The consensus mechanism comprises algorithms, protocols, and other computer systems that allow digital currencies to work. 

These are systems of agreement that define the validity of transactions and keep the underlying blockchain secure. 

In this article, we will share with you the benefits and downsides of the consensus mechanism, how it works, and what types are there.

The Basics of Consensus Mechanism

A consensus mechanism refers to different algorithms and strategies utilized to gain trust, agreement, and security across a decentralized computer network. 

The two most popular consensus mechanisms in the sphere of digital currencies are proof-of-work (PoW) and proof-of-stake (PoS). Besides, this mechanism helps keep records. Critics of Bitcoin miners argue that PoW is excessively energy consuming.

Because of that, new and more functional mechanisms have been designed. If you need cash now it means you don’t feel financially secure. A great tip is to maximize your savings if you start investing in digital assets and learn more about them.

An example of a consensus mechanism is when you purchase one Bitcoin and transfer it to your digital currency wallet. 

If other people don’t agree with the fact that you now own this Bitcoin, this currency will be worth nothing. The proof-of-work method was the first consensus mechanism of Bitcoin. 

The network had to approve every new block that was added to the chain using a unique hash. 

It should have been done with every transaction. This strategy guaranteed agreement on previous transactions and affirmed new ones.

Benefits and Drawbacks of Consensus Mechanisms

Pros:

• Makes a safe environment. Digital currencies and spread applications depend on consensus mechanisms for safety.
• Enable trust in the crypto market. Such algorithms are used for data synchronization among participating users and to form trust.
• Everyone can take part. You may operate your nodes or take part as a miner, there are no limitations.

Cons:

• Prospective for attacks. Consensus mechanisms are prone to some weaknesses and a 51% attack hack.
• Can be energy-consuming. If we speak about the proof-of-work mechanism, it’s quite energy-consuming and demands a lot of electricity.

Executive Order on Ensuring Responsible Development of Digital Assets was issued by The White House. This document states that various activities concerning digital assets remain within the scope of current regulations and domestic laws. 

The US government needs to protect consumers and investors from potential risks related to these digital innovations. 

The principal policy aim of the USA is to protect businesses, investors, and consumers as unique features of digital assets may pose major monetary risks to them.

Types of Consensus Mechanisms

The biggest digital currency is considered to be Bitcoin, and the proof-of-work mechanism powers it. However, there are many different ways a digital currency network operates. 

Here is a list of the common types of consensus mechanisms utilized these days:

• Proof-of-work. This is a widespread kind of consensus mechanism. This algorithm is utilized by Ethereum and Bitcoin networks. Block adders and miners need to perform mathematical computations to get the right hash. The person who finds the right hash below the difficulty level can add his or her block to the network and gets rewards. Later, other network members confirm transactions added by this person.
• Proof-of-stake. This algorithm removes the high energy intensity by PoW. A staking strategy is utilized here so that miners hold their earned coins in an attempt to obtain chosen ones to add a block. Keep in mind that this mechanism isn’t primary and it may be conducted only after enough nodes join the network.
• Delegated proof-of-stake. This algorithm introduces voting and boosts the proof-of-stake strategy. Members of the network utilize their coins to vote for reliable miners. After that, one miner can add his block using an arbitrary choice.
• Proof-of-importance. This mechanism picks a block harvester out of all network members using importance scores. This algorithm strives to liquidate favors for wealthy stakeholders in proof-of-stake consensus. The importance rating is calculated based on the reputation within the network and the quality of transactions. New Economy Movement (NEM) uses this mechanism.
• Proof-of-capacity. This algorithm mines a block within a decentralized network with the help of storage capacity or disk. This type of consensus mechanism urges miners to gather a list of all potential block hashes and nonce before the real mining. The miner simply has to upload the files with potential hashes to the network. Proof of capacity lowers the time it takes to add and confirm the block of transactions.
• Proof-of-elapsed time. This mechanism utilizes an accidental timer that functions in a solitary state on each node to indiscriminately block confirmation to a miner. Later, the block confirmation happens and a new block is added to the network. Hyperledger Sawtooth uses this algorithm.
• Proof-of-authority. This isn’t a widespread algorithm. Generally, companies that utilize blocks designed by vetted sources with unique permissions to the network and private companies choose this consensus mechanism. While other algorithms use public consensus, the guarantees of this mechanism are based on credibility and reputation.
• Proof-of-burn. The consensus mechanism is maintained by miners who occasionally burn coins, i.e. remove or delete that particular coin from circulation forever. New transactions are confirmed by this which also prevents inflation. If the miner wants to boost his odds of adding the new block of transactions, he needs to burn more coins.

If you choose to invest in digital currency, you need to know the type of consensus algorithm used and the way it operates. 

You may have a look at the biggest digital currency exchanges based on 24h volume in the world on September 29, 2022, here. 

Largest cryptocurrency exchanges based on 24h volume in the world on September 29, 2022

As you can see, Binance, a popular crypto trader, ranked among the biggest digital currency exchangers across the globe in 2022. Its trading volume reached the same numbers as ZG.com a few times.

The Bottom Line

To sum up, investing in cryptocurrency has become a really popular investment these days. 

If you want to maximize your savings and diversify your portfolio, it’s a great idea to follow our tips to understand what a consensus algorithm is and how it is used by blockchain technology. 

Knowing its benefits and downsides, you will be able to gain profit by preventing common mistakes and pitfalls.