Abstract
A consensus mechanism is at the core of each distributed ledger technology. This paper provides a brief overview of the two most prominent consensus protocols from the blockchain universe, namely proof-of-work and proof-of-stake. We describe the fundamentals from a design perspective, highlight some crucial differences between the protocols and discuss their implications for the validity and security of the blockchain. The paper concludes by pointing to Byzantine-Fault-Tolerance consensus, which in the future may become a promising alternative to established consensus mechanisms.
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Notes
- 1.
Data from https://cryptoslate.com/coins/, accessed in January 2021.
- 2.
See Narayanan et al. (2016) for one of the earliest comprehensive descriptions of PoW-consensus.
- 3.
In particular, if multiple entities are involved such as in an international money transfer.
- 4.
E.g., DigiCash or e-gold.
- 5.
Hash functions exist in a variety of specifications (e.g., SHA-1, mumur32 or MD5). Bitcoin is based on the hash function SHA256, which assigns a hash value of 64 digits for any practically length of input. For Instance, the SHA256-hash of the term “Bitcoin” results in “346f1bd1c9f195e21e81d662123c3c94c9df4fa728223459216f8e3a19862c2d”, while the term “bitcoin” (notice the small deviation) gives “d67509e37480c61b46c6bfc26f66f6a1884614763f08db3ab45616c8c3c12983”.
- 6.
I.e., the enumeration of potential candidates until a solution is found.
- 7.
In particular, fraudulent miners have to take into consideration that the attack probably has an adverse impact on the market value of the cryptocurrency.
- 8.
Irresberger et al. (2020) document a growth in number and relevance of the PoS blockchains, both in absolute numbers and also relative to PoW blockchains.
- 9.
Nodes, which are selected in the PoS system to update the ledger are also called “validators” since their task primarily consists of validating transactions, whereas PoW consensus requires nodes to repeatedly execute complex hash-computations.
- 10.
Similar in this respect to PoW consensus.
- 11.
For a similar argument in PoW consensus see Budish (2018).
- 12.
E.g., Gans and Gandal (2019) and Halaburda et al. (2021). Savolainen and Ruiz-Ogarrio (2020) provide an interesting discussion of miners’ incentives to attack and double spend in PoW blockchains, which is related to the concept of endogenous coin value in PoS consensus. By analyzing the occurrence of large mining pools, they argue that static costs (mining) are less important compared to dynamic incentives (revenue flows) to maintain honesty.
- 13.
Irresberger et al. (2020) provide an overview.
- 14.
A Byzantine fault tolerant system takes into account false messages provided by Byzantine players and allows for temporary disagreements among users (Halaburda et al., 2021). For more information on the practical implementation, see the whitepapers of Honeybadger, HotStuff and Tendermint.
- 15.
See Diem project homepage.
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Stinner, J., Tyrell, M. (2021). The New World of Blockchain Economics: Consensus Mechanism as a Core Element. In: Herberger, T.A., Dötsch, J.J. (eds) Digitalization, Digital Transformation and Sustainability in the Global Economy. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-77340-3_2
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