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How do consensus mechanisms like proof-of-work (PoW) and proof-of-stake (PoS) work?
How do consensus mechanisms like proof-of-work (PoW) and proof-of-stake (PoS) work?

Everything you need to know about consensus mechanisms like proof-of-work (PoW) and proof-of-stake (PoS).

Updated over a week ago

Everything you need to know about consensus mechanisms like proof-of-work (PoW) and proof-of-stake (PoS).

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In this article:

What is a blockchain consensus mechanism?

For a blockchain to function reliably and securely, participants on the blockchain require a way to confirm that changes are valid. This agreement between everyone on the blockchain network is referred to as consensus. With consensus, transactions can be processed securely, and issues like double-spending can be prevented.

Without a centralized authority to decide the validity of transactions or the need to rely on trust, how to reach consensus on a decentralized network is a problem that all blockchains need to solve.

Consensus mechanisms are blockchain's answer to this problem. A consensus mechanism is a protocol to achieve agreement on valid changes in the blockchain network, such as processing transactions.

Blockchains have developed a variety of different consensus mechanisms. Different consensus mechanisms will have different attributes and affect how the blockchain operates, such as the cost of processing transactions, decentralization, security, scalability, speed, and environmental impact.

What are some of the most common consensus mechanisms?

Below, we will look at the three most well-known consensus mechanisms: proof-of-work (PoW), proof-of-stake (PoS), and delegated proof-of-stake (DPoS)

What is proof-of-work (PoW)?

Proof-of-work was the first model for a blockchain consensus mechanism. Introduced in 2008 with the publication of the Bitcoin Whitepaper by Satoshi Nakamoto, it relies on the network's computation power of nodes (called miners).

These miners compete with each other to solve a complex mathematical problem. The first miner to solve the problem gets the right to add a new block to the blockchain and is compensated with a reward for creating the new block.

For example, on the Bitcoin blockchain, all miners use the SHA256 hashing algorithm, and the mathematical problem to be solved involves generating a hash (number) lower than the current target hash. The mining difficulty is adjusted every 2016 blocks. The aim is to create new blocks every 10 minutes, so the difficulty will be increased if the past 2016 blocks have taken less time. If the past blocks have taken more than 10 minutes on average, the difficulty will be decreased.

Popular proof-of-work coins in Exodus: Bitcoin (BTC), Dogecoin (DOGE), Litecoin (LTC), Bitcoin Cash (BCH), Ethereum Classic (ETC), and Monero (XMR).

What is proof-of-stake (PoS)?

A proof-of-stake blockchain reaches consensus by participants staking their tokens to become validators. Validators (equivalent to proof-of-work miners) can then begin to produce the next block based on the number of tokens they hold rather than their computational power. Thus, those with the largest stakes have the most to lose, incentivizing them to operate in the network's best interest.

As proof-of-stake does not require energy-intensive competition for validating transactions, it allows for faster transaction speeds, lower network usage costs (gas fees), and a lower barrier to entry for those looking to earn rewards for helping to secure the network.

For these reasons, Ethereum migrated from a proof-of-work consensus model to proof-of-stake in 2022.

Popular proof-of-stake coins in Exodus: Ethereum (ETH), Solana (SOL), Cardano (ADA), Cosmos (ATOM), Polygon (MATIC), Kava (KAVA).

What is delegated proof-of-stake (DPoS)?

Delegated proof-of-stake relies on elected delegates to generate new blocks. Delegates are also sometimes referred to as block producers.

Users vote for a delegate by locking their assets in a staking pool linked to a particular delegate. Each block on a DPoS network is validated by multiple delegates to ensure no invalid transactions, and new delegates will be chosen for each ensuing block.

Similar to PoW and PoS, the DPoS model features rewards for validating blocks of transactions. However, rewards are distributed to all staked users in the successful delegates pool. This distribution is equivalent to each stakeholder's share of the pool's balance. For example, if your share of the staking pool is 1%, you'll receive 1% of the block reward.

Popular delegated proof-of-stake coins on Exodus: EOS (EOS), TRON (TRX), and Tezos (XTZ).

What are some other consensus types?

You can learn more about different consensus mechanisms here: Blockchain consensus encyclopedia.

Here are examples of some other consensus mechanisms:

Federated Byzantine Agreement (FBA)

Federated Byzantine Agreement allows a blockchain to reach consensus by trusted nodes forming quorums to decide on the validity of transactions collaboratively.

Directed Acyclic Graphs (DAG)

Instead of linking blocks together like proof-of-work blockchains, DAGs stack transactions, known as vertices, and link them in specific directions.

Proof-of-authority (PoA)

Proof-of-authority is similar to proof-of-stake; however, instead of staking the monetary value, a validator’s identity performs the role of stake.

Proof-of-capacity (PoC)

Proof-of-capacity leverages space on the participant's hard drive to mine a crypto-asset native to the network. Working with any hard drive, including mobile devices, the consensus mechanism is recognized as energy efficient and accessible.

Proof-of-burn (PoB)

Proof-of-burn allows miners to burn virtual currency tokens as they are granted the right to create blocks relative to the burnt coins.

Proof-of-elapsed-time (PoET)

Proof-of-elapsed Time is similar to proof-of-work but removes the need for an energy-intensive process, replacing it with a randomized timer system for network participants.

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