The term consensus in cryptocurrency refers to the principle of transaction verification. Consensus is best described as a method that differentiates between real and fake transactions. Two of the many ways to reach consensus are Proof-of-Work (PoW) and Proof-of-Stake (PoS).
In Proof-of-Work, computers known as miners need to solve complex mathematical problems. This is the first and main technique developed by Satoshi Nakamoto – the founder of Bitcoin and blockchain technology. Before receiving an amount of cryptocurrency, these computer miners should solve some tasks. After the task is completed, a new block is added to the blockchain, and the transaction belonging to that block in addition to receiving these cryptocurrencies. When someone tries to set up a fake block while everyone is digging on the same chain, a new chain is created. After the creation of a new chain, it is decided which one of the chains is real. Based on the PoW system, the longest chain is the real one.
Furthermore, we can say that 51% of the total computing power is used for the invested mining in the creation of chains. That is why the Bitcoin network is safe as long as 51% of the power is not in the hands of a person or a group of people.
What is a Consensus Mechanism?
The consensus mechanism is a way to create consensual or unanimous decisions. Proof-of-Work is considered to be the first consensus mechanism.
The first to start using Proof-of-Work was Bitcoin. This system turned out to be very well-founded and decentralized. However, its scalability remains questionable.
On the Bitcoin blockchain, it looks like this:
- When miners confirm transactions, they open the blocks after which the blockchain is named. When a miner opens a block and confirms a transaction, immediately all other miners confirm the validity and start mining the next blocks as soon as possible.
Proof-of-Work Mechanism On Bitcoin
Bitcoin is decentralized at all levels possible, including the logical, spatial, and managerial levels. Theoretically, anyone could be a miner because they have equal opportunities or enough to start mining. Mining requires equipment. Types of mining equipment can be ordered online, and the connection to the electricity network is provided quickly. Even though becoming a miner on the Bitcoin blockchain could be very beneficial, it is not easy. The costs are relatively high, and there is strong competition. Because of this, the practical decentralization of the mining process is reduced significantly.
Advantages And Disadvantages of PoW
- The production of new coins in circulation is invested with the help of electricity and computer equipment
- Anyone has access and can dig up those cryptocurrencies
- Used in countries with a lot of unused electricity or a lot of natural energy sources like China or Iceland
- When a large number of people use the network, it becomes prolonged
- You can profit by mining using professional equipment, which is significantly expensive.
- Energy consumption would be on a significantly large-high scale, which is a dangerous method for the environment. On the one hand, a solution could be to raise electricity prices. However, on the other hand, rising electricity prices could disrupt the existence of cryptocurrencies.
- Consensus is best described as a method that differentiates between real and fake transactions.
- Proof-of-Work (PoW) is considered to be the most common method of reaching a consensus.
- 51% of the total computing power is used for the invested mining in the creation of chains.
- The consensus mechanism is a way to create consensual or unanimous decisions.
- Anyone could be a miner because they all have equal opportunities or equal enough to start mining.