There are hardly any components of blockchain that are more important than algorithms and protocols. A more definitive phrase for both would be ‘they are the engines of blockchain’. When Bitcoin was introduced to the world in 2009, terms like consensus protocol became more common to the public. It is the only way decentralized systems can agree on running a process.
Definition of Key Terms
First things first, what is an algorithm? What is a protocol? An algorithm refers to a set of rules or processes that is to be followed during a process of solving problems like calculations. They are mostly applicable in but not limited to computers.
A protocol on the other hand is the set procedure or system of rules that govern the implementation of something. A consensus protocol is in turn meant to govern what a blockchain should contain at any given time. The most important of what is determined is if a block being added is the one agreed upon by all nodes in the network. The terms consensus protocol and consensus algorithm can be used interchangeably.
The Consensus Protocol/ Consensus Algorithm
As has been established, a consensus protocol plays a key role in determining which blocks are added to a blockchain. It is this determination via agreements by all nodes in the blockchain network that is referred to as the network verifying a transaction.
The process is indispensable to blockchain which operates as a system of decentralized ledgers. It is also what assures the integrity of the blockchain, making it very difficult for an actor to cheat or hack the system. One must beat the 51% attack rule to be able to change a block and cheat the system. That is highly improbable, especially for any major blockchain network since one has to control thousands of computer nodes at a time. It is however not an impossibility.
The Main Types of Consensus Protocols
There is however no uniform consensus protocol out there. The space itself has achieved tremendous innovations and changes over the years. Each new consensus protocol gives the blockchain its characteristics, and at times an edge over previous blockchain systems. Key among the edges are how the blockchain solves the 51% attack vulnerability or how to improve transaction speed. Below are the two main types of consensus protocols.
Proof of Work
The proof of work consensus protocol was the first to be used in blockchain, having been in the first blockchains like Bitcoin and Litecoin The protocol works to validate transactions via the computation of hash values.
To compute a hash value, a miner has to solve a difficult cryptographic puzzle. A certain number of trailing zeros found in the hash value is what is aimed at by the process. The number that generates the hash value with the specified number of trailing zeros in the hash function is referred to as the nonce.
The consensus protocol is designed for permissionless public ledgers. To reach a consensus, the computational power from the nodes in the system is utilized to solve a cryptographic puzzle and generate the hashes.
Blocks are arranged linearly, each representing a group of transactions. Every transaction in the block is validated and digitally signed using each user’s private and public keys.
PoW is very demanding where power is concerned. The process of mining Bitcoin for instance consumes more power than the Republic of Argentina. Other newer protocols are less power-hungry in comparison.
Proof of Stake
The proof of stake protocol is also among the oldest used in blockchain. Ethereum, which is the 2nd largest blockchain, marked the emergence of top players opting for the protocol.
Unlike proof of work, no hashes are generated by miners. To validate a transaction, each miner gets assigned a block. They in turn have to set aside a particular portion of their crypto holdings to start validating. The process is known as staking, hence the name proof of stake. On successfully validating a transaction, the miner is awarded the crypto they had previously staked as well as transaction fees.
The miners doing the validation are selected as per their economic stake within the blockchain network. By so doing, the protocol can decentralize mining centres as well as provide a staking opportunity to every participant in the blockchain. Excessive electricity consumption is limited.
PoS increases security vulnerabilities. An attacker needs to control just over 50% of all nodes compared to 51% in PoW. There is also a possibility of a bribe attack. An attacker may reverse a victim’s transaction and then bribe attackers to validate the transaction.
Other Uses of Algorithms and Protocols in Blockchain
While consensus protocols are the primary application of protocols and algorithms in a blockchain there are other use cases. The first is when conducting trades. Crypto trade algorithms execute trade orders using automated trading instructions. The instructions are preprogrammed and designed to account for important variables like time, trade volume and prices.
The other use of algorithms is in the form of smart contracts. They are self-executing contracts between two parties and are written directly into the code of the program. They are indispensable in the Decentralized Finance space, which happens to be the most vibrant space in blockchain currently. It is responsible for the creation of tokens and their sweeping innovations such as Non-Fungible Tokens (NFTs)
Algorithms and Protocols are perhaps the most important aspect of cryptocurrencies. They form the backbone of the most basic of blockchain operations.
Via consensus protocols, algorithms and protocols determine how transactions are validated by the large network of decentralized nodes. They improve the security of the blockchain itself and make it tamper-proof. The two main consensus protocols, the Proof of Work and the Proof of Stake are well explained. Many more exist such as the Proof of Space, Proof of Elapsed-time, etc.
Trading algorithms and Smart contracts represent the other ways algorithms are vital to blockchains. Such knowledge is crucial to anyone interested in Blockchain technology.