Blockchain Consensus Protocols — A Financial Revolution

Not since the web itself has a technology promised broader and more fundamental revolution than blockchain technology” — Hyperledger Project.

Blockchain is changing the way financial transactions take place. It is touted to be the future of digital transactions. In Layman’s term, a blockchain can be defined as a “shared public ledger”. To really function on a global scale, it needs a functional, efficient and secure consensus algorithm. David Mazieres, professor of Computer Science at Stanford University and Chief Scientist at Stellar, addressed an enthusiastic crowd at Thought Factory Social, on the various blockchain consensus protocols.

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Consensus mechanism is one of the vital features of blockchain that gives all the participants of a distributed ledger a level playing field. While using blockchain technology, all the ledger transactions should be synchronized across the entire network. This ensures that ledgers only update when appropriate stakeholders approve the transaction. Ledgers update with the same transaction, in the same order. This process is called consensus. According to Prof. Mazieres, the main consensus protocols used by leading digital currencies and tokens are –

  • Proof of Work: Most commonly used consensus protocol. Used by the first ever cryptocurrency — Bitcoin. Bitcoin ‘miners’ are required to make trial and error computations until an agreement is reached that the transaction is valid.
  • Proof of Stake: It functions differently as compared to proof of work. The biggest stakeholders in a particular digital cryptocurrency gets the greatest incentive to make sure that the transactions are completed successfully.
  • Byzantine Fault Tolerance: Byzantine Fault Tolerance enables each node in the network to create a public key. When a message comes in, it is signed by the node to verify whether it is in the correct format. Once enough responses are recorded, the message is marked as a valid transaction. One of the biggest advantage of this method is that it does not require hashing power to validate the transactions. It is currently being used by the Hyperledger Project, which allows developers to build their own digital assets in a digital ledger.
  • Federated Byzantine Agreement: The Federated Byzantine Agreement(FBA) enables participants of a network to distinguish between the important stakeholders and the not so important ones. A transaction is validated once majority of the ‘important’ nodes cast their votes in favor of the transaction. Stellar uses the FBA to verify transactions.

Blockchain as a technology is going to change the way organizations work in the future. It is only a matter of time before the big financial institutions implement blockchain as their core transaction platform. Transparency and decentralized financial space will catapult the world to an entirely new era. Cryptocurrencies and digital tokens, operating using the underlying blockchain technology, have already created a multi billion dollar (almost $150 Bn) financial sector, that is decentralized and cross border. Digital tokens have redefined how startups and other sectors are raising money (Initial Coin Offerings). All these are harnessing the power of blockchain.

Yes, the blockchain revolution is real !

By Shibangsh Chowdhury

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