Consensus Mechanism Meaning

What is a Consensus Mechanism?

A consensus mechanism is a fault-tolerant method – that is, it retains operability despite the failure of single or several components– that allows a distributed set of network nodes to agree on a blockchain’s state or a single source of truth. Consensus mechanisms form the basis or backbone of all blockchain networks and are vital for their security.

In a centralized setup, a single central entity or administrator holds power over the entire system. The entity has the authority to make changes in the system as they please. For instance, the admin of a database system holding voter information in a country has the power to maintain and update, add, and delete the names of voters from the system. 

To avoid the risk of centralization or conflict, decentralized systems need a consensus mechanism in their operation to ensure that actions gain approval from multiple participants or entities.

Imagine a group of friends who want to go out for dinner, but they can’t decide on a place. Each person has a different preference, and they all want to make sure that everyone is happy with the final decision. In this scenario, the group needs to reach a consensus.

One way to achieve consensus is for each person to take turns suggesting a restaurant, and the group votes on each suggestion. The restaurant with the most votes wins, and everyone goes there for dinner. This process ensures that everyone has a say in the decision and that the final choice is agreed upon by the group as a whole.

Similarly, in a blockchain network, each node has a copy of the ledger and can propose changes to it. The consensus mechanism ensures that all nodes agree on the validity of the proposed change before it is added to the ledger.

They are integral in the working of blockchains, which function as self-regulating, decentralized networks where all important ecosystem tasks are performed by rules that determine the legitimacy of contributions from participating nodes or validators.

How Do Consensus Mechanisms Work?

Different consensus mechanisms have their own set of rules and processes. This ensures that all participants in the network agree on the same version of the truth. They are essential for making blockchains fault-tolerant. 

Essentially, consensus mechanisms ensure the validity of every new block produced or added to the network. Under a consensus mechanism, all the participating nodes have to agree on which transactions should be included in the next block and which ones should not. The blocks with the majority votes are added to the blockchain.

What are the Types of Consensus Mechanisms?

The most popular consensus mechanisms are proof-of-work and proof-of-stake, each of which operates on different principles.

• Proof-of-work (PoW) was first implemented with Bitcoin. It is based on validators –or miners– who compete to solve a computationally complex mathematical equation. The first miner to solve the problem is rewarded with a block reward and the right to add a new block to the blockchain. While still popular, this consensus mechanism tends to have a longer processing time and high power consumption.
• Proof-of-stake (PoS) is based on the validators staking a certain amount of their coins or tokens as a form of collateral to validate blockchain transactions. The more coins a user stakes, the more likely they are to be chosen to validate the next block. Validators are eligible to earn transaction fees.

Other types include delegated proof-of-stake, proof-of-activity, proof-of-authority, and proof-of-burn.