What is a consensus algorithm?

A blockchain has no central institution managing transactions. How, then, do its many participants agree that a transaction is valid? The rules for reaching that agreement are its consensus algorithm.

What a consensus algorithm means

A consensus algorithm is an agreed set of rules through which participants, or nodes, around the world decide which transaction records are valid on a blockchain without a central administrator. Rather than one institution such as a bank maintaining the ledger, participants share copies and use these rules to keep their contents consistent.

Why consensus algorithms are needed

Because a blockchain can allow anyone to participate without central control, malicious participants may try to insert fake transactions or spend the same coin twice, known as double spending. Consensus algorithms provide the following.

• Consistency — Nodes share the same transaction order and ledger.
• Resistance to falsification — Arbitrarily changing confirmed records is very difficult.
• Cooperation without prior trust — Participants who do not know each other can trust transaction verification without an intermediary.

Blocks containing transactions are propagated across the network, and processing may incur gas fees.

Proof of work (PoW) and proof of stake (PoS)

The two best-known approaches are proof of work and proof of stake.

Proof of work (PoW) gives miners the right to record a block through a competition to solve a complex mathematical problem first. Bitcoin is a prominent example. The heavy computation provides strong security but consumes substantial electricity.

Proof of stake (PoS) selects record-keepers from participants who have deposited, or staked, coins. Ethereum switched to this approach. Without the computational competition, it is more energy efficient.

Comparing the two approaches

Other variations include delegated proof of stake (DPoS) and practical Byzantine fault tolerance (PBFT), each seeking a different balance among speed, decentralization and security.

What beginners should know

Consensus is a core technology affecting a coin's security, scalability and environmental impact. A technically strong consensus system does not mean the coin's price will rise. Evaluate technical structure and investment value separately. It also helps to understand wallet types and exchange security when storing coins.

This article explains blockchain technology for information and does not recommend investing in a particular asset. Cryptocurrencies are highly volatile and carry a risk of losing principal. Investment decisions and responsibility remain your own.