocurrencies they own and are willing to "bet" as collateral. The more you own, the more leverage you have.
• Advantages: Energy efficient, encourages participation, reduces centralization.
• Disadvantages: Could encourage wealth accumulation.

3. Delegated Proof of Stake (DPoS)

• Used by: EOS, TRON, Binance Coin.
• How it works: Token holders choose a limited group of validators (witnesses) to confirm transactions. Witnesses are rewarded for their services.
• Advantages: Fast and efficient, scalable.
• Disadvantages: Centralization in the hands of witnesses.

4. Proof of Authority (PoA)

• Used by: VeChain, POA Network.
• How it works: Identification of validators is required before participating in the network. Validators are generally trusted organizations.
• Advantages: Fast and secure, suitable for private networks.
• Disadvantages: Centralization and lack of anonymity.

5. Storage Test (PoST)

• Used by: Filecoin.
• How it works: Nodes demonstrate that they are storing data in the network to earn rewards rather than performing computations.
• Advantages: Incentivizes decentralized storage.
• Disadvantages: Technical complexity and lack of widespread adoption.

6. Ripple Protocol Consensus Algorithm (RPCA)

• Used by: Ripple (XRP).
• How it works: Instead of relying on mining or a select group of validators, XRP uses RPCA, which relies on a process of agreement between nodes to validate transactions and establish consensus.
• Advantages: Fast and scalable, suitable for cross-border payments.
• Disadvantages: Centralized in the hands of Ripple, raising questions about decentralization.

7. Avalanche Consensus Protocol

• Used by: Avalanche (AVAX).
• How it works: Avalanche uses a proprietary consensus protocol that is based on a peer-to-peer voting approach. Nodes vote on which transactions should be committed in each consensus round.
• Advantages: Fast and scalable, secure against Sybil attacks.
• Disadvantages: Requires an active voting process.

8. Liquid Proof of Stake (LPoS)

• Used by: Tezos (XTZ).
• How it works: Tezos implements LPoS, which allows participants to vote on protocol updates and reforms based on how many XTZs they own and block.
• Advantages: Encourages participation and decentralized governance.
• Disadvantages: Potential wealth accumulation and complexity in governance.

9. Proof of History (PoH)

• Used by: Solana (SOL)
• How it works: PoH is responsible for recording the order of transactions before they are validated using PoS. This allows for high performance and scalability in the Solana network.
• Advantages: Fast performance and scalability.
• Disadvantages: Requires a two-layer system.

10. Ouroboros - Proof of Stake (PoS)

• Used by: Cardano (ADA).
• How it works: Cardano uses the Ouroboros protocol, which is an advanced variant of PoS. Validators are chosen based on the amount of ADA they possess and block as collateral.
• Advantages: Efficient in energy consumption and safety.
• Disadvantages: Requires a validator selection process.

11. Nominated Proof of Stake (NPoS)

• Used by: Polkadot (DOT).
• How it works: Polkadot uses NPoS, a consensus protocol that combines PoS with nominator and validator participation. Nominators choose validators they trust and receive rewards.
• Advantages: Scalability and active community participation.
• Disadvantages: Possible centralization in the hands of influential nominators.

12. Curl Participation Test (Curl-PoW)

• Used by: IOTA.
• How it works: IOTA uses Curl-PoW, a variant of PoW, where users must perform a small PoW effort when sending transactions to avoid spamming the network.
• Advantages: Scalability and security against spam.
• Disadvantages: Some questions about the safety of Curl-PoW.

What is the best Consensus Protocol?

There is no universally superior consensus protocol, as the choice depends on the specific objectives and needs of each blockchain. Energy efficiency, security, scalability and decentralization are key factors to consider.

Ethereum's transition from PoW to PoS is an example of how projects are evolving in search of more sustainable solutions. Meanwhile, projects such as EOS and TRON have opted for DPoS to achieve greater speed and scalability.

As blockchain technology continues to develop, we are likely to see more innovations in this space, which could lead to even more advanced consensus protocols suitable for various applications.