Consensus models allow cryptocurrencies and blockchains to validate transactions and achieve agreement on the state of the network. There are different consensus models with unique approaches to verification and security.
Proof of Work
Proof of work (PoW) relies on miners competing to solve complex cryptographic puzzles in order to create new blocks.
How It Works
- Miners use computing power to solve the puzzle and verify transactions.
- The first miner to solve the puzzle is rewarded with newly minted coins.
- Solving puzzles demonstrates work and makes tampering with the ledger expensive.
Popular coins using PoW include Bitcoin, Litecoin and Monero.
- Highly decentralized and secure if there is sufficient network participation.
- Aligns incentives between miners, users and the overall network.
- Intensive use of computing power and electricity.
- Mining tends to centralize among players with expensive ASICs.
- Slow transaction times due to block intervals.
Proof of Stake
Proof of stake (PoS) relies on validators staking coins to verify transactions and create blocks.
How It Works
- Validators lock up stakes of their coins to participate in block verification.
- The protocol randomly selects a validator based on the size of their stake.
- Validators earn staking rewards rather than mining rewards.
Examples include Ethereum, Cardano, Tezos and Cosmos.
- Much more energy efficient than PoW.
- Promotes decentralization by allowing any coin holder to participate.
- Faster transaction times measured in seconds rather than minutes.
- Adds complexity in locking up staked coins.
- Requires sophisticated randomness to select validators.
- Lower barriers to attacks if there are few stakers.
Delegated Proof of Stake
Delegated proof of stake (DPoS) uses a limited number of elected validators voted on by coin holders.
How It Works
- Coin holders vote to elect a predetermined number of delegates.
- Top vote-getters become the validating nodes.
- Coin holders can «unvote» poor performing delegates.
Used by EOS, Tron, Lisk and others.
- High transaction throughput measured in thousands per second.
- Computationally efficient without mining competition.
- Allows coin holders to influence validators.
- Much higher centralization risks with fewer nodes.
- Lower network security depending on number of validators.
- Voting mechanics can be manipulated by whales.
Proof of Authority
Proof of authority (PoA) uses approved validators known as «authorities» to verify transactions.
How It Works
- Authorities are nodes that are pre-approved by developers.
- Approval is based on identity verification and reputation of validator.
- Authorities take turns creating blocks in rounds.
Used by private chains like VeChain and some testnets.
- High scalability and fast block times with few authorities.
- Low computation and energy costs without mining.
- Useful for private networks prioritizing speed.
- Highly centralized with reliance on approved authorities.
- Vulnerable to validators colluding together.
- Poor fit for highly secure public blockchains.
Some blockchains use hybrid consensus approaches combining elements of PoW, PoS, DPoS, etc.
— Decred — PoW + PoS hybrid model.
— Ethereum — Transitioning from PoW to PoS.
— Komodo — PoW + DPoS hybrid.
Hybrid models aim to balance the tradeoffs and optimize the benefits of multiple consensus mechanisms.
There are various consensus models used in cryptocurrencies, each with their own unique mechanisms for transaction verification. Understanding the differences helps evaluate the security, decentralization, scalability and other features guaranteed by a project’s choice of consensus. PoW offers strong security but high energy costs, while PoS and DPoS enable greater efficiency and throughput at the potential expense of decentralization. Hybrid models attempt to combine advantages of multiple methods.