Consensus Protocols

Consensus protocols are required in trustless and distributed environments in order to allow actors to reliably transact with one another. A consensus protocol should result in at least the following three conditions:

  1. An actor that discovers the next block in the chain should be incentivised to broadcast it over the network and not hold it
  2. Actors should be discouraged from discovering blocks on top of intermediate chains (i.e. forks that are not the longest)
  3. The protocol should be able to resolve forks

Consensus protocols should try and make the cost of attack higher than that of defence in order to provide a defender’s advantage in maintaining the network. The most obvious costs are economic and these are relatively easy to evaluate. However, economics is not everything and in reality actors will often be influenced by their own moral and ethical viewpoints. In addition, there are always communication inefficiencies across a network. This means that in most cases the costs of an attack will usually be higher than the nominal economic incentive structure would otherwise imply. More secure protocols will make the differential cost between attack and defense as large as possible and implement multiple layers of defense.

All consensus protocols have benefits, costs and limitations. For example, PoS requires actors to invest in the cryptotoken whereas PoW requires them to invest in the network. As such, one would expect PoW systems to have a larger network with higher capacity and more liquidity then an otherwise similar PoS system which would be expected to have greater price stability.

The best protocols are ones that can work under a variety of conditions and assumptions.

PoW vs PoS

Proof of Work (PoW) and Proof of Stake (PoS) are probably the most popular consensus protocols currently but differ markedly in their implementation and outcome.

PoW was developed primarily as a method for deterring actor vectors, in particular double spending, on a distributed, decentralized network by making such attacks extremely expensive to carry out. It is based on a computational expensive mathematical problem that needs to be solved. In the expansion phase of the cryptotoken, miners are paid rewards for solving the problem associated with each block. Miners on the network then compete to be the first to find the next block and claim their reward.

PoW protocols work on the basis of energy expenditure in return for potential rewards. However, this is resource expensive and in principle the cost of attack and defense are at a 1:1 ratio with no defender advantage for the network. PoS relies on potential penalties and ensures the security of the system by making actors stake economic value in order to participate.

In PoS systems the creator of a new block is chosen in a deterministic way based on the number of cryptotokens the actor is willing to stake on the network. No block rewards are given for creating a new block, but instead, the creator of a new block is able to charge transaction fees. The fact that computational expensive work does not have to be done in PoS systems makes them several times more cost effective than similar PoW systems.

The costs of mining (hardware, electricity, maintenance, etc) are paid for primarily with fiat currency in the local country where the miner is based. This constant requirement for exchanging the miners earnt cryptotoken to fiat in order to pay these expenses leads to a constant downward pressure on the value of the cryptotoken.

CriteriaProof of WorkProof of StakeComment
Cost of attackHigherLower
Distribution of blocksBased on % of total network hash power Based on % stake of total cryptotokens staked
ConsensusObjectiveWeakly subjective In PoS a node needs a recent state, network messages and protocol rules to determine current state of the network
VulnerabilitiesDoS, Sybil attacks and selfish miningBribe attacks

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