Blockchain consensus protocols are key for the functioning of a blockchain. Different types of consensus are invented throughout the years. It is important to know the differences and how a protocol works because it can be key for determining if an ICO is worth your investment. In general, a consensus algorithm is used to ensure that the next block in the blockchain is the only version of truth.
Proof Of Work
Proof of work is the most well-known consensus algorithm because Bitcoin makes use of this. Miners have to solve a cryptographic puzzle as fast as possible where they are competing with other miners. The first miner to solve this puzzle gets a reward of 12.5 newly minted Bitcoins. It’s all about an output which is hard (costly, cpu/gpu intensive, time-consuming) to generate for miners, but easy to verify by others (miners).
Proof Of Stake
This is the most common alternative to proof of work. The stake you own is crucial for the weight of your vote. For example, you can become a validator in the Ethereum ecosystem which gives you voting power. To do so, you have to lock up your Ether (stake it). Now, the weight of your vote depends on the staked amount of Ether. Miners will still be rewarded for mined blocks, but the verification of the cryptographic puzzle output will be done by the validators. Proof of stake has the benefit that it requires less energy and hardware to operate in contrast to Bitcoin’s proof of work which burns one million dollar worth of electricity and hardware costs per day.
Delegate Proof Of Stake
Delegate proof of stake (DPOS) is created by Bitshares. It means that stakeholders can elect representatives to generate blocks. Each account is allowed one vote per share per representative. The top N representatives are able to generate blocks. When a representative generates a block, he gets a reward for his delivered service. In most cases, the representative will share his reward with the people who have upvoted him.
Lisk for example allows the top 101 delegates to generate blocks. Each delegate gets 10 seconds to generate a block. If he fails to generate one, the work will be reassigned to the next delegate. Delegates who are unable to generate blocks have a good chance to be downvoted in the rankings. It not easy to become a delegate. Most of the delegates are well-known people within the community who have contributed a lot to Lisk.
- Fast and efficient
- Flexibel (can change bad delegates quickly)
- Not as decentralized as we want (discussion still ongoing because we have 101 very trustworthy delegates)
- People are lazy and fail to vote… When there are not enough votes, large stake holders can simply vote for themselves
Proof Of Activity
Proof of activity is created because people fear the security of Bitcoin when all 21 million Bitcoins are produced. When this happens, miners won’t get their 12.5 Bitcoins anymore but will only receive transactions fees. Taking away the bigger incentive can lead to a switch of miners to other, more profitable coins.
Proof of activity is very interesting because it’s a mixture of proof of work and proof of stake. First, miners have to solve a cryptographic puzzle to create a block. However, this block won’t contain transactions, only the winner’s address (proof of work). Next, proof of stake kicks in. A random group of validators is chosen to verify the transactions that will be added. Validators get a reward for validating transactions. You are more likely to be chosen when you own more coins (proof of stake).
Proof of Capacity
Proof of capacity (also known as Proof of Space) is designed for people who want to mine but don’t particularly have a powerful computer or don’t want to let it running 24/7 because energy costs can be higher throughout the day than at night. Proof of capacity makes use of hard drive space which users can lend to the network. This hard drive space is used to generate tokens. It is much more energy efficient and it enables you to generate a small passive income with free hard drive space. On the other side, people who have limited free hardware space don’t have a good chance of earning a reward. Your chances become bigger as you have more free hardware space.
Proof Of Burn
It is impossible to delete data from a blockchain. Some clever people invented the process of burning coins. This means that you sent the tokens to a verifiably unspendable address. It is possible to do this process yourself which gives you a lifetime privilege to mine coins. The election process for miners is pretty random. However, if you burn more coins, you have a better chance of being elected to mine. It seems to be an expensive process, however you are not consuming resources other than the burned underlying asset.
The Bottom Line
Each protocol has pros and cons. Is the delegate proof of stake the best method? Because requires people to become active people in the community? The whole community benefits from the contributions of delegates. On the other side, there is the combination proof of activity uses. It seems like a combination between proof of work and proof of stake. In most cases, the protocol depends on the intended use of the coins. There are many more consensus protocols, many of them are barely used: proof of elapsed time, proof of authority, proof of proof… what do you think?