Consensus Protocol: The Ultimate Guide
Consensus Protocol: The Ultimate Guide
Blockchain technology is an exciting new technology with a lot of unexplored potentials. Since the technology’s inception in Bitcoin in 2009, the application of blockchain technology has expanded significantly with new use cases for the technology entering the market almost at a daily rate. However, the current adoption rate of blockchain technology has raised a few concerns within the space. One of these concerns is the sustainability of blockchain technology. In this article, we will take a look at the topic of blockchain sustainability by looking at how a blockchain's consensus protocol can impact its sustainability.
What is a Consensus Protocol?
A consensus protocol is a critical part of every blockchain network. It's mainly a set of rules and parameters that define how transactions are processed within a network, and also stipulates how nodes in the network communicate with each other. The peers, or nodes, in the network are governed by a network’s consensus protocol as it defines how decentralization is achieved within the network. It’s basically a framework for the nodes to build on so that transactions can be processed and verified without the need for a third-party intermediary.
Now that we have taken a look at what a consensus protocol is, let’s take a look at the most popular consensus protocols in the market. These are the consensus protocols that have been proven to be effective within a blockchain.
The Most Popular Consensus Protocols
To date, the most popular consensus protocols are Proof of Work and Proof of Stake. Let’s take a look at each consensus protocol in more detail.
Proof of Work
Proof of Work is the first blockchain consensus used in a blockchain network and is used in Bitcoin. In a nutshell, Proof of Work is a complex mathematical puzzle that needs to be solved and, once solved, forms the next block in the blockchain. The peers in a Proof of Work network compete with each other to solve this puzzle and the peer that solves the puzzle receives a reward. This is commonly referred to as blockchain mining. Once a peer solves the puzzle and receives its reward, the new block is appended to the blockchain, and the race to solve the puzzle starts again. This process is perpetual and is how each new block is appended to the Proof of Work blockchain.
Proof of Work has one problem: its environmental impact. As more and more people join a Proof of Work network to mine the blockchain, its impact on the environment increases. This is because the mathematical puzzle increases in difficulty as more people try to solve it. The increase in the puzzle’s difficulty requires more electricity to power the more powerful machines needed to solve the puzzle. Once a blockchain has a certain number of peers mining it, the blockchain is no longer sustainable because of the strain of the collective demand of the peers on the global energy supply.
In order to address the energy demand of a Proof of Work blockchain, teams around the world researched and developed new ways to create a consensus protocol that does not have the environmental impact that Proof of Work does. This resulted in the Proof of Stake consensus protocol. Let’s take a look at what Proof of Stake is.
Proof of Stake
Proof of Stake is a consensus protocol wherein people don’t compete to solve a complex mathematical puzzle. Instead, peers are randomly selected according to how much cryptocurrency of the native blockchain they hold and stake, hence why it is called Proof of Stake. The idea behind this is that the more cryptocurrency a user stakes to the network, the more they have to lose if some criminal activity were to take place on the blockchain. So, the more a person stakes in the network, the more they can be trusted to process transactions that take place on the network. This approach to a consensus protocol is more environmentally friendly than Proof of Work, mainly because the puzzle to form the next block in a Proof of Stake network is relatively simple and peers in the network are elected to process transactions instead of having to compete with other peers in the network.
However, some people in the blockchain space believe that Proof of Stake could leave the network vulnerable to centralization, which defeats the whole purpose of a blockchain. Although the selection process of the peers that will process the transactions in the network is fairly random, the amount that a peer stakes in the network do play a role in the selection process. This is because the network believes that peers with a bigger stake in the network are more trusted. With this taken into account, it’s easier to see why some in the blockchain space feel that a Proof of Stake network is vulnerable to potential centralization.
Let’s now take a look at the two main sides of blockchain sustainability.
Both Sides of Blockchain Sustainability
The term blockchain sustainability is a bit vague. When looking at how to make blockchains more sustainable, the two major focus areas are the environmental impact of a blockchain network and the transaction throughput (transactions per second) of a blockchain. By designing and implementing solutions that address both areas of blockchain sustainability, blockchains will be able to unlock their true potential and go fully mainstream. Let's now take a look at some of the challenges of the two most popular blockchain consensus protocols.
As you may recall, one of the responsibilities of a consensus protocol is to define how transactions are processed within the network. It mainly defines how the network of decentralized nodes reaches a consensus regarding the formation of each block before finality. With the current adoption rate of blockchain technology, blockchains using Proof of Work and Proof of Stake are starting to create a backlog in unprocessed transactions on their networks. This has to do with the nodes in a network not being able to process transactions at the rate required to meet the current network traffic.
Another issue is the negative environmental impact of a blockchain network. This applies more to Proof of Work blockchain networks as more computing power is required to process transactions on a Proof of Work blockchain than that of a blockchain using any other consensus protocol.
The negative environmental impact of Bitcoin shows the magnitude that a Proof of Work blockchain can have on the environment once it reaches a certain number of daily transactions. At the time of writing, the Bitcoin network uses more energy than Switzerland, and as the number of daily transactions on the network grows, so too will the magnitude of its environmental impact. This is a big reason why Proof of Work blockchains are not considered sustainable, hence why the majority of Proof of Work blockchains, most notably Ethereum, are switching to Proof of Stake.
Risk of Centralization
This last point applies to both Proof of Work and Proof of Stake blockchain networks, and that is the risk of centralization. The main motivation behind blockchain networks is to enable distributed, decentralized networks. However, the Proof of Stake and Proof of Work consensus protocols run the risk of becoming majorly centralized. With Proof of Work, the network can lose its degree of decentralization if one person or company is able to acquire large amounts of the computing power in the network. This can be seen by large companies that buy cryptocurrency mining equipment in bulk. In doing so, they skew the block reward payments to themselves, making the network less fair. This is why Proof of Stake was created.
Proof of Stake has a more protected degree of decentralization than Proof of Work. This is because network validators are not selected according to the amount of computing power they contribute to the network, but rather by the amount of the native cryptocurrency that they stake in the network combined with some more randomized selection logic. However, there have been some concerns about how randomized the selection logic of a Proof of Stake network is, with some people saying that validators with more staked cryptocurrency get more chances to validate transactions, and therefore earn more block rewards. So, Proof of Stake blockchains may also not achieve the desired decentralization in a blockchain network.
If the desired decentralization for a blockchain network can’t be achieved, then it’s only a matter of time before a blockchain network becomes completely decentralized.
Blockchain sustainability can be broken up into two main parts: a blockchain’s environmental impact and the transaction throughput of a blockchain. Both are somewhat reliant on the consensus protocol of the network, which defines how transactions are processed and how nodes interact with each other on the network. To date, the two most popular consensus protocols are Proof of Work and Proof of Stake. Each of these consensus protocols have limitations that restrict the sustainability of blockchain networks. If these limitations are not addressed, then blockchains will not be sustainable enough to go mainstream.
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