Consensus Mechanism

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This aspect is at the very heart of the groundbreaking potential of blockchain technology and is a truly ingenious feat.

Satoshi Nakamoto’s main invention is arguably the decentralized mechanism for emergent consensus within a decentralized system.

Why is that such a big deal?

I’m sure by now you’ve stumbled upon the fancy words Byzantine Generals Problem somewhere in the vast blockchain space.

Satoshi found a groundbreaking and mesmerizing solution this old problem (there will be a full length article about this soon). This problem describes the great challenge to coordinate resources among different participants and to find consensus. The problem is often described as a group of Byzantine generals who all besiege a city. Only if they attack at the same time, they will be able do win the battle — the only problem is that they need to find a way of how to trust each other to attack in a coordinated manner.

Bitcoin managed to achieve Byzantine Fault Tolerance and solved this problem elegantly. It does so by using a marvelous consensus mechanism known as Proof of Work (PoW).

Proof-of-Work is the most commonly adopted consensus algorithm and is used both by Bitcoin and Ethereum. It constitutes a cryptographic puzzle, which competing mining nodes try to solve. In order for a competing mining node to win the right to broadcast their block into the network and thus gain the newly created coins and the accumulated transaction fees, the node needs to hash the block header repeatedly, changing one parameter at the time. They are basically guessing the possible solutions.

Why all this hassle you might ask yourself?

Well, this guessing is using a lot of computational power. And this computational power needs energy. Energy that you need to pay for. Therefore, by proving that you worked hard to find a solution and were willing to pay for it, you eventually at some point get rewarded big time: the one who finds the correct solution for the puzzle gets a reward (currently 12,5 Bitcoin) plus the transaction fees (that the other people have to pay in order to have their transactions be conducted).

All the blocks that have been linked together are a testament to all the work that went into finding them. If you’d want to change something in a past block, you’d need to redo all the work that has been conducted afterwards!

While Proof of Work is the most widely used consensus algorithm, there are many other forms.

One famous alternative is Proof of Stake. The Proof-of-Stake algorithm determines each user’s right to validate the unconfirmed transactions depending on their stake in the system, measured by the quantity of native coins that they respectively hold. Thus the participating validators are supposed to be disincentivized to corrupt the ledger since it is vital to the value of their own assets.

You can check out the other parts of the mini-series on finding consensus right here: