Consensus mechanisms
Consensus mechanism
Cryptocurrencies use blockchain as their database; therefore the consensus mechanism secures blockchain by validating entries into the blockchain thus ensuring the utmost security of all transactions. There are mainly three types of consensus mechanisms most prevalent in validating transactions; Proof of Stake, Proof of Staked Authority, and Proof of Work elaborated as follows:
Proof of Stake, aka PoS
Proof of Stake is a consensus mechanism to process transactions and create or add new blocks to the blockchain. Validators stake a certain amount of crypto as security to validate transactions on the blockchain. The system randomly picks validators to perform mining tasks, which is completely opposite to how the Proof of Work works. As a reward, validators get paid the transaction fees.
In PoS, blocks get assigned according to the stake pledged by validators. Rather than competing to be the first in finding the necessary amount of preceding zeros for a block hash, blocks are pre-assigned to validators.
Each of the consensus mechanisms has its own merits and limitations. However, PoS is supposed to be more environment-friendly than PoW as it doesn’t call for investing in the setup and/or consuming massive amounts of electricity.
Why PoS is preferred?
With proof-of-stake, the blockchain is kept secure by reducing the amount of computational work required for block verification and transaction verification. Each of the consensus mechanisms has its own merits and limitations. However, PoS is said to be more environment-friendly than PoW as it doesn’t call for investing in the setup and/or consuming massive amounts of electricity.
How does PoS work?
Proof of stake randomly selects validators who have pledged their stake to verify transactions and add new blocks to the blockchain. PoS is said to be more economical consensus mechanism than PoW in terms of infrastructure and setup.
As there are certain factors required by PoS to work, it may incur a lot of expenses. For example, a full-fledged processing and storage unit corresponding to the size of your blockchain is required to run a full node.
The downsides of Proof of Stake
One of the notable downsides of PoS is it encourages lobbying/hoarding of stakes. The larger crypto shares a party holds, the more will be their influence, irrespective of the consensus. This itself to some extent dismantles the idea of a decentralised framework and also fair trade the blockchain across the globe works on.
Proof-of-Staked Authority, aka PoSA
PoSA has been widely used by many cryptocurrency networks or validators as an inherent consensus mechanism. Utilising a cryptocurrency client that participates in PoSA validation or becoming a validator in a way helps to secure the network and earn rewards.
From that baseline of the EVM compatibility, Chiliz Chain introduces a system of 11 validators with the Proof-of-Staked Authority (PoSA) consensus that supports shorter block time and lower fees. The most bonded validator candidates of staking then become the validators and start producing blocks. Moreover, the double-sign detection and other slashing logic further guarantee security, stability, and chain finality.
Proof of Work, aka PoW
Proof of Work is another type of consensus mechanism. It validates, approves, and records all cryptocurrency transactions before adding to the blockchain. It potentially slows down the creation of new blocks. Proof of work assures secured transactions with no security breaches. It gives miners an opportunity to earn block rewards also in the form of crypto coins.
How does PoW work?
Every transaction comes with a transaction hash, here, the miner has to produce a hash similar to that of a target hash. Miners (specialised computers) aim to be the first ones at solving the equation.
Much similar to the video games we play, the complexity of mining gets tougher if these puzzles are solved in less time. Also, more complex puzzles can call for more rewards. That said, there is no structure or format to demonstrate how a mining algorithm works.
Decentralised Application aka dApps
dApps is short for a Decentralised Application. It is built on a decentralised network, which connects a frontend user interface with a smart contract. Usually, dApps have open APIs and as a developer, you can possibly use existing smart contracts or templates coded by others.
Fungible tokens
Cryptocurrencies are the perfect example of fungible tokens since they have the same value as another coin of the same type at a given point. The fungible properties of cryptocurrencies are indicated by the code script/smart contracts. They can be divided into parts and are not unique.
GOOD TO KNOW
Fan tokens are fungible tokens.
Non-fungible tokens aka NFTs
Non-fungible tokens aka NFTs can be in the form of digital assets such as art, music, games, video games, rare collectibles, and so on. NFTs represent ownership of (mostly) unique items, which can be bought, sold, transferred, and even created. Since these tokens are stored on the blockchain, every transaction has its digital record on the blockchain, which allows creators to prove not only ownership but also authenticity of these assets.
The main similarity between NFTs and cryptocurrency is that they both are built on the blockchain and use similar programming languages.
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