May 4, 2025 Welcome back to our blog, where we help our readers better understand cryptocurrencies and how to leverage that knowledge to their advantage with advanced automated trading.
In today’s blog post, we’ll delve into one of the most fundamental aspects of cryptos and blockchains—consensus mechanisms. We’ll answer the questions of what they are, why we need them, which types exist, and how the field is expected to develop.
Before proceeding, we would like to remind you that the information on our blog is solely for educational purposes and should not be considered financial advice. Several factors influence the current and future valuations of cryptocurrencies, and this article is not intended to determine whether any specific cryptocurrency is suitable for trading or investment.
It’s a known fact that blockchain technology is the driving force behind the crypto world. This enables cryptos to be a fair ecosystem that offers financial inclusion to all participants, not just the wealthy.
At the heart of every blockchain lies its consensus mechanism, which comprises consensus protocols. Blockchain democratizes our global financial landscape safely and securely through decentralization. Data is saved across a distributed network of computing systems known as nodes. Each node on the blockchain stores the entire updated history of the network.
This means that when a new transaction needs to be registered on the blockchain, all the nodes must agree about which data is legitimate and which isn’t. The ecosystem must have a general understanding of how to do this to fulfill this goal.
Consensus mechanisms are the protocols and algorithms that enable all nodes on the network to synchronize and reach a consensus about data validity.
While the specifics can vary from protocol to protocol, they all share the same purpose: making their underlying blockchains efficient, trusted, and secure from takeover or malicious activities.
While the world of crypto consists of many different types of consensus protocols, two main ones dominate the scene:
Proof of Work is the first consensus mechanism created in 2008 when the Bitcoin mainnet was first launched. Although primarily associated with Bitcoin (BTC), other popular cryptocurrencies, such as Litecoin (LTC), Dogecoin (DOGE), and Monero (XMR), utilize Proof-of-Work (PoW) algorithms.
The operation of Proof-of-Work (PoW) protocols is relatively straightforward. Participants compete with one another for the right to confirm transactions and form new blocks onto the blockchain in exchange for block rewards. Also known as mining rewards, a few new tokens are created every time a new block is added to the mainnet. For example, Bitcoin’s mining rewards stand at 3.125 BTC per block after the last halving event.
To receive this financial incentive, a participant (miner) must demonstrate that they have completed solving a highly complex mathematical puzzle more quickly than others. It’s a performance-based race that rewards the fastest nodes to determine the correct answer.
For PoW to remain operational, significant high-energy equipment must be running 24/7. This is why one of the most discussed tenets of PoW blockchains is the enormous amount of resources they consume. Between the nodes and the energy required to operate them, these protocols are believed to harm our environment.
While there are some disagreements about the exact numbers, considering that in some PoW cryptos, such as Bitcoin, the mining process is becoming increasingly complex over time, which requires higher energy consumption, this potential issue is expected to amplify as time passes. This high demand for the computational power of PoW algorithms also has some advantages.
It creates an almost impossible barrier for any malicious entity or entities wishing to control the network or manipulate its data. The investment required to buy enough mining equipment to gain control over the network is considered too expensive to make it worthwhile. Adding the enormous energy bill with operations, it’s easy to understand why it’s considered too much to handle.
This is one of the primary reasons why many consider PoW the most decentralized and secure cryptocurrency protocol. That said, decentralization is not the only important factor when evaluating consensus protocols.
The most substantial pitfall of PoW is that, compared to its alternatives, it is a slow and time-consuming process. This creates significant limitations regarding speed, scalability, and the ability to support certain advanced types of dApps.
Proof of Stake (PoS) is another popular consensus mechanism introduced in 2011 to address the disadvantages of Proof of Work (PoW) consensus protocols. It presents a cheaper, faster, and more energy-efficient alternative for managing blockchains.
Nowadays, some of the most significant cryptocurrency projects, such as Ethereum (ETH), Solana (SOL), Cardano (ADA), and many others, utilize a version of Proof-of-Stake (PoS) algorithms to reach consensus among their network validators.
