Cryptocurrency is an incredibly popular topic in the media right now. It’s also a very volatile market that can leave investors feeling anxious and confused about what they should be investing in.
One of the most confusing aspects for many cryptocurrency investors is blockchain technology, which is at the heart of every cryptocurrency transaction.
This technology uses blockchain consensus mechanisms to verify transactions and protect data from tampering, so understanding how these work will help you make better investment decisions.
What is Blockchain?
Blockchain is a decentralized, peer-to-peer digital ledger that uses cryptography to record all transactions and share them across multiple computers. It’s essentially like Google Docs for financial data.
It makes the process of recording cryptocurrency transactions transparent without sacrificing privacy or security.
How are Blockchain and Cryptocurrency Related?
Cryptocurrency is a blockchain-based digital currency that uses cryptography to control transactions and verify data. One of the most popular cryptocurrency examples is Bitcoin, which was released in 2009 as an experimental technology platform.
Cryptocurrencies are completely decentralized which means they aren’t regulated or controlled by any central organization, bank, or government.
This is why cryptocurrency prices can fluctuate so wildly because the value of currencies like Bitcoin and Ethereum isn’t tied to economic conditions in a country’s economy.
What are the Advantages of Blockchain Consensus Mechanisms?
The biggest advantage for most cryptocurrency investors is that blockchain consensus mechanisms protect them from spending money on coins, tokens, and shares that no longer exist because they have been hacked or lost forever due to fraudulent activity.
Cryptocurrency cannot be manipulated by outside forces like banks can through inflation rates, interest rates, minimum deposit requirements, so it’s also more secure than traditional financial systems which rely on centralization.
This makes it a potentially great investment opportunity for many people who want complete control over their own finances without having to trust anyone else.
How does Blockchain Consensus Work?
The blockchain network has several nodes (computers) that communicate with each other through the internet.
Every time one computer sends information to another node on the blockchain, this piece of information needs to be validated before being confirmed as valid and added permanently into a block within the chain.
This validation step requires consensus from every node in order to prevent fraudsters from adding fraudulent blocks into the chain. Therefore, what are the different types of blockchain consensus mechanisms?
Proof of Work
The first blockchain consensus mechanism is called “proof of work.” This involves miners who use specialized computers to solve incredibly complex equations that are required for the transaction verification process.
Proof of stake, which was developed as an alternative to proof of work, requires cryptocurrency investors with a larger share in the currency they want to mine (or acquire) have more votes on their transactions being included and verified by other miners.
One example of this type of system is Ethereum’s Casper Protocol. A third option that has been proposed is approval voting-style mechanisms.
This is where each cryptocurrency investor has one vote per every token or coin that he holds when verifying a new block in the chain, but some research suggests this method can be easily manipulated if it is not well-funded or organized.
Proof of Stake
One of the benefits of proof of stake is that it requires less computing power than its predecessor, so cryptocurrency miners can save money on electricity bills.
It also reduces the risk for blockchain attacks by making attackers have to own 51% or more of all coins in order for a majority attack to succeed.
This means they would essentially be attacking themselves if they tried any sort of fraud with this type of consensus mechanism.
Another benefit is that transaction times are reduced dramatically because there’s no need to solve complex equations before being able to add new transactions into a block in the chain.
However, one drawback is that larger cryptocurrency investors will make even more profit from owning large amounts and voting on many blocks at once depending on how quickly each miner gets paid.
Delegated Proof of Stake
One of the most common blockchain consensus mechanisms is called “delegated proof of stake.”
This type of system requires cryptocurrency investors with more than a minimum amount in their wallets to be able to vote on new blocks,
However, there are only several hundred voters who receive rewards for voting on transactions and verifying them as valid instead of having every transaction rely on votes as approval voting-style mechanisms do.
Proof of Capacity
Proof of capacity is a consensus mechanism that allows cryptocurrency miners to use free disk space on their computers for mining.
This also means they don’t have to buy specialized computer equipment in order to mine new coins because proof of capacity uses much less electricity than proof-of-work and proof-of-stake systems.
However, it’s been criticized as an unfair advantage over other miners who aren’t able to take advantage of the same benefits because this type of system requires a slower hard drive speed compared with faster ones since there are more reads instead of writes involved in the process.
Proof of Elapsed Time
Proof of elapsed time is a blockchain consensus mechanism that requires cryptocurrency miners to wait for some sort of permission from the network in order to add new blocks into the chain.
It uses less energy than proof-of-work systems.
Nonetheless, it’s more expensive and complex compared with other types because there are several different types of trusted hardware involved in this type of system.
For example, Intel Corporation recently developed an SGX solution called “Sealed Authenticated Computation” which enables multiple parties who don’t trust each other to compute something without leaking any secret information about it.
One advantage of this blockchain consensus mechanism is that you can run all sorts of applications on top of blockchains while allowing them to be completely isolated.
Proof of Identity
Proof of identity is a blockchain consensus mechanism that requires cryptocurrency miners to prove they own an account on the system in order to add new blocks into the chain.
