What is a consensus algorithm & why does it matter?


If you’ve followed the roller-coaster ride that cryptocurrencies have been on since 2017, then you probably have an idea about how blockchain technology works.

But do you know anything about consensus algorithms? It’s odd that the backbone of blockchain remains largely unknown to crypto investors and enthusiasts. These algorithms are responsible for maintaining the decentralized nature of blockchain. Keep reading to learn what a consensus algorithm is, why it matters, and the different types of algorithms used today.

What is a Consensus Algorithm?

In computer science, a consensus algorithm refers to the process used in distributed process systems to reach an agreement on a single data value. This fits perfectly into the distributed ledger framework on which blockchain operates.

While countless crypto investors busy themselves with Bitcoin Trader Test to reap returns on their investment, it helps to understand the role of consensus algorithms in making blockchain such an innovative and groundbreaking technology. These algorithms ensure that a level of reliability is achieved in a network consisting of a series of nodes. If a transaction takes place, the algorithm communicates across the network to verify that particular action.

Types of Consensus Algorithms

Many investors look at the real-world applications of cryptocurrencies when deciding where to put their money. But it’s worth looking at the type of consensus algorithm these coins employ as well. Here are some of the most common consensus algorithms and how they work.

1) Proof-of-Work (PoW)

This algorithm has been made popular by some of the oldest and most trusted names in the cryptocurrency market including Bitcoin, Litecoin, and Ethereum. While the PoW approach is the first consensus algorithm to be used, many coins still employ it today.

This approach primarily relies on the computational powers of the network’s members. Each member works in cohesion to solve problems and achieve consensus to verify transactions. Over the years, the PoW approach has been proven effective while also being resistant to cyber attacks.

The downside of this approach is that it requires a ton of power. Bitcoin alone uses 29TWh annually, which is about the same as the annual energy consumption of Morocco.

2) Proof-of-Stake (PoS)

To address the high energy consumption of the PoW approach, many cryptocurrency projects sought for a more energy efficient algorithm that doesn’t compromise on safety and efficiency. The PoS approach requires much lower energy consumption while being more decentralized at the same time. Ethereum shifted from PoW to PoS, showing the immense potential of this alternative approach.

The PoS model operates on probability. The larger the amount of Ether a validator holds, the higher the chances of getting a block to solve. The Ether the validator has staked to the network acts as collateral which can be taken away if the validator is found guilty of any wrongdoing.

3) Byzantine Fault Tolerance (BFT)

This approach is based on “The Byzantine Generals Problem,” an old mathematical conundrum. This consensus algorithm works on mass coordination, like the conundrum in which the Byzantine generals must agree on when to attack or retreat. Failing to reach an agreement would lead to disaster even if each general comes with their respective armies.

The goal of the BFT approach is to create a fast and seamless communication between a string of networks. It’s also a low-cost solution with a huge potential for scalability. However, it remains a niche approach that still needs time to prove its worth in the crypto space.