Crypto Guides

Consensus & Its Importance In Any Existing Cryptocurrency


In most of our previous articles, we have discussed a lot of topics regarding cryptocurrencies. We now know the properties of cryptos, advantages, and their fundamental purpose. In this article, let’s discuss the concept of consensus and why it is essential for the existence of any cryptocurrency.

The consensus algorithm plays a vital role in validating the transactions of any crypto network. One of the crucial reasons for the success of cryptos is its ability to handle the problem of double-spending adequately. And this also an important reason for the failure of digital currencies before Bitcoin; they weren’t able to solve the problem of double-spending. So let’s see what this problem is about.


Double Spending

Double spending is a fraud where the same money is promised for two different transactions but is spent on making only one transaction in real. This is a significant problem for digital currencies because the entire system is decentralized, and there is no entity confirming the authenticity of the transactions. The cryptos after Bitcoin alleviate this problem by waiting for the confirmation of the payments. During this wait time (which is very minimal in general), the transactions are validated by the users present in the blockchain network using the ‘consensus’ algorithms.

The consensus here is nothing but a mutual agreement within all the partiers that are present in a cryptocurrency network. The majority of the validators must approve the transactions, and this is made possible by the consensus algorithm. Also, because of this protocol, a crypto network cannot be controlled by a single person or a group of people. Now, let’s look at two of the most important and equally reliable consensus mechanisms – Proof of Work & Proof of Stake.

Proof of Work (POW)

Proof of Work is used by Bitcoin blockchain. This consensus algorithm proposes a mathematical problem for the miners in the network. To solve this challenge, high power computing devices are used, and thereby a lot of electricity is consumed. The first one to solve the problem gets to validate the transactions and communicate the same to all the other miners in the network through gossip protocol. Then all the other miners verify the transactions and seal them in a block.

The crux here is this. To solve this challenge, the miner uses a considerable amount of power and hardware, which is a costly process. Hence, one would be honest enough to not validate faulty transactions as a lot of stake from the user side is already expended. This is how POW makes the miners be reliable and run the blockchain efficiently. They are rewarded with the in-house cryptos for doing this work. Though the POW consensus algorithm is the most efficient one out there, it is the costliest of all the consensus algorithms and not eco-friendly, which is the need of the hour.

Proof of Stake (POS)

In this consensus protocol, the participants who want to be the validators must stake some of the native cryptocurrency in a virtual safe for a specified period. The network randomly picks the validators based on certain methods. The two most used methods are ‘Randomized Block Selection’ and ‘Coin Age Selection.’ In Randomized block selection, the validator is chosen based on the highest stake and lowest hash value. While in the Coin Age Selection, the validators are picked based on the duration of the native currency staked in the virtual safe. Dash and Peer coin are examples of cryptos that use POS.

Why is POS more reliable than POW? 

POS algorithm uses considerably less energy compared to POW. Hence, the process is less expensive, and most importantly, it is eco-friendly. Also, the POS protocol fulfills the fundamental property of blockchain as it serves the purpose of complete decentralization. This is not the case in POW because currently, there are large mining pools who mine cryptos (Bitcoins, for example) and get the maximum reward. But that’s not possible in POS, making them truly decentralized.


Apart from these two, there are other major consensuses like Delegated Proof of Stake (DPOS), Proof of Burn (PoB), Proof of Elapsed Time (PoET), and Proof of Activity (PoA). These protocols are gaining momentum because of their efficiency and eco-friendly nature. However, a lot of research is still happening to develop more efficient and cost-effective consensuses. We hope you find this article worthful. Let us know if you have any questions in the comments below.


By Reddy Shyam Shankar

I am a professional Price Action retail trader and Speculator with expertise in Risk Management, Trade Management, and Hedging.

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