What is a consensus mechanism for cryptocurrencies?

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Everybody knows that you can’t trust anyone online.

As Andreas Antonopoulos famously said: the person who you speak with could be a fridge. Internet is a challenging environment and the rules that apply everywhere online are also true for blockchain.

This was one of the most crucial problems that had to solve Satoshi Nakamoto to make digital money work:

How to keep the integrity of a network without a central authority?

How all the nodes in the network will agree on a single digital history of transaction?

This conundrum has kept generations of engineers in check in computer science departments. Without consensus on who owns the bitcoins in circulation, the network would be worthless. Bitcoin’s consensus mechanism is called Proof-of-Work (PoW - See the previous lesson).

This mechanism traces the history of each of the transactions that were integrated into the network. We are talking of a fault-tolerant system because the nodes in the network must agree on a single state of the network. If you live in Brazil and broadcast a transaction from your full node, the nodes that are closest to you will get it earlier than nodes operating in Africa.

Therefore, there are many sets of slightly different history of the same transaction but eventually, all nodes in the network must agree on a given version and this what PoW is about.

The most prevalent consensuses mechanisms are Proof-of-Work (PoW) and Proof-of-Stake (PoS) but many alternatives were created in the past 5 years. And, obviously, they have their own respective strengths and downsides. They all try, however, to correct or better the weaknesses of PoW and PoS.

They claim to be more efficient, but a detailed study of their mechanisms is beyond the scope of this chapter. They also bring a new number of methodologies created to achieve agreement, trustlessness and security across distributed peer-to-peer computer networks.

The number of these consensuses is continually expanding and bring new path for evolution in the crypto ecosystem.