It’s only used for permission blockchains, which means it can’t be applied to public or private ledgers because there are privacy concerns involved with this type of system.
The main benefit of proof-of-identity systems includes allowing organizations and corporations who don’t trust one another to create transactions without having any information leak about them during verification processes.
This allows financial institutions like banks or other businesses to use blockchains that meet their specific needs while still maintaining security protocols throughout all aspects of their network infrastructure.
Proof of Authority
Proof of authority is a blockchain consensus mechanism that uses real-world identities to verify transactions using private blockchains.
It’s considered an easy way for companies or organizations to get started with two-fold security measures because it allows cryptocurrency miners in the network to have separate permissions when verifying new blocks being added into these types of chains.
This means they can’t approve anything without permission from higher levels within their own organizational structure.
However, there are some drawbacks including less decentralization and immutability features compared with other systems.
This is since the type only gives a partial trust on top of public ledgers while still letting them operate as if they’re completely decentralized.
There are several different types of blockchain consensus mechanisms used today depending on what each business needs in
Proof of Activity
Proof of activity is a blockchain consensus mechanism that requires cryptocurrency miners to prove they are actively involved in mining new blocks into the chain.
It’s one of the most popular types because it has several benefits including allowing lower hash rate participants to mine on top of longer chains while providing additional security features when trying to prevent double-spending attacks from happening within these networks.
However, there are also some disadvantages associated with this type too since using proof-of-activity systems can lead to an increased rate of forks occurring compared with other traditional systems.
Another drawback includes needing more resources which require higher amounts of electricity for cryptocurrency miners who want to run full nodes throughout all aspects of their network infrastructure.
What Makes an Ideal Blockchain Consensus Mechanism?
Now that you know all of the different types of blockchain consensus mechanisms, now’s the time to find out how to choose the right one.
The following information should steer you in the right direction for making the best choice.
Select a Safe Mechanism:
You’ll want to be sure that all of the cryptocurrency miners have a good amount of security protection when using any type of blockchain consensus mechanism.
Choose One That Fits Your Network:
You need to find a system that will work with your business model since not every option available works for everyone in this space.
Focus on Efficiency and Effectiveness:
Not only should you consider how each one operates, but also think about how much value they bring as well as what impact it has on different types of transactions within your network infrastructure.
Focus on the Mechanism’s Participation in the Database:
These systems also need to show that they’re involved with helping create new blocks within your blockchain database.
Choose One That Works Best for Your Business Model:
You should always use one of these consensus mechanisms which fits best based on what you want out of the system. This will help provide benefits throughout all aspects of your business infrastructure while still achieving overall network security too.
Don’t Be Afraid to Ask for Help:
Next, if you’re ever having trouble figuring out which type of blockchain consensus mechanism can work best for your business or organization then don’t be afraid to ask the community for help.
Blockchains are designed to be secure and decentralized since they use this type of system in order to verify new transactions within their databases every single day.
Conduct Plenty of Research:
This is one of the most important steps to take since you’ll need to conduct plenty of research before making any type of decision.
Use Multiple Mechanisms if Possible:
For instance, proof-of-stake and proof-of-work can be used together in order to provide additional security for cryptocurrency networks especially when they’re trying to prevent double-spending attacks from happening at different points throughout their day.
Select One That Is Practical:
A practical option is only one that can provide benefits while also making it easy to use by cryptocurrency miners who will implement this system into their own blockchain networks too.
Avoid Blockchain Reorganizations:
You’ll want to avoid these types of attacks since they could lead your blockchain network down a path where blocks might get orphaned and you won’t be able to regain your overall database accuracy again either.
These reorganization events typically occur when there’s been some type of mistake during mining or an attempt at double-spending has occurred within your internal infrastructure.
What are the Consequences of Choosing the Wrong Mechanism?
When you make the mistake of selecting the wrong blockchain consensus mechanism, you will encounter many problems, which include:
Problematic Blockchain Forks:
Blockchain forks can be caused by different types of consensus mechanisms that aren’t working together correctly.
Forks can also happen when a blockchain splits into two different versions with different rules.
This is typically caused by the inability to come to an agreement about which types of transactions should be included in successive blocks within your internal database infrastructure.
If you choose one, make sure it’s clear and concise since this will help prevent future problems from occurring too.
You’ll want to avoid network congestion at all costs since these events could impact cryptocurrency miners who are trying their best to keep up with all additions being made throughout each day in order for them not to miss out on new coins that have just been mined as well.
This is especially true if there isn’t enough transaction capacity being offered or if demand exceeds supply.
This is one of the worst problems to face since it’ll make your blockchain less appealing as a whole, according to bytefederal.com.
It’s important for cryptocurrency transactions within each block to be verified, validated, and linked together with other blocks in order to establish a secure chain throughout your overall network structure too.
This will help provide certain levels of protection from future attacks being made against them as well.
Ready to Choose the Right Blockchain Consensus Mechanism?
As you can see, there are different types of blockchain consensus mechanisms to choose from. To learn more about this subject, continue reading this blog for more helpful articles.