In Proof-of-Stake (PoS), token holders stake their coins as collateral in exchange for the opportunity to validate transactions and generate blocks, earning rewards in return. Unlike block rewards in PoW (which are newly generated tokens), the earnings of validators in PoS protocols are derived from transaction commission fees instead.
In most Proof-of-Stake (PoS) protocols, a minimum number of tokens must be staked before becoming a validator on the blockchain. These high-stakes requirements function similarly to the significant demand for computing power in PoW. This means that the number of staked tokens required to take control of the blockchain presents a significant financial challenge for anyone to overcome. Additionally, the collateral serves as an economic incentive to prevent validators from engaging in malicious behavior, as their tokens will be forfeited indefinitely if they do.
The way PoS protocols operate is that, instead of the tedious process of competing to solve complex mathematical puzzles, they work in a randomized manner to determine which validators will be included in the formation of new blocks on the mainnet, similar to a lottery. This means a validator with a larger pile of staked tokens, such as someone with multiple raffle tickets, is statistically more likely to receive a reward.
Thanks to PoS’s more straightforward approach, many of the drawbacks are addressed. To begin with, PoS enables blockchains to be more scalable, processing a significantly higher number of transactions per second (TPS). PoS blockchains are generally considered more developer-friendly platforms, making them more suitable for supporting new developments and advanced features.
Furthermore, it’s a more efficient solution for protecting our environment. For example, when the Ethereum blockchain transitioned its consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS) in 2022, it was suggested that the network could reduce its carbon footprint by more than 99%.
While these advantages support the position that PoS is superior to PoW, some experts suggest it’s not necessarily the case. One of the most compelling arguments against Proof-of-Stake (PoS) protocols is that the technological advancements they offer come at the expense of a more decentralized ecosystem, which benefits the wealthy at the expense of others.
Many argue that PoS, as a mechanism built on the premise that the larger your stake is, the more likely you are to receive rewards, expands the financial gap between the rich and the poor, contradicting the promise of the crypto world being an equal-opportunity ecosystem. With no other option for becoming validators, many small token holders are driven to lend their tokens to third-party validators, sacrificing some potential profits to secure a seat at the table.
This in itself brings another issue. Size is important, and some of these third-party validators, known as staking pools, can reach enormous sizes that have the potential to disrupt the entire ecosystem. In the Ethereum blockchain, for example, Lido Finance and other industry giants like Coinbase, Kraken, and Binance are operating massive staking pools that manage a substantial amount of ETH, which many experts see as a potential threat to the decentralization of the whole ecosystem.
Ironically, the cryptocurrency world struggles to agree on which consensus mechanism is the best. If you delve deep into the rabbit hole, you’ll find different arguments supporting both methods, including independent claims not mentioned here.
While PoW and PoS are still the most popular protocols, we can now find many hybrid consensus mechanisms that attempt to combine the best aspects of both protocols and cannot be categorized as purely PoW or PoS. All these consensus protocols, old and new, are being tested daily, allowing us to continue learning about their advantages and drawbacks and examining how they stand the test of time.
As for the future of consensus mechanisms, the race is underway for an efficient and decentralized blockchain that is fast, scalable, energy-efficient, and genuinely fair for all participants. A deeper understanding of their true nature and technological advancements assures us that this field will continually improve. New technologies, such as artificial intelligence, machine learning, and quantum computing, have an undeniable potential to revolutionize the field and render current protocols obsolete.
Consensus algorithms are the backbone of blockchains; therefore, it’s highly recommended that traders learn about cryptocurrencies’ underlying protocols before investing in them. Following up on news and developments in the field is also advisable, as they can provide important information that helps us identify new trading opportunities and gain a deeper understanding of the cryptocurrency world.
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October 13, 2022 Crypto technical analysis involves studying past price movements to forecast future movements. Traders use candlestick charts, pivot point trading, and Fibonacci retracements to analyze trends and make trading decisions.
