It is very important to realize that without the concept and functionality of consensus, the blockchain technology would be devalued in a short span of time. Since there is no centralized authority in the network, we seek the help of a consensus algorithm which allows all nodes on the network to verify a transaction and accept it as legal before registering it on the immutable chain. But once the consensus passes it and the transaction is recorded, there is no way that anyone could tamper or delete it from the record. It stays there forever.
Let’s have a look three of the most popular consensus algorithms that you are most likely to choose for your ICOs.
PROOF OF WORK (SUPPOSE YOU ARE LAUNCHING AN ERC20 BASED TOKEN) (PoW)
As of yet, this protocol is being used by a wide variety of organizations ranging from Bitcoin to an array of budding currencies and the primary aim is to halt the DDoS attack, preventing the unexplained exhaustion of resources. In order to understand the concept and its working at the grass root level, you should think of yourself as an accounting student, who is solving a specific problem at any particular instance.
You should also assume that the room is filled with an array of students, attempting to solve the same problem. For instance, you take one hour to solve a specific question and other pupils in the class have done only half of it. Don’t you think that you deserve a reward provided that you have a well-driven method for reaching the conclusion and the examiner is able to evaluate each step of your iteration?
Now if the question you are solving is difficult enough that it requires a reasonable amount of brain power, your resources are being used. That is exactly the scenario on Ethereum blockchain. Users solve different math problems to allow efficient running of the network and then based on the effort they have offered and the hardware resources they have used, they are rewarded accordingly.
As such, the Proof of Work model does not have any flaw apart from the fact that its extensive usage may lead to a 51% attack.
Therefore, even though this protocol is fine for most of the scenarios, the PoS is way ahead of PoW.
WHAT IS 51% ATTACK?
As the name suggests, it is a situation or rather an event where a miner (most commonly referred to as a pool of miners) take control of 51% of the entire computational power associated with the network. With such a heavy computational power limited to a narrow stream of users, attackers have the ability to invalidate transactions and even the double spending of coins. It ultimately thwarts all the measures offered by the Proof of Work model.
It becomes possible with the creation of fake blocks. These blocks will be used to confirm invalid transactions and even reject the authentic and legal ones. This is where the Proof of Stake model comes into play and offers yet another layer of security and transparency.
PROOF OF STAKE (CONSIDER A MINING SCENARIO) (PoS)
Since it rests on the concept of a person’s stake (we’ll learn that in a while), the percentage of blocks that can be confirmed by the user is offered on a linear scale. It means that if person A has ten times more coins that person B, then A would never be able to mine more than 10 times the ability of B. As compared with the Proof of Work model, it overcomes the challenges and proves to be an even better option in the following ways:
● Expensive hardware is not required, and even an ordinary laptop would serve the purpose, as long as it is online;
● Since it does not consume high electricity, PoS is an energy efficient model;
● Validations are efficient
In the PoW model, miners are given rewards on the basis of solving mathematical problems and deriving new blocks. However, this robust and futuristic model has a keen focus on the wealth of each individual.
Now let us assume that you happen to be a validator and that you are in possession of 100 tokens. It is your stake and the duration for which you have held each coin will be referred to as its very age. But please be advised that if you transfer the currency to any other wallet, the age tag associated with each transferred coin will be refreshed. The number of coins and the age associated with them could be regarded as a guarantee which assures the automated system that this very individual is more loyal to the network, so he should be rewarded by allowing him to validate a block.
Hence, it happens to be a robust solution for diminishing the risk of frauds (nearly eliminating it). This is because the algorithm prefers those individuals for block building who appear to be more
loyal to the network.
DELEGATED PROOF OF STAKE (DPoS)
If you are familiar with the concept of democracy and voting, you already know half of the mechanism here. Basically, this algorithm works on voting and reputation maintenance system. So, for instance, if you are allowed to vote but your reputation on the network is down for a legitimate reason, your opinion won’t carry much weight. Until now, it has proven to be (probably) the most decentralized thing on the blockchain technology since it allows everyone on the network to give an opinion about something and yet, it covers pretty much all of the necessary parameters
required to give permissions.
Please note that the new role assignment is at the discretion of current token holders. For instance, if Adam wants to join the network and Chris is already a member, then the later mentioned needs to vote for Adam’s approval, provided that Chris has a certain threshold of tokens in the wallet to prove his loyalty to the network. Therefore, it is very important to assign roles in a purely decentralized environment to minimize the risks associated with the centralization of power.
Shortly put, the DPoS seeks to by speed up transactions and block creation, while not compromising the decentralized incentive structure at the heart of the blockchain. DPoS is the next step in the evolution of consensus mechanisms. It builds on the original Proof of Stake consensus mechanism and drastically increases speed and scalability.
If you ever wish to partner with us for one of your ventures, we could always explore the possibility. For instance, you come up with a brilliant market-thrilling idea. But you do not have the skillset
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