Ethereum is set for the largest protocol change in history. They are moving from Proof of Work (PoW) to Proof of Stake (PoS). Many view PoW systems as environmentally unfriendly and see PoS as a less power-hungry system.
The aim is to make Ethereum faster and cheaper to use. High gas fees (transaction fees) have plagued and congested the blockchain (i.e. CryptoKitties). With the popularity of Ethereum and NFTs, users are more than ready for “The Merge” to begin.
What exactly are consensus mechanisms though? Let’s take a look under the hood of these cryptocurrencies and how they operate. Keep reading to learn all about them.
What Is a Consensus Mechanism?
Different types of cryptocurrencies like Bitcoin and Ethereum (with their corresponding blockchains) operate with different types of consensus mechanisms.
They are used to authenticate transactions while maintaining the security of the blockchain (network/distributed ledger technology).
Definition and Examples of Consensus Mechanisms
Every time a transaction is validated, it’s recorded on the blockchain. Each copy of the blockchain contains all valid transactions.
Bitcoin’s Proof of Work (PoW) was the first consensus mechanism. If you buy ApeCoin and send it to a cryptocurrency wallet, then everyone must agree that you own the ApeCoin in the first place and it was sent to that specific address.
Each new block added to the chain required a unique hash (approval) with each transaction. This is how the validation process of transactions (new and old) occurs.
Types of Consensus Mechanisms
The dominant consensus mechanism currently is Proof of Work with the two largest cryptocurrencies, Bitcoin and Ethereum, running it. There are several other consensus mechanisms though. Let’s take a closer look, shall we?
Proof of Work (PoW)
Miners will compete against one another to validate the incoming block of transactions. The miner receives cryptocurrency as a reward.
Proof of Stake (PoS)
Proof of Stake works by whoever holds the largest holding of the network’s native cryptocurrency to validate new blocks. Faster and nominal transaction costs are a result. The biggest stake receives cryptocurrency as a reward.
Delegated Proof of Stake (DPoS)
Staked users vote on the number of delegates for the creation of new blocks. It is a variation of Proof of Stake (PoS).
Proof of Authority (PoA)
Proof of Authority isn’t one of the more popular consensus mechanisms like Proof of Work or Proof of Stake.
Blocks are created by vetted sources who are granted special permissions and access to the network. Proof of Authority is mainly used by private companies and organizations.
Proof of Article Completion
You have successfully learned the basics of consensus mechanisms. As you learn more about cryptocurrency, you’ll begin to see it as an endless onion.
Each crypto and its corresponding consensus algorithm is something to marvel at.
As the crypto market moves fast, you’ll want to keep up. Do so right here on our blog.
