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A blockchain is a decentralized peer-to-peer system with no central authority figure. While this creates a system that is devoid of corruption from a single source, it still creates a majorĀ problem.
- How are any decisions made?
- How does anything getĀ done?
They need to come to a consensus using āconsensus mechanismsā.
āThe Byzantine Problemā
Before bitcoin, there were loads of iterations of peer-to-peer decentralized currency systems which failed because they were unable to answer the biggest problem when it came to reaching a consensus. This problem is called āByzantine Generals Problemā.
The concept
Imagine there is a group of Byzantine generals and they want to attack a city. They are facing two very distinct problems:
- The generals and their armies are very far apart so centralized authority is impossible, which makes coordinated attack veryĀ tough.
- The city has a huge army and the only way that they can win is if they all attack atĀ once.
In order to make successful coordination the armies on the left of the castle send a messenger to the armies on the right of the castle with a message that says āATTACK WEDNESDAY.ā However, suppose the armies on the right are not prepared for the attack and say, āNO. ATTACK FRIDAYā and send back the messenger through the city back to the armies on theĀ left.
In computing terms
In computing terms, the computers are the generals and their digital communication system links are the messengers. Although the problem is formulated in the analogy as a decision-making and security problem, in electronics, it cannot be solved simply by cryptographic digital signatures, because failures like incorrect voltages can propagate through the encryption process. Thus, a component may appear functioning to one component and faulty to another, which prevents forming a consensus whether the component is faulty orĀ not.
So letās see the most popular solutions existent in blockchain world for thisĀ issue.
Proof of workĀ (POW)
This is the solution in Bitcoin and all POW based cryptocurrencies.
- The miners solve cryptographic puzzles to āmineā a block in order to add to the blockchain.
- This process requires immense amount of energy and computational usage. The puzzles have been designed in a way which makes it hard and taxing on theĀ system.
- When a miner solves the puzzle, they present their block to the network for verification.
- Verifying whether the block belongs to the chain or not is an extremely simpleĀ process.
But unfortunately there are some issues with proof-of-work.
- First and foremost, proof of work is an extremely inefficient process because of the sheer amount of power and energy that it eatsĀ up.
- People and organizations that can afford faster and more powerful ASICs usually have better chance of mining than theĀ others.
- As a result of this, bitcoin isnāt as decentralised as it wants to be. So, more than 65% of the hashrate is divided among 5 mining poolsĀ alone!
But thereās another solution which fixes this issues in POW. And itās Proof of StakeĀ (POS)
Proof of stakeĀ (POS)
Proof of stake will make the entire mining process virtual and replace miners with validators.
This is how the processĀ works:
- The validators will have to lock up some of their coins asĀ stake.
- After that, they will start validating the blocks. Meaning, when they discover a block which they think can be added to the chain, they will validate it by placing a bet onĀ it.
- If the block gets appended, then the validators will get a reward proportionate to theirĀ bets.
What are the benefits vsĀ POW?
- No need to consume large quantities of electricity in order to secure a blockchain (eg. itās estimated that both Bitcoin and Ethereum burn over $1 million worth of electricity and hardware costs per day as part of their consensus mechanism).
- Because of the lack of high electricity consumption, there is not as much need to issue as many new coins in order to motivate participants to keep participating in the network. It may theoretically even be possible to have negative net issuance, where a portion of transaction fees is āburnedā and so the supply goes down overĀ time.
- Proof of stake opens the door to a wider array of techniques that use game-theoretic mechanism design in order to better discourage centralized cartels from forming and, if they do form, from acting in ways that are harmful to the network (eg. like selfish mining in proof ofĀ work).
- Reduced centralization risks, as economies of scale are much less of an issue. $10 million of coins will get you exactly 10 times higher returns than $1 million of coins, without any additional disproportionate gains because at the higher level you can afford better mass-production equipment.
- Ability to use economic penalties to make various forms of 51% attacks vastly more expensive to carry out than proof of workĀ .
This approach will be used in Ethereum in theĀ future.
Conclusions
The consensus mechanism is necessary to deal with the Byzantine Generals Problem which is a fundamental to deal. None is perfect. But there are many other consensus mechanisms, so itās key to be updated in this aspect of blockchain aspect.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.