Consensus algorithms have somehow gained a mystic appearance in the industry. This article attempts to demystify the main differences between them by first defining consensus algorithm before diving into the primary mechanisms, briefly describing alternative implementations.

After that, differences and similarities between consensus mechanisms are drawn out to allow you to identify what fits your business needs.

## What is a consensus algorithm?

In blockchain and other distributed ledgers, the consensus can be defined as:

> in a distributed network, the consensus mechanism is how machines and validators agree in how to process and organize transactions.

Consensus algorithms are among the core elements in how a network processes transactions while keeping all participants synchronized in the network’s data.

Since the launch of Bitcoin in 2009, the **number of consensus algorithms has exponentially increased, serving the needs of thousands of blockchains**.

Yet, amidst this growing complexity, there are three core families of mechanisms: Proof of Work (computing-based), Proof of Stake (incentive-driven), and Proof of Authority (identity-based)

## What are the main consensus algorithms?

There are three leading families of consensus algorithms that can be used for distributed ledgers: Proof of Work ("PoW"), Proof of Stake ("PoS"), and Proof of Authority ("PoA").

### Proof of Work ("PoW")

In Proof-of-Work blockchains, validators are miners who need to solve a computational problem to organize and produce a block. The world’s first blockchain, Bitcoin, relies on Proof of Work. For instance, Bitcoin transactions are organized and validated through a process named “mining".

By definition, PoW blockchains allow anyone to compete for validating transactions on the network. Since there is a monetary cost to confirm transactions (due to the computation problem leading to electricity costs), misbehavior is discouraged and extremely costly.

There is a wide range of mining algorithms such as SHA-256d (Bitcoin, Bitcoin Cash), Script (Litecoin), RandomX (Monero), Equihash (ZCash), or ETHhash (Ethereum).

Proof-of-Work consensus has its significant share of criticisms, notably due to its high environmental cost, high costs, miner concentration, and other vector attacks (e.g., Sibyl attack, 51% attack low mining participation). These have led to the **fast** **expansion of alternative consensus algorithms** such as Proof of Stake and Proof of Authority.

### Proof of Stake ("PoS")

Unlike Bitcoin, Proof-of-Stake ("PoS") blockchains rely on the concept of masternodes. In this case, masternodes are the network validators of the ledgers and serve the same function as miners in Bitcoin: masternodes validate and organize transactions in blocks. To do so, each of them is required to lock a significant amount of cryptocurrencies (e.g., ATOM) as a **monetary commitment to avoid bad behavior**.

In the event of wrong operations (or apparent misconduct), committed funds would be slashed with usually different penalties for each specific event. For instance, a masternode being offline typically is likely to receive a financial penalty lower than an attempt to re-organize a network.

In Proof-of-Stake networks, masternodes are rewarded by collecting transaction fees on the network. Furthermore, while a standard node allows third parties to monitor and verify transactions independently, masternodes are nodes that also validate incoming transactions (and collect network fees to do so).

There are a wide variety of PoS implementations, such as Delegated Byzantine Fault Tolerance ("DBFT"), Delegated Proof of Stake ("DPoS"), and Proof of Stake Voting ("PoSV"). For instance, some of these allow users to vote for masternode in a democratic process called **vote delegation** and to collect some of the network fees by doing so.

Popular networks like Cosmos use PoS-based implementations for consensus finding. However, the most anticipated public network is perhaps Ethereum, which is expected to transition to a Proof-of-Stake consensus algorithm by the end of 2020.

### Proof of Authority ("PoA")

With the use of Proof of Authority ("PoA"), validators have their identity verified, resulting in an incentive to behave to prevent any reputational loss and other real-world legal actions well.

For instance, a company acting as a validator on a PoA network that would purposely be censoring transactions from a competitor would likely **face legal actions and reputational damage**.

The use of Proof of Authority was proposed in 2017 by Joseph Lubin, one of [Ethereum](https://flyingblock.com/article/what-is-ethereum)’s co-founders who co-founded ConsenSys. PoA is currently used in multiple Ethereum testnets and even in public and private blockchains.

There are a variety of implementations for Proof of Authority for distributed ledgers. The most notable applications are Clique POA, Raft, IBFT, and PBFT.

### Hybrid consensus mechanisms ("PoW/PoS")

Some consensus mechanisms are also referred to as “hybrid" as they combine elements from both Proof of Stake and Proof of Work. Usually, they rely on both masternodes and miners for finding consensus on the network.

For instance, Dash is a popular public permissionless network with a focus on user privacy. Dash relies on a pool of miners (i.e., PoW) and a system of masternodes (i.e., PoS). Masternodes are used to validate specific transactions and in charge of the network governance while miners also receive fees for organizing blocks and verifying timestamps.

### Other consensus mechanisms

#### Proof of Elapsed Time ("PoET")

Proof of Elapsed Time is designed as an alternative to Proof of Work through the use of a lottery system. Each participant is assigned a waiting time and a number. If selected, the validator becomes the next block producer.

The main network relying on PoET is Hyperledger Sawtooth.

#### Proof of Burn ("PoB")

Proof of Burn relies on a mechanism that let validators send funds to a non-spendable address to prove their work. There are multiple implementations of this mechanism, but it is considered an alternative of Proof of Work: the required computing resource cost is replaced by a “burn transaction" leading to a financial loss from the perspective of block validators.

