DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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Cryptocurrency has brought a lot of changes to the lifestyle of a huge amount of people. It has become a significant part of so many lives and what sets it apart from other kinds of investments is that it can make someone a millionaire in the matter of days. On the other hand, it can also bring a millionaire to ashes within the same time.
When the market is already so volatile, it just won't do if all of the system or the blockchain where the transactions regarding cryptocurrency happen, was volatile as well. And that is the reason why security of the blockchain must be ensured at all costs.
The level of security that the crypto blockchains have these days is truly a thing to marvel. The blockchains are effective as they ensure decentralization and transparent transactions throughout the system with utmost security and efficiency.
There is a reason why all the transactions are carried out so smoothly or in particular, verified so smoothly. Consensus mechanism is something that makes it possible. This article discusses blockchain consensus and explains what PoW and PoS are, along with their major differences. So let us get started.
A blockchain consensus mechanism is basically a mechanism that is used by the blockchains to make sure that the data across all the nodes on a blockchain remains the same and that it does not contradict any information being shared by the millions of nodes on the network.
These mechanisms are an essential part of the blockchain as they validate all the transactions happening on a network and ensure the safe record-keeping of the details of the transactions. A consensus mechanism can be any mechanism that is used to ensure the agreement, trust and security of transactions happening across a blockchain.
When you talk about a centralized system, you know that all the records of agreements are kept on a single, central structure which is responsible for validating whether everything is done properly or not. The consensus mechanism also does the same for the decentralized blockchains.
The blockchain consensus determines whether all the data being shared on the public ledgers is secure, genuine and real-time or not. So the consensus mechanism is basically just a set of rules that decides whether all the data being shared by the numerous nodes is legitimate or not.
The reason a blockchain consensus mechanism is needed is because there are tons of nodes of a blockchain out there and it is not possible for everyone of these nodes to instantly send and receive information about all the transactions happening around the world. Millions of transactions happen within an hour, different nodes are responsible for different transactions.
This would affect the efficiency of the blockchain because some of the blockchain nodes could be connected to the internet with a very fast connection while others might have a slow connection speed. That is why all the information being broadcast on the blockchain would take a very long time to reach others.
That is where a consensus mechanism would come in. A consensus mechanism can process all the data periodically across all the nodes. This will also make sure that even if some of the data clashes, at the end of the day, there will only be one master copy across the whole blockchain.
What a consensus mechanism also does is that it prevents some people from misusing the nodes for their personal gains as when a person controls a node, they can manipulate the information in some way.
The transactions that happen on the blockchain, do not need any 3rd party involvement as they are all decentralized. All the details of any transaction are updated on the digital distribution ledger. The validation of these transactions has to be carried out by the computer nodes on the network.
Now the way that these transactions should be validated is defined by the consensus algorithms. Proof Of Stake and Proof of Work are two of the most popular consensus algorithms in the world.
They both offer brilliant services and hence, the people who need to choose a consensus algorithm are confused as to which one is better for them. That is where this article comes in. It is essential that one understands what defines the effectiveness of one algorithm or the other.
Both PoW and PoS are essential when it comes to the process of verifying the transactions on the blockchains amongst the users and then adding them to the public ledger. So let us learn what they both are and what sets them apart from each other.
Proof-of-Work is a good start if you want to practically understand what consensus mechanism is. Once you get what PoW is, it will be easier to understand the working principle of a more advanced consensus mechanism, Proof-of-Stake.
The first ever cryptocurrency created, i.e. Bitcoin uses the PoW consensus mechanism. The purpose of PoW is simply to verify the transactions and add new blocks to the blockchain. This PoW system is the backbone of bitcoin’s blockchain.
In the proof-of-work system, miners are given complex mathematical equations to solve. Once a miner successfully solves the equation, the transaction is verified and a new block is added to the blockchain. The complexity of these equations are adjusted to create a fair balance between competitors and transaction speeds.
For validating each transaction and adding a new block to the blockchain, miners are rewarded with freshly minted tokens along with the transaction fees paid by the trader. Therefore, the PoW system eliminates the need of any centralized body to regulate cryptocurrency as the miners are incentivized to keep the blockchain valid and operational.
Proof-of-Stake is another Consensus Mechanism just like Proof-of-Work. Similar to Proof-of-work, Proof-of-stake verifies the transactions and adds new blocks to the blockchain without any third party involvement.
PoS and PoW are quite vital parts of Blockchain because they secure the blockchain system and protect in a way that no one can tamper with the blockchain. With this it maintains transparency and traceability of every transaction on the blockchain.
In PoS, consensus basically means the user has to agree on certain terms like account balance and order of transactions. But the working of Proof-of-Stake is quite opposite to that of Proof-of-Work.
In PoS, users participate to get selected as validator by holding stakes at a particular platform. The stake a user holds is considered as a security deposit, and the higher stake a user holds, the higher are the chances of getting selected as a validator. This whole process in Proof-of-Stake is called minting or forging.
Now that both the Proof-of-Work and Proof-of-Stake consensus mechanisms are clear to you, let’s sum up the key differences between these systems.
To simplify it, a blockchain consensus mechanism makes decentralized record-keeping safe and secure and makes it like any centralized database. It is an automated process that makes sure that the information shared across the blockchain does not contradict in any way.
As the cryptocurrencies are becoming mainstream, the world is trying to come up with newer and efficient consensus systems. Currently PoW and PoS are the two most recognised consensus systems being used by different cryptocurrencies.
We hope this article helped you in understanding how the Proof-of-Stake system is different and better from the Proof-of-Work system. If you wish to know more about consensus mechanisms, check out our other articles about the same.
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