Consensus - putting the trust in a trustless network

by Filip Blagojević, January 23, 2023
In our Birth of blockchain blog, we mentioned that Bitcoin uses a Proof-of-work consensus mechanism to ensure trust between decentralized parties participating in value exchange on the network. In this blog, we will be diving deeper into different consensus mechanisms and comparing them. 

Proof-of-work (PoW) is a consensus mechanism used in some blockchain systems (e.g. Bitcoin, Litecoin, Dogecoin, Monero, Ergo etc.) to determine which nodes (called "miners") are allowed to create new blocks and add them to the blockchain. In a Proof-of-work system, miners compete to solve complex mathematical problems, and the first miner to solve the problem gets to create the new block and add it to the blockchain.

The Proof-of-work mechanism was first used in the Bitcoin network. The idea behind Proof-of-work was to create a decentralized system for verifying transactions and adding them to the blockchain, without the need for a central authority.

In order to create a new block, miners must expend a significant amount of computational power to solve the mathematical problem. This process is known as "mining," and it requires miners to invest in expensive hardware and use large amounts of energy.

One of the important benefits of Proof-of-Work compared to other mechanisms is entropy. In the context of Proof-of-work, entropy refers to the randomness or unpredictability of the mathematical problems that miners must solve in order to create new blocks and add them to the blockchain. This randomness is essential to the security of the Proof-of-work system, as it makes it difficult for miners to predict which problems they will be asked to solve and gives all miners an equal chance to create a new block.

The entropy of the Proof-of-work problems is typically increased by introducing additional variables into the calculations, such as a "nonce" value that is unique to each block. This nonce value is chosen at random by the miner who creates the block, and it helps to ensure that each block is unique and cannot be easily replicated by other miners.

Overall, entropy is an important concept in Proof-of-work systems, as it helps to ensure the security and reliability of the blockchain by making it difficult for miners to predict or manipulate the mining process.
One of the key benefits of Proof-of-work is that it helps to ensure the security of the blockchain, as it is difficult for a single actor to gain control of the network and manipulate the blockchain. However, Proof-of-work has been criticized for its high energy consumption and the potential for centralization, as only those with access to expensive mining hardware can meaningfully participate in the mining process. Entities with access to lower cost of electricity have an advantage as well.

Despite these criticisms, Proof-of-work has been widely adopted and is currently used in a number of different blockchain systems. However, alternative consensus mechanisms, such as Proof-of-stake, have been proposed as more energy-efficient alternatives.

Proof-of-stake (PoS) is a type of consensus mechanism used in some blockchain systems to determine which nodes (called "validators") are allowed to create new blocks and add them to the blockchain. In a Proof-of-stake system, validators are chosen to create new blocks based on the amount of cryptocurrency they hold, or their "stake" in the network.

The concept of Proof-of-stake was first proposed in a whitepaper published in 2012 by Sunny King and Scott Nadal, who were looking for an alternative to Proof-of-work (PoW).

King and Nadal proposed Proof-of-stake as a more energy-efficient alternative, as it does not require as much computational power and can be run on less expensive hardware.

Over the years, Proof-of-stake has gained popularity and has been implemented in a number of different blockchain systems, including Ethereum, Cardano, Polkadot and many more. However, there has been some debate within the blockchain community about the relative merits of Proof-of-stake versus Proof-of-work, and the optimal consensus mechanism for different types of blockchain systems.

There are several different types of potential attacks in Proof-of-stake networks:

Nothing at stake attack: In a nothing at stake attack, validators have no economic incentive to act honestly and may be more likely to engage in malicious behavior. This can occur if validators are allowed to participate in multiple networks or if they are able to create multiple validator accounts.

Long range attack: A long range attack involves creating a fork in the blockchain by building a new chain that starts at an earlier point in the history of the network. This attack may be more likely to succeed if the network has a low level of decentralization or if the validators have a low level of stake in the network.

Stake grinding attack: In a stake grinding attack, an attacker creates multiple validator accounts and uses them to manipulate the selection of validators in order to create new blocks. This attack may be more likely to succeed if the network has a low level of decentralization or if the validators have a low level of stake in the network.

Each blockchain tackles these potential attack vectors in their own way taking into account decentralization of the block producers, network parameters, punishing the block producers by taking their staked cryptocurrency (“slashing”) etc. Several different sub-categories of Proof-of-stake exist, such as Delegated Proof-of-stake (“DPoS”), Nominated Proof-of-stake(“NPoS”), Pure Proof-of-stake etc.

Proof-of-work and Proof-of-stake are two most popular consensus mechanisms, but there are several others in use today:

Proof-of-authority (PoA): Proof-of-authority (PoA) is a consensus mechanism in which validators are chosen based on their reputation or identity. In a PoA system, validators are required to provide proof of their identity and are typically held to a higher standard of behavior than in other consensus mechanisms.

Proof-of-storage: Proof-of-storage is used to ensure that data is being stored and maintained as promised. In a Proof-of-storage system, nodes compete to store data by proving that they have allocated a certain amount of storage space to the data. To prove that they are storing the data, storage providers must generate "proofs of possession" for the data, which are cryptographic proof of the data's existence and location. These proofs are then stored on the blockchain, along with a reward for the storage provider. Proof-of-storage is designed to be a more efficient and cost-effective way to store data compared to traditional centralized storage systems, as it allows multiple storage providers to compete for the opportunity to store data. It is also designed to be more secure, as it allows users to verify that their data is being stored as promised and that it has not been tampered with. Proof-of-storage is used in a number of decentralized storage systems, including Filecoin and Storj. 

Proof-of-elapsed-time (PoET): Proof-of-elapsed-time is a consensus mechanism developed by Intel which is more energy efficient but is relying on trusted execution environment (TEE) chips

Many more consensus mechanisms exist and the research is still ongoing on combining existing ones and creating new ones. 

In our next blockchain blog, we will tackle the programmability of blockchains, a revolutionary innovation brought forth by Ethereum.

About the author:
Author avatar
Filip Blagojević
Business Development and Blockchain Operations
Filip is the person to contact if you want to use our services. He deals with client needs and project management. He is also our resident crypto enthusiast, educating our clients and us on the best use cases of blockchain technology.
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