Blockchain consensus protocols and how to use them?

A consensus is a dynamic way to reach an agreement in a group. It is done with an aim to benefit the entire group as a whole. The method through which consensus decision-making is achieved is called “consensus mechanism.”

Now, which consensus protocols should be used for a wavering entity like blockchain?

As understood, blockchain is a decentralized peer-to-peer ledger without a central authority or a leader controlling it.  It creates a system which is devoid of corruption from a single source. In blockchain, independent nodes in the network must come to a consensus on the ledger status. This consensus mechanism ensures that all participants of a distributed ledger are on the same page.

Below are some standard consensus protocols used in the crypto space and their working:

Proof-of-Work ( PoW )

Bitcoin’s creator, Satoshi Nakamoto, invented the proof-of-work protocol. Going by the protocol’s name, the mechanism requires nodes to prove the work that has been done to have the right to add a new transaction to the blockchain. The transactions are done by ‘miners’ who solve cryptographic puzzles to “mine” a block to add to the blockchain. When a miner solves the puzzle, they present their block to the network for verification and in turn receiving the newly created cryptocurrency unit provided by the protocol as a reward. This entire process is energy intensive as it involves the nodes hashing data through high-performance, application-specific integrated circuit (ASIC) chips. Proof-of-work involves high computation energy and electricity which makes it an expensive process.

Proof-of-Stake ( PoS )

Proof-of-stake differs from the proof-of-work protocol. In this consensus algorithm, mining new blocks become easier for those who hold the highest amounts of the cryptocurrency. In other words, a proof-of-stake system requires the user to show ownership of a certain number of cryptocurrency units. The miners or creators of the new block are chosen randomly. It depends on the user’s wealth, also defined as ‘stake.’ In the proof of stake system, blocks are said to be ‘forged’ or ‘minted,’ not mine. Forgers are referred to users who validate transactions and create new blocks in this system. Validation of a transaction and creation of a new block requires the forgers to put their coins at ‘stake.’ Proof of stake protocol is a lot more resource-friendly than proof-of-work.

Proof-of-Capacity (PoC)

Proof-of-Space or proof of capacity algorithm uses the existing free space on hard drive to mine coins. Its very nature makes it more decentralized and low on power usage. Assigning more hard drive space will allow users to have more “plots” of data. The nodes receive a reward in the form of the native coin depending on the space made available by the nodes to the network.

Proof-of-Burn ( PoB)

Proof-of-Burn is consensus protocol which is an alternative to Proof-of-Work and Proof-of-Stake. In this algorithm, the coins are sent by the miners to an unspendable address ( eater address), and efficiently burning them. The burnt coins cannot be accessed an spent again. The idea behind burning a cryptocurrency is that the user is willing to undergo a short-term loss for a more long-term investment. Users are rewarded over time as they earn a lifetime privilege to mine on the system. The more coins a user burns, the higher the chance he or she will have of mining the next block. Proof-of-burn works like virtual mining.

Delegated Byzantine Fault Tolerance (DBFT)

The Byzantine alternative or distributed Byzantine Fault Tolerance algorithm is named after the Byzantine Generals problem. It addresses the issue of achieving consensus in distributed systems. DBFT recognizes two kinds of participants in the blockchain ecosystem: professional node operators or bookkeeping nodes, who run nodes to make money; and users who are just interested in making use of the blockchain. Delegated Byzantine Fault Tolerance utilizes this division of labor to provide better security for blockchains. The professional node broadcasts its version of the blockchain to the network. If 66% of the other nodes agree with the information, a consensus is achieved. When the consensus is not reached, there is an appointment of a different professional node broadcast its blockchain version until a consensus can be established.

Centralized vs Decentralized Blockchain

Blockchains have garnered interest from investors from all over the world due to their incredible promise of being an incorruptible ledger. When most people think of blockchains, they are referring to the decentralized or public blockchains like Bitcoin which anyone can access and participate in. However, blockchain technology is not limited to being just decentralized as the centralized or private blockchains also have some advantages for corporations over the public ones. Private blockchains are useful for corporations who want to use the power of decentralized ledgers to improve the ongoing function. Let’s take a look at an in-depth comparison of public and private blockchains.


Similarities Between Centralized and Decentralized Blockchains

From a technological standpoint, both centralized and decentralized blockchains are very similar as both are distributed peer to peer networks where every node is responsible for storing and securing the shared ledger. Both public and private blockchains require a consensus mechanism (like proof-of-work or proof-of-stake) among nodes to establish a single ledger. Both of these types of blockchains also have to provide upper and lower bounds on the security and efficiency of the network.


Differences Between Centralized and Decentralized Blockchains

The biggest factor that differentiates public blockchains from private ones is the pool of nodes that can participate in the network, and make administrative changes to the network. So, for example, Bitcoin which is the largest public blockchain in the world has no barrier to entry when it comes to accessing the ledger and sharing computer power to execute its proof of work algorithm. By contrast, IBM’s HyperLedger Fabric is more customizable in the sense that the organization that is deploying the blockchain has a say in every aspect of blockchain participation. Private blockchains are typically more restrictive in who they allow making changes to the ledger as they use the blockchain for the internal records.


Advantages of Decentralized Blockchains

Decentralized blockchains like Bitcoin, which is the most popular blockchain in the world, have very high security because of the enormous amount of mining resources that go in to secure the network. That means to coordinate a successful attack on the Bitcoin network; a malicious actor would have to acquire a massive amount of resources which is economically unviable. Another advantage is that anyone can use the network to send funds to any part of the world without going through an intermediary.


