How Does Consensus Algorithm Work in Blockchain Network?

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Anything that happens in this world essentially requires a process of understanding to make things practical. Starting from tiny atoms to the social interaction of the people, a correlation generates between the organisms, so as to move on with a balanced life. Let us term this an “agreement” between things.

What if the technology we use grips on the same mechanism of agreement? In fact, there would be a better output on its practical side in a way that a particular technology fits in a specific area. So talking about the blockchain network, there is a consensus (agreement) algorithm that decides which block must be created at what time.

A blockchain network deploys a decentralized process of creating blocks where each block contains data. When data is filled in a block, it goes to the next block and thereby creates a long chain of blocks.

Also, blockchain is a type of Distributed Ledger Technology (DLT) that stores records of data processed through blocks in several connected computer nodes. Each of the nodes of the ledger consists of transaction details that are consensually shared across the globe.

In other words, blocks are the smaller unit of data that consists of transaction details. These data drive into blocks only when the blockchain nodes agree on transaction details validated by the nodes.

Consensus Algorithm in Blockchain

In the chain of decentralized data blocks, a mechanism of understanding between the user and the block mechanics is essential. Therefore, a consensus protocol works here, creating a consensus algorithm between all the peers of the network. This is also a common agreement about the current state of the DLT.

However, in a centralized structure, a single body takes the power to control the overall system. There is no complex governance and a need for understanding between administrators. As mentioned, a decentralized setup requires distributed database for reaching a consensus on what amount of entries are added to a node.

There are different types of consensus protocols to make the blockchain network more reliable for users.

1.  Proof of Work (PoW)

PoW is an important consensus algorithm that selects a miner node to create the next block. This algorithm essentially solves complex mathematical puzzles and easily provides a good solution.

The mathematical calculation used in PoW requires a lot of computational power and the node that solves the calculation fastest will start mining the next block. Although the PoW concept evolved earlier, it was initially implemented only in Bitcoin.

Later on, many critics came up with the conclusion that PoW consumes a higher amount of energy. This led to the launch of the Proof-of-Stake (PoS) consensus protocol.

2.  Proof of Stake (PoS)

PoS consensus is an alternative to PoW. This consensus protocol does not require miners, hardware to do calculations, or a massive amount of energy consumption. The basic thing that you need is a PC. Also, external resources such as hardware and electricity are not required in PoS. Instead an internal resource—cryptocurrency—is required here.

Staking is important in PoS, as validators have to lock up their crypto assets in a wallet as a stake and reach a consensus with other validators in deciding what transaction will move into the next block. However, choosing a block depends on a bet, and the protocol will select one from the bet blocks.

In short, PoS allows validators to invest in the coins of the system rather than investing in expensive hardware to solve technical puzzles.

3.  Proof of Burn (PoB)

In PoB consensus, validators don’t have to invest in expensive hardware resources. Instead, they can burn coins by transferring them to an address. But these coins cannot be retrieved from the addresses.

PoB is the third attempt to create a protocol for a consensus algorithm. This protocol effectively avoids any chances for a coin double-spending. Both PoS and PoB work to prevent fraudulent activities on a blockchain network.

4.  Proof of Capacity (PoC)

With Proof of Capacity, validators invest in their hard drive space instead of burning the coins as in PoB and investing in expensive hardware as in PoW.

If there is more space in the hard drive, the chances of validators getting selected for mining the next blocks are high. Hence, they can also earn more block rewards.

5.  Proof of Elapsed Time (PoET)

PoET is quite different from all of the pre-mentioned consensus algorithms. Here, the mining of blocks takes place through the fairest means, where every validator in PoET gets a fair chance to mine their block.

PoET is mostly used in permissioned blockchain networks. Practically, all the nodes in the network randomly wait for some amount of time and add a proof of wait in their block. Once the blocks are created, they are broadcasted to the network considering others.

In this way, the node/validator which completes mining within less time will be the winner and that validator’s block will be added to the blockchain. However, there are additional techniques to prevent the nodes from winning at all times and generating blocks at the lowest time value. 

6.  Proof of Activity (PoA)

With Proof of Activity consensus, validators can experience both the features of PoW and PoS consensuses. This makes the PoA system prevent validators from the chance of a 51% attack, as in PoW and PoS.

Here, the mining process starts when miners start mining new blocks quickly with higher computational power. This is similar to the process in PoW. When a new block is found, the system changes to PoS and the newly created block contains only a header and reward address of the miner.

Following this, a new group of validators from nodes are randomly selected depending upon the header details. These validators then sign or validate the new block. The more the validators own coins, the more the chances validators will be selected as a signer. 

Only if all the validators sign the newly mined block, it will be in a complete form, as it enters the blockchain network and transactions get recorded on it. If some validators are unavailable to validate the block, the mechanism goes to the next winning block with a new random group of validators. This process moves on until a new winning block gets the required number of validators to make it a complete block. 

The miners and the validators who participated in the long mining process will get the mining rewards shared among them.

Cryptocurrency Decred (DC) is a well-known coin that uses the PoA consensus algorithm.


Besides these six consensus mechanisms, there are several other algorithms used in blockchain networks. So far learned, it is clear that each block in a network is not simply created, but they have undergone an algorithmic agreement, where the validators consense to create/mine new blocks.

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