Consensus Protocols - Blockchain Basics for RIAs
Updated: Oct 27
Not all blockchains are created equal. To gain a deeper understanding of their components, it's crucial to distinguish the blockchain itself from the consensus protocol that empowers it. The blockchain functions as a digital ledger, preserving a history of verified information—a single source of truth. The way that information is agreed upon, is done via the consensus protocol.
What many investors in the blokchain space often overlook is the intricate interplay of these components and the reliability of the underlying protocol. The Avalanche ecosystem represents a significant technological advancement, surpassing the pioneering work of Satoshi, the founder of Bitcoin.
As a result, we witness quicker settlement times, more cost-effective transactions, and a blockchain ecosystem primed for scalability.
Now, you may be wondering, what exactly is a consensus protocol?
A consensus protocol ensures agreement on the validity and order of transactions in a decentralized network, promoting system security. It functions like the collective decision-making process in a parliamentary voting system, determining how data is added to the database. Consensus protocols use diverse methods, similar to voting approaches in a democratic system, to prevent fraud and maintain trust by achieving consensus on valid transactions within the blockchain.
Now that we know what a consensus protocol is, let's dive a little deeper into their history.
Classical Consensus - 1970
Participants exchange messages or votes to propose values or decisions, with consensus confirmed when the majority agrees on a specific value or decision
Limited scalability and limited performance
Vulnerable to bad actors that can spoof accounts to tally more votes
Nakamoto Consensus - 2008
Participants (Miners) compete instead of voting (Proof of Work)
High energy consumption due to the computational requirements of solving puzzles.
Slow transaction confirmation times,
Inefficiency in terms of resource utilization, as mining power becomes concentrated in the hands of a few powerful players.
Avalanche Consensus - 2018
Nodes sample and update preferences until a significant majority holds the same opinion, confirming consensus
Proof of Stake (PoS) mechanism limits bad actors from spoofing votes
PoS eliminates energy-intensive computational puzzles
Rewards distributed to community Validators
Highly scalable and able to handle a large number of transactions.
The evolution of consensus protocols is crucial in shaping the blockchain landscape. Avalanche, with its unique approach, has revolutionized blockchain technology, offering faster transactions, cost-efficiency, and scalability. It's vital to choose the right protocol for success in the ever-evolving blockchain world.