In this article, I want to use my unique vision to help the reader gain a deeper understanding of the general concept of blockchain technology, but also one that is unfortunately misunderstood: the consensus algorithm.
To gain a deeper understanding of this blockchain component, in these articles I always like to take a step back and look at the big picture, because the consensus algorithm is only a small part of a much larger system.
Blockchain is a game where players compete to confirm transactions by grouping them into blocks that correspond to the blocks with transactions created by other players. Encryption is used to hide data that could allow these people to cheat. A random process is used to distribute digital tokens to people who follow the rules and create blocks that correspond to blocks sent by other people. These blocks are then linked together to create a verifiable record of all transactions made on the network.
When people make new blocks with different parameters, we call it a “fork” because now the chain divides in two different directions. This is the exact opposite of what we want. All the value of the blockchain stems from the fact that everyone agrees – and has agreed – on which transactions took place and when. Consequently, consensus algorithms tend to solve the division.
Satoshi’s real creation
Finally, what makes sure everyone updates their database to match each other comes down to how they get punished when they do not. The protocols contain rules for the correct organization of transactions, but if breaches of these rules do not entail consequences, they will be ineffective. The real innovation that Satoshi Nakamoto introduced in his Bitcoin Whitepaper (BTC) was his elegant use of financial incentives.
Satoshi Nakamoto did not invent the idea of ”electronic currency”. He created an elegant system that integrates cryptoeconomics by using electronic currencies, now called cryptocurrencies, to use incentives to solve problems that algorithms alone cannot solve. The design forced people to donate money to extract blocks of transactions. People will have to sacrifice this money over and over again, play by the rules of the system and try to organize transactions in blocks that everyone else on the network will accept. If they do this long enough, they will be rewarded in platform currency.
Of course, the blockchain may not know that the money was spent in the form of US dollars, yen or euros, so use a proxy as a pointless job. This made block mining unnecessarily difficult, so anyone who succeeds in block mining should definitely spend money on hardware and energy to operate these devices. Thus, each successfully recovered block is supplied with money that is not only sacrificed for the hardware but also the energy needed to operate that equipment and produce that block. Where there are forks, Proof of Work (PoW) consensus algorithms are an automated system where the fork, supported by most of the work, is the “right” fork.
Related topics: Evidence of effort and evidence of work: Differences explained
This means that whoever continues to produce blocks on this fork will continue to receive rewards, and whoever continues to produce blocks on another fork will not receive rewards. Since these people have already spent their money on installing the equipment and starting the production of the blocks, the punishment will be light, because they have already received financial punishment. They spent their money, so if they want to continue producing blocks on the wrong chain, that’s fine. They will not receive any rewards and will not get their money back. They would never sacrifice this money. The network will not accept their bans and they will not earn tokens.
This work proof system ensures that the only way for anyone who does not want to play by the attacking rules is to get more equipment and play on it than all the others combined, such as starting a 51% attack.
This is the elegance that lies at the heart of Proof of Work. The system cannot function without sacrificing ever-increasing capital. Satoshi combined cryptography and economics to create a register of reliable, trustworthy transactions.
However, there are different consensus algorithms that work in slightly different ways. The most famous of these is Proof of Stake (PoS), which I will discuss in the next article in this series. Then I will talk about the algorithm that we will use in Koinos, which is the first of its kind in the general blockchain.