In the context of cryptocurrency, consensus algorithm is an essential element of each blockchain network, since they are responsible for maintaining the integrity and security of these distributed systems. The first cryptocurrency consensus algorithm that was created was Proof of Work (PoW), developed by Satoshi Nakamoto and implemented on Bitcoin as a method to overcome Byzantine errors.
A consensus algorithm can be defined as the mechanism by which a blockchain network reaches consensus. Public (decentralized) blockchains are created as distributed systems and, since they do not depend on the central authority, the distributed nodes must agree on the validity of the transactions. This is where consensus algorithms come into play. They apply the rules of the protocol and ensure that all transactions take place without trust, so the coins can be spent only once.
Before going into the types of matched algorithms, it is important to understand the differences between algorithm and protocol.
Consensus algorithm vs protocol
The term algorithm and protocol are often used interchangeably, but this is not the same thing. In short, we can define the protocol as the basic rules of the blockchain and the algorithm as the mechanism by which these rules will be followed.
In addition to widespread use in financial systems, blockchain technology can be used in various business areas and can be suitable for various use cases. Regardless of the context, the blockchain network will be built over the protocol, which will determine how the system should work, so all the different parts of the system and all participants in the network will have to follow the rules of the main protocol.
Despite the fact that the protocol defines the rules, the algorithm tells the system which steps must be taken to comply with these rules and obtain the desired results. For example, the blockchain consensus algorithm is what determines the accuracy of transactions and blocks. Thus, Bitcoin and Ethereum are protocols, proof of work and proof of stake test are their agreed algorithms.
To illustrate further, consider what the Bitcoin protocol determines how nodes must interact, how data must be transferred between them and what the requirements are for successfully testing the blocks. On the other hand, the reconciliation algorithm is responsible for checking balances and signatures, confirming transactions and effectively checking the blocks, and everything depends on the coherence of the network.
Different types of matched algorithms
There are different types of matched algorithms. The most common implementations are PoW and PoS. Each has its advantages and disadvantages when trying to balance security with functionality and scalability.
Proof of work (PoW)
PoW was the first consistent algorithm that was created. It is used by bitcoins and many other cryptocurrencies. The Proof of Work algorithm is an integral part of the mining process.
PoW extraction involves multiple hash attempts, so more computing power means more attempts per second. In other words, miners with a high hash rate are more likely to find the right solution for the next block (also known as a hash block). The PoW matching algorithm ensures that the miners can check the new transaction block and add it to the blockchain only if the nodes of the distributed network reach consensus and agree that the hash block provided by the miner is a valid proof of the work.