Facts About The Governance of Crypto

Consensus mechanism is the cornerstone of any blockchain network or cryptocurrency. It determines how the new coins are created, exchanged, and stored using a distributed ledger. All in all, it’s like a rulebook for digital assets and their creations. Since the crypto revolution is getting huge, the understanding of basic concepts is gaining traction. 

Consensus Mechanism: In a Nutshell

Blockchain is a decentralized system for storing and sharing information. Most importantly, it works with the participation of multiple parties. Unlike centralized structures, it involves everyone in making any decisions regarding the network. One big objective of the consensus mechanism is to prevent any act of cheating. Because every structured system leaves some scope for loopholes for bad actors to leverage.

That’s a big reason behind the growing proneness towards decentralization. The centralized system gives authority to some folks who govern over the rest. Blockchain changes it but still needs to maintain its righteousness. Understanding it with an example would make the purpose of the ledger clearer. 

For instance, Charles transfers 10 tokens to Smith, the transaction is done and there’s nothing else to do. But Charles tries to use the same tokens again for a different transaction, this time, to Phillipa. In this scenario, the consensus would ensure that everyone in the network knows about Charles’ first transaction. It would show the exact amount of transactions along with the remaining balance of Charles’ wallet. By keeping everything open, this mechanism rules out any possibility of fraud. 

At the same time, the mechanism incentivizes actors who contribute to the flawless functioning of the network. 

Consensus Mechanism: Types & Their Mechanism

Two consensus mechanisms have been the foundation of most cryptocurrencies. These are:-

Proof-of-Work (PoW)

Proof-of-Stake (PoS)

Proof-of-Work (PoW)

In this consensus mechanism, the individuals who create new assets are miners. They solve mathematical equations and create new coins in the process. When they successfully produce a new coin, they get a reward which is some portion of the crypto itself. Notably, this particular process consumes plenty of computing power and energy. 

Proof-of-Stake

In this system, the creators of new blocks or coins are called validators. Instead of solving equations, they purchase and store their tokens in the blockchain. The process is known as staking because the token holders stake their assets in the network. By doing that, they get entitled to validate new blocks. The network does not require sizable computer power or energy to run this mechanism. 

Conclusion

Shared databases came into being with the rise of computers and networks. However, they worked as per the centralized mechanisms securing access to just a few. Because these databases recorded information in different locations, they came to be known as distributed ledgers. While they gave easy access to information, they needed some security measures to prevent data tampering and unauthorized access. 

With the creation consensus mechanism, the ledger became foolproof. Today, developers are exploring it and inventing new versions of it as well. Like any other technology, it has endless possibilities too. 

Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.

Latest posts by Nancy J. Allen (see all)

Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.