The decentralization aspect of the blockchain alleviates the need of any singular controlling authority and places the power in hands of all the members present in the blockchain network. The blockchain is a database that keeps the track of all the transactions taking place between the members of the network.
In traditional transaction systems, one single authority handles all transactions, including verifying the transactions and storing them in a database. This traditional model introduces a dependency on a central system as well as a security risk: in order to disrupt the complete system, including the database with account balances, bad actors only need to succeed in tampering with one single system. Blockchain overcomes this problem through decentralization: by removing the existence of a single control centre, users on the network hold joint responsibility in the maintenance of all personal records and confirmations of transactions.
A challenge that bitcoin, being the first blockchain system, overcame is how pseudonymous users can be relied on to perform credible verifications of transactions happening in the transaction system.
The solution to this involves an incentivised consensus mechanism.
What is consensus?
Consensus is a decision-making process which happens in a group in such a way that all the members present in the group are satisfied with it. Unlike voting system, consensus does not focus on imposing the majority’s decision on the group but arriving at a point where everyone agrees with the decision.
In blockchains different players are granted from time to time the task of verifying and confirming a number of transactions and registering them into a block. They are assigned this task based on the amount of risk they have been willing to take to earn the right to perform this task. In turn, they receive a reward (the block reward). The next player that earns the task of forming a block of new transactions will base his block on the last block that he agrees with. If a player’s block is not accepted by subsequent players (because of some fraudulent transaction), his block will be ignored and his block reward will be forfeited. Since the player already put some risk in earning the right to form a block, it is not economically attractive to include fraudulent transactions in the block to begin with. Because each block needs to follow the last valid block in the blockchain, over time this mechanism results in consensus.
The term ‘risk’ used above refers to the amount of resources spent or temporarily made inaccessible while earning the right to form a block. Because this plays a pivotal role in the long-term consensus on the block chain, this is called the consensus mechanism.
Types of Consensus on the Blockchain
There are various methods by which a group on the blockchain network can reach long term consensus.
Proof-of-Work involves solving a complicated puzzle that includes the transactions you want to include in a block to show that you have put a certain amount of computational power at work. When a puzzle is solved, other members of the blockchain double check the solution. The one who solved the calculation first presents it to the group to confirm if the answers match. If the answers are indeed the same, the process of solving the puzzle starts over for a new block with new transactions. The now solved block is confirmed by others by including (a reference to it) in the next block.
Advantage: It works every time and ensures that the block validated is 100 per cent genuine. Moreover, the participation of all nodes is desirable but not necessary.
Disadvantage: To ensure a steady flow of blocks, the difficulty of the puzzles increases automatically with the amount of competing computer power. It takes more and more computational power and memory to confirm the same amount of transactions this way, which makes the blockchain network not very environmentally friendly.
Proof of Stake (PoS):
In this method, instead of earning the right to validating the block by applying computing power, the difficulty of the puzzle an individual needs to solve depends on how many crypto coins he puts at stake. There is an analogy with buying lottery tickets: the more you buy the bigger your chance to win. With one exception: if you don’t win, you will not lose your bet, although it might be locked up for a while. In this case, people who own a lot of coins have an interest to keep the network reliable, as an unreliable network would render their coins worthless. Therefore they will only confirm valid transactions. In some versions of PoS stakes are actually lost if the rest of the network does not confirm your block.
Advantage: Employs less computational power and takes up less memory.
Disadvantage: Since nothing is exactly put at stake, there possibly remains a question in the credibility of the tokens or the currency used to make the bet.
Delegated Proof of Stake (DPoS):
Delegated Proof of Stake involves members of the blockchain electing delegates that will validate the blocks (instead of members validating the block themselves).
Advantage: This method is easy to scale and effective on cost and computational energy. Although returns on investment might be the same in the long run, it enables owners of small amounts of currency to get regular (smaller) paid rewards.
Disadvantage: DPoS can be considered partly centralized, which can in some senses detract from one of the blockchain’s key advantages.
Also known as Proof of Activity, the hybrid consensus method is an amalgamation of two consensus methods. UnitedBitcoin is implementing a hybrid consensus mechanism that is split between Proof-of-Work (50%) and Proof-of-Stake (50%).
This hybrid consensus method gives all Workers and all Stakers together equal chances of winning a block. While Proof of Workers increase their chances by working harder, Proof of Stakers increase their chances by staking more. Each group has a 50% chance to win.
Once the block is mined, the process starts over. In the way UnitedBitcoin implements this, there is no fixed order in which blocks need to be mined by either of the groups. On average 50% will be mined by PoS and 50% will be mined, but through either method a few subsequent blocks could be mined.