Consensus mechanisms are used to verify that transactions are valid without a centralized authority. Developed by Nakamoto, this system avoids using a central record keeper and instead uses “miners” to verify the validity, which keeps the network decentralized. To validate a specific transaction, one must ensure that the account transferring currency has enough of that currency in their account to conduct it. This is done by checking the history associated with the account. Whilst validating, all the transfers associated with the account are tallied to verify that the right amount of currency is present. This is also how each account can see how much currency they have associated with their account right now.
In any centralized system, there is a central administrator who has the authority to maintain and update the database. The task of making any updates, like adding/deleting/updating, is performed by a central authority who remains the sole in-charge of maintaining genuine records that no one else can change. But, there is no central authority in the blockchain.
In a blockchain, the task of updating data is shared through block mining activities. All participants agree on the status of the ledger. There are contributions from hundreds of thousands of participants who work on verification and authentication of transactions occurring on the blockchain. Thus to make decisions you need a decision-making process like a consensus mechanism. Achieving agreement on single data value or state of network among distributed processes or multi-agent systems.
There are different kinds of consensus mechanism algorithms that work on different principles:
With proof of work consensus mechanism system, anyone a part of the network can become a miner. When a new transaction occurs, it is put into the mining pool and is broadcast to every miner on the network. From there, miners select the transactions they want to validate from the pool and put them into a block, then compete to create a valid block. Only one miner wins the privilege of adding the next block to the blockchain. This is a common consensus used by Bitcoin. However, it needs high energy and time consumption.
Another consensus mechanism that is currently on the rise is proof of stake. The key difference between these consensus mechanisms is that in proof of stake instead of anyone being able to mine a block, there are specific validators that the network elects to validate a block. The proof of stake mechanism helps bring transactional costs down, as each individual is no longer paying for the electricity that goes into mining, they are only paying for the loan of the stake given. In addition, it’s also more environmentally friendly in comparison to proof of work, because less energy is being used as fewer computers are guessing.
Mining devices are also known as nodes use available memory space on their hard drives to mine cryptocurrency. This available space is used to store possible solutions to the next block. This means the more memory a node has, the more likely it will “solve” the next block in the ledger thus more likely to be rewarded.
A network of nodes with timers is each given a random amount of time to wait. The first node to finish its waiting time (or first node to wake up) commits the next block to the blockchain and is therefore rewarded.
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