A consensus mechanism is a system used in a distributed framework (mainly to support a blockchain network to validate the transaction and all the states in the system). To maintain the integrity, security, and robustify of a decentralized network it is important to allow multiple, independently running parties to agree on the same output without the use of a trusted party. The consensus mechanism ensures that the coins are distributed evenly to all the nodes in the network, so every node in the network checks the same data and takes the same version of the ledger.
Key Concepts of Consensus Mechanism
A core idea is a consensus mechanism by which the decentralized participants can choose the one and only, correct, copy of the blockchain without a central authority. How different consensus mechanisms all agree on this agreement in different ways. While Proof of Work (PoW) is the most widely used method, this entices nodes (slang for miners) to compete in the ability to solve extremely complex math problems. The first one which solves the puzzle gets the cryptocurrency and of course, the right to validate the block of transactions they create. This is a very computationally expensive procedure, wherein you use a lot of energy to do it.
A second widespread approach is Proof of Stake (PoS) here, where nodes (nodes that are interested in validating transactions for a cryptocurrency) are chosen based on the amount of cryptocurrency they have and are willing to 'stake' (or purchase) for their fairness. It is more energy efficient because it doesn't decorate your life with cryptic puzzles and it also incentivizes good behavior by preventing malicious actors from forgoing all of their staked assets if they do malicious things.
Locally two cases boil down to decentralization, security, and cryptographic verification. However consensus mechanisms do not solely serve as fault tolerance mechanisms, and thus a majority of nodes performing correctly is still required even if some nodes do not work or are malicious to enable network operations to be performed correctly.
Advantages of Consensus Mechanism
One of the most important advantages is the consensus mechanisms. So without having an authority management overhead, more than one entity can now manage the entire setup. However, this decentralization results in much safer, because the storage of the data on the blockchain becomes almost impossible to be controlled or manipulated by one single actor. Additionally, since the whole system is more transparent all nodes have the same ledger and it’s publicly available to anyone to audit.
Fault tolerance is also a part of the advantage. Consensus mechanisms are needed for a network to run even if some nodes fail or might try to put so that the network can keep running. Since the entire network may break down if just one point fails, the decentralized systems are more robust than the centralized systems, but this is what allows the decentralized systems to be more robust.
The trustless part of consensus mechanisms is advanced even further. This is not so great with traditional systems as they require everyone who is involved in a system to place their confidence in a central authority that will guarantee the validity of any transactions. Even in systems such as blockchain and its consensus algorithms, people don’t have to trust each other and no intermediary, but blockchain and its cryptographic rules ensure only valid transaction processes.
Disadvantages and Considerations
There are a few drawbacks to consensus mechanisms though, and in banality, you have to trade that off for their benefits. The two biggest disadvantages are that some consensus mechanisms are very heavy resource usage (Proof of Work for example). The only thing PoW has is enormous power and energy to sacrifice in solving mathematical puzzles, and, this creates fears about its environmental cost. PoS is based on the same tradeoff: The reason it’s more energy efficient is that certain people have the option of centralizing power into their hands by staking more cryptocurrency.
Another thing to worry about is attacks. In PoW systems we have an attack that we call a 51% attack since an entity owning more than half of the network's computational power can manipulate the blockchain. If PoS, large token holders can rule the decision-making making decentralization of the network oxymoron.
Consensuses can also impose latency. The reason why it’s a problem with the scalability of consensus-based blockchain networks is that the process of validating and confirming a transaction in a decentralized network is often slower than in centralized systems. Ways to solve this scalability problem are ongoing research and development areas for blockchain technology.
Common Use Cases for Consensus Mechanism
One of the most popular consensus mechanisms used from applications in a wide array of blockchain projects, cryptocurrencies such as Bitcoin and Ethereum are included. Bitcoin does this, however, by using Proof of Work to ensure transactions are validated and transactional trust guarantees are built through their network. The PoW, used by Ethereum previously, is changing to Proof of Stake to make it more energy-efficient and scalable.
For any smart contract platform based on some blockchain, there is a need for mechanisms — we call them consensus mechanisms -- that ensure executing code is logically guaranteed, without any central authority other than the cryptocurrencies. Similarly, they are also used by the Decentralized finance (DoFi) platforms to verify their financial deals as well as lending, borrowing, and trading.
This second use case is decentralized voting. On the blockchain, consensus mechanisms are happening to prevent users from suffering from unfair, insecure, and transparent voting systems in DAO by participating in governance under idealized autonomous organizations.
Conclusion
Consensus mechanisms are the heart and backbone of decentralized systems where independent participants come up with a mutual understanding of the network state without the involvement of the center. They also bring some advantages over traditional methods here: security, decentralization, and fault tolerance; these are important building blocks of blockchain networks. However, these risks are prevalent in some models in terms of high energy consumption, risks of centralization, and scalability. Due to this reason, the consensus mechanism will still exist and continue to remain an essential enabler for blockchain technology thus far and will innovate to overcome the current barriers faced. With more and more adoption of blockchain, consensus will become a necessary (to be good and trustworthy decentralized systems) part of it.
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