How does the consensus algorithm work?
The consensus algorithm is a tool that coordinates collaboration between users or computers in a distributed system. Its purpose is to ensure that all entities in the system can agree on a common data state. It aims to make sure all nodes in the distributed network share an identical version of the "ledger" recording all executed transactions. For blockchains to function, consensus algorithms are crucial because there's no central authority verifying transactions and ensuring network security. With tens of thousands of nodes holding copies of the blockchain data, challenges associated with data consistency and potentially dishonest nodes must be addressed. Various consensus algorithms exist to maintain blockchain's credibility, dictating how nodes in the network achieve mutual consensus.
We will delve into two specific consensus mechanisms: Proof of Work and Proof of Stake, but a closer look at their specifications will be covered in the next article!
Benefits of blockchain
1. Decentralization: Unlike traditional centralized systems (like regular banks), blockchain eliminates a single point of control, making it more resistant to potential attacks and failures.
2. Transparency: In blockchain, every transaction is visible to all participants, enhancing trust and simplifying tracking and verification of their correctness.
3. Immutability: Once a transaction is recorded in the blockchain, it cannot be altered or deleted, resulting in a permanent and trustworthy record of each transaction.
4. Efficiency: With the elimination of intermediaries like banks, transactions are faster and more efficient.
5. Lower Fees: Without intermediaries, costs are reduced, leading to savings for all parties.
6. Trust Not Required: All participants can verify transactions themselves without needing to trust third parties.
Types of blockchain networks
- Public Blockchains: These represent decentralized platforms open to all interested parties. Thanks to their open-source code and transparency, they impose no access restrictions and can be used by all users. Examples of public blockchains include Bitcoin and Ethereum.
- Private Blockchains: As the name suggests, this type of network is not for public use. It's typically managed and operated by a specific entity, often a corporation, primarily for internal operations and needs. Access to private blockchains is regulated and restricted, meaning that it's clearly defined who can view its records and add new data. These networks aren't decentralized; their governance hierarchy is clear. However, there's still distribution potential since data copies are stored on multiple nodes. Use cases include health records management.
- Consortium Blockchains: These sit between public and private blockchains, drawing characteristics from both. Its uniqueness lies in how consensus is achieved. In public blockchains, anyone can verify blocks, while in private ones, a single entity is responsible for validators.
For consortium blockchains, there's a group of equal validators. Subsequently, various data visibility levels can be set: It can be restricted only to validators, specific entities, or remain fully open. If validators agree on changes, implementation is straightforward.
Consortium blockchains are ideal for situations where multiple organizations in a sector need a common platform for transactions or information sharing. Joining such a consortium (business partnership) can offer organizations the opportunity to share industry-related information and experiences.
Examples for using blockchain
1. Cryptocurrencies: The original and most well-known use of blockchain as a decentralized ledger recording transactions.
2. Digital Identity: Enhances the security of creating a digital identity in the online world.
3. Voting: Blockchain voting systems offer greater transparency and reduce the risk of electoral fraud.
4. Supply chain management: Blockchain technology can compile records of all supply procedures containing individual transactions (tasks).
5. Smart contracts: Self-executing contracts activated once stipulated conditions are met, leading to decentralized applications and organizations. More about them will be discussed in an upcoming article.
Although blockchain might seem like just a tech buzzword, its true potential in transforming industries is undeniable. From finance to logistics, blockchain technology represents the future of a decentralized, transparent, and secure digital world.