Disadvantages of Decentralized Blockchains

Due to their public nature, public blockchains like Bitcoin are susceptible to all kinds of analyses that can reveal more information about the network participants making the blockchain less private. The massive amount of miners mining on the network means that difficulty needs to keep increasing thereby leading to mostly useless computations done by miners to outcompete each other. It is estimated that every Bitcoin transaction costs about as much electricity that is required to power an average home for eight days. Therefore public ledgers are not very environment-friendly.


Advantages of Centralized Blockchains

Centralized blockchains offer much more customizability and control over the network to the organization deploying it as they can decide who gets to participate in the network. That means that not as much resources have to be invested in competing to secure the network which makes Centralized Blockchains more environment-friendly compared to their Decentralized counterparts. This also means that they have higher overall throughput because they get to decide the hardware that the network runs on. In practice, this means that corporations could use private blockchains to store sensitive information among nodes that they trust. This allows them to use the incredible power of blockchains without having to make the sensitive information public.


Disadvantages of Centralized Blockchains

Since there is not as much computing power securing the network as in the case of decentralized blockchains, centralized blockchains are less secure. It only requires a few of the nodes hosting the network to collude by amassing enough resources to hack the network. Also, since transactions are not publically viewable, it is harder to verify the authenticity of the transactions for an outside party. Also since private ledgers are not available for public use, they are of little use to anyone besides the corporations that deploy them.



Common Misconceptions about Blockchain

The market is abuzz with the advent of the blockchain. It has now become a ‘term’ which evokes strong public opinion, comments- whether valid or not. Let us begin by understanding the term blockchain. In simple terms, blockchain is a technology that serves as an alternative to centralized data storage. Instead of the data being stored on one or multiple servers which are prone to hacks, blockchain is distributed among computers. Radically challenging the status quo, blockchain works on a peer-to-peer verification of transactions. It allows for complete transparency as no single entity can possess the system.

However, the contemporary era is always ‘high’ on misconceptions surrounding any innovation. Just like the introduction of smartphones and internet dazzled the market and ‘legendary myths’ engulfed the mass, the world of blockchain has already created a lot of misconception.


● The existence of the only Blockchain. Nooooo!

This belief is conclusively false. Although blockchain is commonly compared to the internet, unlike the internet, there are numerous blockchain- each designed to serve a distinct purpose. The common denominator is that they are distributed, have some form of consensus mechanism. Examples could be Bitcoin’s blockchain, ethereum, hyperledger, IBM and Microsoft blockchain, etc.

● Blockchain applications are used for criminal activities. Nooooo!

The collective mass is tied to the belief of cryptocurrencies supporting nefarious activities. It has its roots in the silk road and the dark web along with the mistaken belief of blockchains offering anonymity. While it is true that, to an extent, cryptocurrencies are a virtual boon for drug-trafficking, illegal pornography, and even terrorism, it’s ignorant to assume that it is an untraceable underworld enabler. On the open side, cryptocurrencies are a means to exchange digital assets. Bitcoin being a public ledger, there is always a record of any transaction taking place. The transactions can be traced anytime, anywhere, regardless the purpose of the transaction.

● Blockchain and bitcoin can be used interchangeably. Nooooo!

For beginners and most of the mass, blockchain is always understood as bitcoin and vice versa, creating a lot of confusion.
The blockchain was born with bitcoin, as the underlying technology. Simply put, blockchain is a technology whereas bitcoin is the application based on this technology. What bitcoin is to blockchain is what email is to the internet – its first ‘killer app.’

● All the Blockchains are public. Nooooo!

It is true that bitcoin, along with many well-known blockchains are public, but not all blockchains are. There exist private and semi-private blockchains with varying degrees of penetrability, approachability, and transparency. A public blockchain is open to the public where all the transactions are visible, and anyone can participate at any level. On a private blockchain, only parties with necessary keys can review private transactions. Technically, public blockchains utilize proof-of-work methodology whereas private blockchains use proof-of-stake.

● The Blockchain acts as magical data storage in the cloud. Nooooo!

The working of blockchain and cloud are poles apart. The common misconception is due to their intangibility. A blockchain doesn’t store physical information like PDF files or a word documents. It only provides for a proof-of-existence. Blockchain, conceptually, is a flat file, a linear list of simple transaction records. This ‘flat file’ holds code that certifies the existence of a particular document and not the document itself.

● The Blockchain is used only in the financial sector. Nooooo!

Blockchain technology was highlighted because of the introduction of bitcoin, its first application. Blockchain can be used in numerous areas referencing its implementation; finance incontestably is one of them. In fact, the Indian government is looking forward to employing the blockchain technology in education, health, and agriculture to fulfill its aim of India going truly digital.

● Cryptocurrencies are a replacement to traditional currencies. Nooooo!

As no single entity, corporation or a nation owns or controls the blockchain, it is often hailed as a revolutionary technology. With financial intermediaries,a.k.a middlemen flocking every sphere of our lives, this technology might bring in a new global economy. However, it is unlikely to happen, not anytime soon. The reason accounts for the exorbitant cost of mining, and also that blockchains are not scalable or efficient enough to support global usage. The difference can be seen in the duration of the transaction. Bitcoin can process a maximum of seven transactions a second whereas Visa can process thousands of transactions a second.

The blockchain technology is very much in its nascent stage- or experimental, according to some. The misconceptions mentioned above are few of many, and debunking such myths will provide a field for developers and researchers to produce more viable and efficient solutions. The blockchain technology can transform the society at all the levels. All we need is exploration and experimentation with the aim of a new invention.