What is consensus?

Proof-of-work (POW)

POW is the most common consensus mechanism and is used in Bitcoin and Ethereum. When a new block of transactions is being added to the blockchain, to verify these transactions, POW is performed by miners (i.e., powerful computers or processors) that are competing with one another to solve a cryptographic problem (i.e., hash puzzle). The cryptographic problem is based on the new block of transactions and also all other previous transactions block in the blockchain. The cryptographic problem is designed such that it is extremely difficult and time consuming to solve it (i.e., hashing) but once found by one of the miners, the solution is easily verifiable on the network by all other miners. Once the cryptographic solution has been verified as valid, the miner who solved it receives a mining reward for the computational work being done to solve the cryptographic problem.

Criticisms of POW are as follows:

• The process of of solving the cryptographic problem (i.e., hashing) is energy intensive and an excessive waste of resources.

• People or organizations that have the resources to purchase powerful computers have a higher chance of mining and receiving the transaction fee.

• Although many cryptocurrencies such as Bitcoin claim to be decentralized, the hashrate distribution (i.e., the diversity of miners that are hashing or solving the cryptographic problem) is concentrated across as few as five mining pools.

Proof-of-stake (POS)

POS is a consensus mechanism designed to mitigate some of the criticisms of POW. The concept is based on the idea that miners that hold a large amount of cryptocurrency have a larger stake in ensuring the validity of the blockchain.

In POS, a miner has to submit a portion of coins as their stake. The coins being staked have a “Coin Age”, which is basically a measure of how long a coin holder has held onto coins without spending or moving them. When a new block of transactions is being added, selecting which miner produces the new block is based on the total Coin Age of all the coins that are being staked and the cryptographic problem. There are no block rewards, and each miner receives a transaction fee. POS is faster, more resource-friendly, and energy efficient compared to POW. To improve the security of the consensus mechanism, newer versions of POS include miners also staking a bet of coins on the validity of a block that is being added to the blockchain. If the block is successfully (not successfully) appended, the miners will get a transaction fee proportionate to their bets (some or all of their stake will be penalized/removed).

Criticisms of POS are as follows:

• In POW you are selected to create a new block based on how fast you can complete the hashing process; however, in POS this is also dependent on how many coins you stake in that blockchain system. Thus, POS is skewed towards miners that have large stakes.

Delegated-Proof-of-Stake (DPOS)

In DPOS, stakeholders (i.e., individuals that stake a portion of their coins in the blockchain) can outsource the block production process to a third-party, also known as delegates (also known as witnesses or block producers). Thus, multiple stakeholders can vote for a few delegates that are responsible for achieving consensus and will perform the generation and validation of new blocks to the blockchain. Each delegate submits an individual proposal requesting for votes, and stakeholders have voting power proportional to the number of coins that are staked to elect their delegate of choice. Generally, the mining rewards collected by the delegates are shared proportionally to their respective electors.

Thus, DPOS is a voting system that is dependent on the delegate’s/miner’s reputation. If the elected delegate/miner does not operate efficiently or acts maliciously, they are immediately expelled and replaced by another delegate. DPOS is more efficient and scalable in block production compared to POS or POW.

Criticisms of DPOS are as follows:

• DPOS is perceived as a methodology to streamline and improve the efficiency of block production.

• DPOS is fast, but not as fair as the competition-based system of POW where being a block producer is purely based on the solution to the cryptographic problem.

Proof-of-stake Velocity (POSV)

POSV modifies the POS consensus mechanism to improve network participation primarily by using a coin aging function that is non-linear. This encourages coin stakeholders to actively stake their coins on a regular basis.

It can be seen from the graph above that the PoS Coin Age value increases linearly with age; however, the PoSV Weighted Coin Age value is greater in the first few days and weeks rather than in later weeks. Thus, coin stakeholders are incentivized to stake their coins as much as possible as the coin age value is greater the “younger” the coin.