Consensus algorithms in open and decentralized systems

blockchain trilemma security decentralization scalability projects consensus algorithm

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In my first and second pieces, I’ve discussed Ethereum 2.0 and the best tools for developers. In my third and fourth articles, I’ve discussed quadratic voting and open governance models. Then, in my fifth piece, I’ve looked into Swarm’s infrastructure. Afterwards, in my sixth one, I’ve dove-deep into consensus algorithms. Finally, in my last release, I’ve looked into the blockchain trilemma. Thankfully, the previous issue perfectly links to what we’ll discuss today.

Now to the topic at hand: how do different consensus algorithms fare in terms of decentralization? Namely, how does decentralization affect security and the scalability of a protocol? Does it make sense the most decentralized protocol is the most secure, or the most scalable?

blockchain trilemma security decentralization scalability projects

The role of decentralization

Decentralization is amongst the most important characteristics and values treasured by the cryptocurrency and cipher-punk communities.

In blockchain protocols, decentralization emerges from the degree to which roles and decision-making are open to everyone; or instead, restricted to a small group. In addition, there are three main roles: users, who perform the transactions; validators, who record and verify transactions obeying to specific consensus mechanisms; and the developers, who vote and suggest amends to the code. 

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In conclusion, the level of decentralization of a consensus algorithm is linked to its censorship resistance. Decentralization refers to the degree to which the decision-making on recordkeeping is open to anyone. That is to say open protocols allow anyone to participate in the network.

What is decentralization?

Within the governance of cryptocurrencies, there are different degrees of decentralization. Such degrees exist across multiple dimensions and consensus algorithms. While some consensus algorithms greatly improve decentralization, others focus on security or scalability.

Decentralization reflects the degree to which transactions between agents are possible and effective, without the control or authorization of a particular group of individuals.

In other words, decentralization guarantees censorship-resistance. 

Some cryptocurrencies have permissionless access for users, but permissioned access for validation or decision-making. Others only require permissioned access at the decision-making level.

For the sake of simplicity, I will consider that consensus algorithm that presents at least one role that requires permission, would rank low on decentralization. In contrast, ones that are entirely permissionless across all roles, rank higher in governance decentralization.

Hence, next I’ll look into the features that make a system either open or closed.

Properties of decentralization

For a system to be decentralized, it must promote the following properties:

  1. The information must be cryptographically secured, meaning there must be some sort of decentralized chronological hashing of blocks.
  2. Peer-to-peer (P2P), meaning communications do not rely on any intermediary. In addition, to reach consensus on the state of the network, protocols make use of rewards, incentives and applied game theory.
  3. Easy-to-access, meaning the less barriers between a validator and consensus, the better. For example, requiring special hardware to validate transactions, or additional expenditures for validators like electricity can potentially increase centralization in the long-term (PoW or PoS).
  4. Low cost, as for the general population to access a tool, it must be near-free to transact. The higher the transaction costs, the less participants a network will have. However, the cheaper the transaction cost, the less secure the entire network is.

In conclusion, any consensus algorithm that ticks the four boxes is the most decentralized. In contrast, one that doesn’t tick any will be the most centralized. 

Consensus algorithms

As I’ve been discussing, consensus algorithms are a critical component of blockchain technology. Depending on the algorithm, many choices emerge for the end-user. It’s possible to focus on the security and robustness of a protocol (PoW); or instead, to give priority to decentralization and open-participation (PoS); or even to focus on scalability and fast transactions (dBFT). 

By comparing each consensus mechanics on how well they fare, we can reach a conclusion on which is the most decentralized (Yes), and which is the one most prone to centralisation (No).

 

PoW

PoS

DBFT

Cryptographically secured?YesYesLYes
Permissionless?YesYesNo

Mandatory incentives and rewards?

YesYesNo
General hardware can be used?NoYesYes

Low transaction costs?

NoYesYes

We can conclude that the consensus algorithm which grants the most decentralization seems to be pure-PoS, as it ticks the following boxes:

  1. It has information cryptographically secured; (PoW, PoS);
  2. PoS is permissionless, with open participation; (PoW, PoS);
  3. It achieves consensus through rewards and incentives; (PoW, PoS);
  4. It creates the least barriers to entry; (PoS, DBFT)
  5. And it has low transaction costs; (PoS, DBFT)

The reason behind the finding could be linked to the fact PoS has no energy requirements. PoS is simpler for users to become a validators just, by staking a portion of their stake. 

For instance, in Ethereum it’s planned that anyone can be a staker, as long as they commit at least 32 ETH. 

Hence, when it comes to decentralized systems, it appears a greater number of participants may be achieved with less barriers to entry. However, the more decentralized a system is, the harder it is for information to reach all nodes. 

A balance between decentralization and security is needed, to achieve maximum effectiveness for users.

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