consensus mechanism
In the context of blockchains, a consensus mechanism refers to the standard that governs the manner of adding, changing, or deleting information to or from a blockchain that is agreed upon by all its members. When there is a consensus in a blockchain, there will be a newly created block attached to the existing chain. All participants of the blockchain will receive an update regarding the new block. With a consensus mechanism, a blockchain offers transparency and security. Such a consensus mechanism-based governance method is fundamentally different from that of a traditional ledger in which it is its centralized authority, often consisting of a small group of people, that determines the manner of adding, changing, or deleting information. As such, compared with a blockchain, a traditional ledger could potentially be more vulnerable to security breaches. See: Friel v. Dapper Labs.
Proof-of-Work (PoW) and Proof-of-Stake (PoS)
There are two major categories of consensus mechanisms governing blockchains: Proof-of-Work (PoW) and Proof-of-Stake (PoS).
The Bitcoin blockchain operates under the Proof-of-Work (PoW) mechanism (see: A Peer-to-Peer Electronic Cash System). Under the Proof-of-Work (PoW) mechanism, the individual or institution called a miner that adds a new block to an existing blockchain will receive newly created cryptocurrency as a reward. The qualification of adding a new block is determined based on the outcome of the competition of solving complex mathematical problems between various miners, which would necessitate computing power. See: United Am. Corp. v. Bitmain, Inc.
The Ethereum blockchain operates under the Proof-of-Stake (PoS) mechanism (see: Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform). Under the Proof-of-Stake (PoS) mechanism, the qualification of being a validator (the counterpart of a miner that can add a new block) is determined based on the selection among those who deposited, or “staked” their own cryptocurrency. A larger amount of staked cryptocurrency would create a higher chance of being selected by the blockchain system to be a validator. (See: Audet v. Fraser and Friel v. Dapper Labs.)
Energy Consumption
The amount of energy consumption under the Proof-of-Work (PoW) mechanism is huge, thereby resulting in criticism (see: Zamfir v. Casperlabs, LLC). In October 2024, the Cambridge Centre for Alternative Finance estimated that the annualized electricity consumption of the Bitcoin blockchain was more than 150 TWh. By comparison, according to the International Energy Agency (IEA), the annualized electricity consumption of the Netherlands in 2023 and Argentina in 2022 was 110.8 TWh and 128.6 TWh, respectively, less than the estimated amount of annualized electricity consumption of the Bitcoin blockchain.
In contrast, Proof-of-Stake (PoS) necessitates less energy compared to the energy consumption under Proof-of-Work (PoW) mechanism. In October 2024, Cambridge Centre for Alternative Finance estimated that the annualized electricity consumption of the Ethereum blockchain was approximately 5.6 GWh. By comparison, according to Société d’Exploitation de la Tour Eiffel (SETE) in 2015, the annual electricity consumption of the Eiffel Tower was 6.7 GWh.
[Written in November of 2024 by Kai Wang with the Wex Definitions Team]
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