Cryptocurrencies

PoW, PoS, dPoS, DoA …. What is a Blockchain Consensus? – Cryptocurrencies

What is blockchain consensus? We hear this word everywhere, we know that it is important for the security of various cryptocurrencies, but in the end, this notion remains rather vague. In this article, we will explain to you how a consensus works, what it is used for, but also the different large families of consensus that exist!


Preamble

In order to explain how does consensus work, let’s start with its own definition: procedure which consists of reaching an agreement without proceeding to a formal vote, which avoids revealing objections and abstentions. In a decentralized system such as blockchain to allow the community to self-regulate consensus is essential. It not only ensures the verification of transactions but also generates value. We often hear about Bitcoin mining (BTC), it is, in fact, a consequence of the Bitcoin consensus: the proof of work (proof of work).

To be able to fully understand proof of work, let’s first understand how a blockchain works.

For this a small lexicon is essential:

  • Block: A block groups together a set of transactions time-stamped and validated
  • Hash: The hash occurs during “hashing” which is a cryptographic process used to associate with each transaction a unique identifier of 64 characters, following the use of the SHA 256 function.
  • Minors: Minors are people validating the authenticity of transactions and thus allowing the creation of new blocks.
  • Blockchain: The blockchain or in French a series of blocks can be perceived a large immutable accounting register, that is, which cannot be corrupted. It is decentralized!
  • Decentralized: Decentralized means that all information related to the blockchain is not kept by a third party but accessible by all. No specific actor does not have a blockchain, the notion ofself-regulation is intimately linked to the decentralization.

Bitcoin (BTC), the first blockchain, the first cryptocurrency and the first consensus

Satoshi Nakamoto, still incognito today, created Bitcoin and unknowingly opened the door to an ever-expanding blockchain ecosystem 10 years later. The source of the success of Bitcoin and more broadly of the Blockchain rests on the consensus protocol that it managed to put in place. How can you ensure that transactions submitted to the blockchain are true?

Concrete example: Velleyen a 10 BTC (Bitcoin) and decides send 15 to his friend Gaëtan, the role of minors is to check that Velleyen has 10 BTC : if this is the case, they will validate the transaction. In the current system, the bank centralizes information so it can directly define a customer’s balance.

In a blockchain environment, miners will base their agreement on comparing the different copies of the blockchain because the balance is not stored, but the history of all transactions allows it to be found. You should know that a new block is generated every 10 minutes. Minors who, you will understand, are network nodes, are rewarded when they discover a new block. Indeed, this new block contains resources reserved for minors: 6.25 BTC which are given to them as an incentive. Note that minors are also recipients of transaction fees

But how do you mine a block?

Mining a block means finding the answer to a computer puzzle. The first to find the solution is the big winner and produces the block. However, solving this puzzle requires specialized equipment and a lot of energy to power this computer. It ultimately converts their electrical energy into Bitcoin, which is a fact that will help explain the creation of value within Bitcoin. It’s here proof of work which allows link each block between them.

Is there still a risk?

The only way to cheat the bitcoin blockchain and this consensus that is proof of work / proof of work is to take control of the network at 51%. Indeed in this case, it is then possible to validate false transactions by causing the main blockchain to diverge and by mining it with 51% of the network for artificially create a new chain blocks longer. However, this process only concerns one transaction or a set of transactions. It cannot challenge the blockchain and requires a colossal investment.

The Bitcoin blockchain has proven its worth since it has never been touched by an attack 51%. Its weak point comes from its lack of true scalability, it can only do 7 transactions per second.

Proof of stake or the alternative solution

Unlike proof of work, proof of stake or “proof of stake”, does not involve minors But validators. The first nuance is that it is not absolutely necessary to have specialized hardware to authenticate transactions and generate blocks. All it takes isa simple server and put funds in escrow. This process is called “staking”, freezing your funds in order to potentially be eligible for validation and the creation of a new block. This selection is made randomly in proportion to the quantity of staked cryptocurrencies. This random factor helps ensure decentralization. In addition, one of the advantages of proof of stake is its low energy cost compared to PoW (proof of work); enticing higher profitability, a lower risk for validators and increased security. Indeed, to carry out a 51% attack would require acquiring 51% of the entire cryptocurrency supply, which financially would require substantial funds. In addition, the attack would hardly be profitable since the price of the cryptocurrency would drop immediately. All validators therefore have an interest in ensuring the security of the network in order to maintain a value at worst equal to the funds they have sequestered.

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Cryptoassets are highly volatile unregulated investment products. No EU investor protection. Your capital is at risk.

A problem may exist: nothing to stake

Here we have to place ourselves in the case of a fork of the blockchain, that is to say the creation of a chain of parallel blocks.

The validators would have every interest in committing their funds in escrow (stake) on the two chains so their hope of gains would be greater.

If he did so, it would result a heavy penalty resulting in the loss of part of the funds. The same fate is reserved for those who decide to forge the minority chain. We call this penalty: the “slashing”.

Right now we talk a lot about Ethereum 2.0, this big “update” is due to the change of consensus from PoW to PoS.

The limitations of PoS (Proof of Stake)

PoS in its initial form allows each network participant to become transaction validator. The probability that the validator is not online being potentially uncertain, the risk of network downtime is high. Also without peer oversight, an attacker’s nuisance power is proportional to his funds.

In order to improve PoS, the DPoS (Delegate Proof of Stake) or the delegated proof of stake has emerged.

DPoS the improvement of the PoS which EOS is the bearer.

A group restricted of validators (delegates or witnesses) are the only ones able to validate the blocks. These delegates are elected by the holders of the native blockchain token. Thus, the DPoS is based on the democratic vote of token holders. They elect nodes with supreme power, that of validate and register blocks on the chain. The blockchain makes this voting process completely transparent. To be able to vote, it is necessary to put the tokens in sequestration for 3 days. So like a political election, the different validators will each offer their program to the community, sell their seriousness and try to gain its trust. In particular, they will have to prove their commitment as well as proof of ownership of robust material. Those who do not respect their commitment are doomed to no longer be able to become validators in the next round since the community will no longer vote for people in this case. DPoS is a consensus pushing its users to transparent, honest and inclusive behavior. In addition it also comes with a promise at EOS the possibility of making 1 million transactions per second and free of charge. In order to understand more precisely how DPoS works, stay on Cryptocurrencies as an upcoming more technical article will be published soon.

Other consensuses use the same dynamic as DPoS such as PoA.

What is PoA (Proof of Authority)?

The “PoA”, or “proof of authority” uses the same principle as the DPoS by designating onlya small number of people which manage the creation of blocks and which can interact with the blockchain. There is no need for sequestration here, people are chosen and known. A use case of this system is in the banking sector with the JPMcoin of JP Morgan. It ensures maximum security, very low costs allowing private blockchain operation. It is used in particular to streamline and facilitate the management of fund movements at JP Morgan. One of the big problems with this consensus which prevents it from spreading within the blockchain ecosystem is its great centralization. Power is only kept by a handful of people. Which does not fit in with the values ​​that the blockchain community wishes to disseminate.

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Cryptoassets are highly volatile unregulated investment products. No EU investor protection. Your capital is at risk.

In this article we have seen that each consensus has its strengths and weaknesses. Combining security, scalability and decentralization is not easy, this challenge is sometimes even deemed impossible to fully meet. Many consensuses are waiting to be invented, perhaps one of them will be the exception that will prove the rule?

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