Blockchain Consensus Algorithms

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What is Proof-of-Work (PoW), Proof-of-Stake (PoS), and Proof-of-Transfer (PoX)?

There are multiple consensus designs used in blockchains, offering a range of security and performance features. The purpose of consensus is to ensure a bad actor cant corrupt the network and a single state of the blockchain is maintained. The most secure and decentralized consensus mechanism is Proof-of-Work (PoW), which is used by the Bitcoin Blockchain. Miners need to expend resources running computers to solve a mathematical equations. This mathematical equation is the “work” in proof-of-work. Other network participants can easily verify that a miner performed the work. A miner is randomly chosen to have the opportunity to add the next block to the blockchain. It would be very expensive and pointless for a miner to propose a dishonest block since the network would reject it, and the miner would not receive the mining reward (coin base). Additionally, this miner expended computer and energy resources to perform this work.

Proof-of-Stake (PoS) is another consensus mechanism. Ethereum, the second largest Blockchain, was upgraded from PoW to PoS on September 15, 2022. PoS requires validators (assume the role of miners) to stake assets making them eligible to validate blocks. Validators trying to propose dishonest blocks get slashed and lose part of their stake. Validators adding honest blocks receive a block reward from the network and gas fees for processed transactions. Financially incentivizing good behavior and penalizing bad behavior, secures the Ethereum network.

Proof-of-Transfer (PoX) consensus requires miners to transfer assets to another market participant as an expenditure, similar to computing resources of Proof-of-Work. PoX is a variant of PoB Proof-of-Burn, where the miner sends assets to a burn address. PoX is used to secure a network to an existing PoW chain. For example, The Stacks blockchain uses PoX to secure its network to the Bitcoin Blockchain. Stacks leverages Bitcoin security by using PoX. Miners on the Stack blockchain are randomly chosen using a verifiable random function (VRF) and receive newly minted Stacks (STX) tokens for adding the next block. This minted token offsets the miner’s asset transfer expense. Participation rewards represent the assets transferred by the miners (the PoF), and are used to reward other market participants for verifying that the current chain version is the correct one. This confirmation is useful to miners and ensures they are proposing honest blocks.

In Summary, consensus algorithms for public blockchains require computing or financial resources to secure the blockchain state. Mining mechanisms used by these algorithms are broadly divided into proof-of-work, in which nodes dedicate computing resources, and proof-of-stake, in which nodes dedicate financial resources to participate in the consensus algorithm. The high-level idea behind both proof-of-work and proof-of-stake is to make it practically infeasible for any single malicious actor to have enough computing power or ownership stake to attack the network.

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