If you follow Bitcoin, the chances are good that you’ve heard about and read about consensus and the blockchain at some point. While consensus isn’t something you have to have a deep knowledge of to buy or sell Bitcoin, it does help to understand how it relates to the blockchain.
You might also hear consensus mechanism and consensus algorithm along with the term 'consensus'. While these aren’t one and the same, they are closely related. What’s the difference? We’re so glad you asked. Read on to learn more about consensus and the blockchain, consensus mechanisms, and more!
It might sound complicated, but the concept of a consensus mechanism is straightforward, especially when it comes to the blockchain. Cryptocurrencies, like Bitcoin, use consensus to validate and verify transactions on the blockchain. By doing so, they’re ensuring the security of the network.
Most blockchains use algorithms, protocols, or other systems for their consensus mechanisms. These systems agree that the transactions are valid while simultaneously helping govern the blockchain. There are various types of consensus mechanisms, which we’ll get to momentarily.
For now, just know that it creates an agreement on the blockchain that transactions are valid, which provides security and trust on its network.
If you’re using a cryptocurrency that resides on the blockchain, then you’re part of a network that uses a consensus mechanism. This system is a network of users that agree on the validity and legitimacy of any transactions that take place on the blockchain.
By using this type of system, the cryptocurrency is ensuring that every transaction on its blockchain is not only legitimate but also recorded on every copy of it. A well-defined consensus mechanism not only grants security to the network but also influences network fees, energy consumption, transaction speed, and several other details applicable to the blockchain.
Nodes, or computers on the network validate every transaction that takes place on the blockchain. On a proof-of-work blockchain, like Bitcoin, miners compete to validate the next block of the blockchain. The first miner to do so ears the fees associated with the block, which are paid for by users who send and receive funds on the network.
Additionally, the consensus mechanism used by the network ensures agreement (e.g. consensus) and distributes the transaction information accordingly. Because of this, anyone interested in downloading the blockchain to their computer can do so, and run it as a node.
The most popular cryptocurrency in the world - Bitcoin - uses Proof of Work to attain consensus. However, what many people don’t know is that there are several other types of consensus mechanisms used by other blockchains.
Most consensus mechanisms fall into one of the following categories:
As we mentioned previously, with Proof of Work, miners work against one another to confirm the next block in the blockchain. If they’re the first to do so, they earn rewards from the block. However, Proof of Work requires a lot of energy consumption, which is a turnoff for some within the industry.
Proof of Stake is another well-known consensus mechanism, used by many popular cryptocurrencies. With Proof of Stake, those holding the largest amount of the blockchain’s currency confirm blocks. The benefits Proof of Stake holds over Proof of Work are that it’s much faster, requires less energy, and completes transactions at a lower cost.
Similar to Proof of Stake, Delegated Proof of Stake allows currency holders to delegate their votes to a user. If the user mints the next block in the blockchain, anyone who voted for that delegate receives a part of the rewards.
You probably won’t see Proof of Authority very often because it’s not as common as Proof of Work or Proof of Stake. However, it is used by private projects that only give certain permissions and access to the network. With Proof of Authority, validation is based on authority and reputation as opposed to public agreement and consensus.
You already know that Bitcoin uses Proof of Work, which is a reason why it takes a few minutes for your Bitcoin to show up in your wallet. And now you know a little more about what goes on behind the scenes during the transaction. You can add to your wealth of knowledge that Bitcoin Depot BMTs are safe, secure, reliable, and transparent, so you have a positive Bitcoin buying experience every time.