Cryptocurrencies run on the Blockchain, a decentralized space used mostly for financial tools and mechanisms. Decentralization refers to the functionality of distributed networks that do not need a central authority to make decisions regarding transactions or to control their transfer processes. But it’s essential to know that a Blockchain can only “survive” with a consensus mechanism, which guarantees the data and asset security.
Through these mechanisms, the network ensures that no one spends money twice (a problem known as double-spending), that transactions and users’ data are entirely valid, and some mechanisms even deal with the sudden appearance of new coins in the chain. Over time, several types of consensus mechanisms have been developed in the cryptocurrency space to resolve what was desired from the Blockchain – security, speed, or scalability.
Proof of Work Consensus Mechanisms
Proof of Work is a mechanism used by Bitcoin that verifies the accuracy of every data that exists on the chain as new blocks are validated and integrated into the Blockchain. Data integrity is ensured by miners who have to solve puzzles and advanced mathematical problems in a timely manner with the help of powerful computers and equipment, which can consume quite a lot of electricity.
Here, hardware is required, such as ASICs, GPUs, cables, and enough electricity, which is why there have been situations Bitcoin suffered price declines, followed by Altcoins – due to political problems in specific countries, where miners had to quit their operations. Overall, it is a mechanism by which new coins are mined and introduced into circulation – thus, they can be transferred in a highly secure but relatively slow way.
Proof of Stake Consensus Mechanisms
Through Proof of Stake, a node receives tasks in the data chain according to the amount of cryptocurrencies they have staked. There can be all sorts of limits on these amounts so that the initial investment is high enough for the network to attract serious and motivated users. The amounts of cryptocurrency are locked in digital vaults with the help of Smart Contracts. In addition to the paid interest that increases in value over time, users are constantly rewarded for their work.
Hybrid Consensus Mechanisms
Given that Proof of Work and Proof of Stake mechanisms have different characteristics, hybrid mechanisms combine individual consensus mechanisms, turning the process into a mixed one. Thus, Proof of Work miners creates new blocks on the chain, after which Proof of Stake validators vote whether to confirm or reject the blocks. Finally, the data is approved depending on how many coins they have staked and when most of the votes are positive.
The hybrid model provides more security over information and minimizes the disadvantages that these consensus mechanisms have individually. In addition, this type of consensus eliminates a possible monopoly that miners or validators with more power may have at the expense of others, making the system more democratic by segregating these responsibilities.
What are the advantages of a Hybrid Mechanism?
If we use two different consensus mechanisms – we have multiple benefits and fewer disadvantages. Also, from a technical point of view, the nodes that would represent dangers for the network would need more than 51% of the ledger’s computing power on which both consensus mechanisms work simultaneously. To take control over blocks and systems, one would need over half of the computing power represented by Proof of Work miners and most of the coins staked by Proof of Stake validators – a potentially enormous cost to anyone.
Why is extra security required?
Depending on the need that people have from a Blockchain network, which can be multiple, many people may worry about the security of their data or its correctness, demanding more from the system to trust it. Blockchain technology and consensus mechanisms can be used for many other things outside of the cryptocurrency space, like elections and healthcare systems.
For example, in Indonesia, people voted in 2019 using a procedure that included the vote count through Blockchain, but it was a more centralized version, given how new the technology was. Besides the use cases we might find in public administrations, networks can be used for medical systems that would contain databases of sensitive and confidential information, as well as for agriculture (to verify the soil moisture and coordinate the irrigation systems), and many other things.
Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not consider your individual needs, investment objectives, and specific financial and fiscal circumstances.
Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty, or undertaking, stated or implied, is given as to the accuracy of the information contained herein. IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.
Investment involves risk; any ideas or strategies discussed herein should, therefore, not be undertaken by any individual without prior consultation with a financial professional to assess whether the ideas or techniques discussed are suitable to you based on your personal economic and fiscal objectives, needs, and risk tolerance. IXFI disclaims any liability or loss incurred by anyone who acts on the information, ideas, or strategies discussed herein.