#### Auxiliary PoW ("AuxPoW")

Auxiliary PoW is a mechanism allowing users to rely on the existing computing power for Proof-of-Work blockchain used for consensus and to redirect this power to other blockchains referred to as child blockchain in a process called merged mining. For instance, Dogecoin is a cryptocurrency designed a joke on the Internet that has got extremely popular. It is currently merged-mined with Litecoin as their miners can also decide to mine Dogecoin with no associated cost (and collect additional rewards!).

Due to their use of the same computing resources between some cryptocurrencies, merged mining **prevents competition between two blockchains for the same pool of miners**.

## Differences and similarities between consensus algorithms

|  | Proof of Work | Proof of Stake | Proof of Authority |
| --- | ------------- | -------------- | ------------------ |
| Energy consumption | High | Medium to low | Low |
| Trust | Trustless | Trustless | Trust-based |
| Transaction costs | Yes | Yes | No |
| Validator requirements | Hardware (e.g., ASIC, GPU) (+ nodes) | Software (+ nodes) | Software (+ nodes) |
| Validator incentives | Block subsidy rewards + transaction fees | Transaction fees + staking rewards | Reputation alignement (+ potential transaction fees) |
| Costs to operate the network | High | Low | Low |
| Permission for validators | Permissionless | Permissionless (Permissioned can be an option) | Permissioned |
| Private/Public? | Public | Public or Private | Public or Private |
| Examples of consensus finding algorithms | SHA-256d, Script, RandomX | DPoS, DBFT, PoSV | Raft, IBFT, Clique POA, PBFT |
| Examples of projects | Bitcoin, Litecoin, Monero | Algorand, Cosmos | Quorum |

## What consensus algorithm is right for me?

When it comes to choosing a consensus algorithm, it is fair to say **that no size fits all**. In general, the choice of a consensus algorithm depends on your **preferences and your set of requirements, scope, and range of use cases**.

Several questions need to be answered to decide what consensus mechanism to select:

* Will your scope of use cases be enterprise-restricted or part of a consortium?
* What type of data will be shared on the network?
* Will your data need encryption?

Finally, the choice of a consensus algorithm **works in tandem with deciding the distributed ledger solution that fits your needs**.

Proof of Work, Proof of Stake, and Proof of Authority are the most popular consensus algorithms. Discover them.

A Guide to Consensus Algorithms

There are many misconceptions between the meaning of a public network and a private network. These include whether everyone always sees transactions in an open network or whether a permissionless system is a synonym of a private blockchain.

This article defines both public and private blockchains and focuses on the several differences with permissionless and permissioned networks. Besides, the differences and similarities between public and private systems are analyzed to define what type of blockchains makes the most sense to cater to your needs.

## What is a public blockchain?

> A public blockchain is a network that allows users to operate full nodes on its network, without any restriction, nor requirement such as KYC.

In public blockchains, third parties can join the network and synchronize nodes to obtain the entire set of transactions from the network, without any pre-required approval. Bitcoin and Ethereum allow anyone in the world to run a full node on Bitcoin and synchronize the entire blockchain history.

In a public blockchain, while full nodes are not used to organize and validate transactions in a block (" mining"), they are useful to broadcast transactions to other nodes. Hence, the higher the number of full nodes, the more secure a distributed network becomes. In addition, running a full node also contributes to the decentralized property of a public blockchain.

### Differences between permissionless and public

Typically, most **public blockchains are permissionless**. Any individual can attempt to become a validator without any restriction except software and hardware (for PoW blockchains) and balance requirements (for PoS blockchains).

However, differences lie like their network, i.e., at the protocol level. A public network always allows anyone to access the complete history of the blockchain since its inception. Still, it does not necessarily enable individuals to become participants in consensus without having their identity verified (permissionless vs. permissioned environment).

## What is a private blockchain?

> A private blockchain is a network that does not allow users to operate full nodes on its network.

While an approved entity operating nodes on a private blockchain could display real-time activity on its network to third parties, no individual is allowed to run a node to synchronize in real-time the transactions from a private blockchain. This prevents third parties to validate independently the accuracy of the information running on the network.

An example could be a private blockchain serving to settle payments across clients from two financial institutions. Let's assume Alice (bank X) transacts to Bob (bank Y) to transfer 250 USD. Alice can rely on the figures provided by her bank about her account to make sure the transfer to Bob has been completed.

### Differences between permissioned and private

A permissioned system relates to who has the "right" to operate the network, i.e., whether only certified/approved parties can attempt to become a validator.

While most permissioned blockchains are private, some exceptions exist. For instance, the POA Network allows users to run a full node. Yet, it is a permissioned network running a Proof-of-Authority (" PoA") consensus algorithm, where each network validator is a certified notary in the US.

### Differences between privacy and private blockchains

Some blockchains are public, yet with built-in privacy features. Designed as alternatives of Bitcoin for its function of being a "means of payment", these cryptocurrencies are referred to as privacy coins. The most notable of them are Monero ("XMR"), ZCoin ("XZC"), and ZCash ("ZEC").

Anyone can operate a node on the networks and participate in the consensus (e.g., "PoW", "PoS") for privacy coins. Their respective architecture is constructed so that third parties can't decrypt the relationship between the sender and the receiver, and information about balances for each participant.

Similarly, multiple layers exist for public blockchains to provide privacy. For instance, [Tornado Cash](https://tornado.cash/) on Ethereum allows users to break the links between addresses, and CoinJoin also allows obfuscating the transactions on the Bitcoin blockchain.

However, **a private blockchain, despite requiring participant identities to be verified, can also offer privacy.** For instance, Quorum is a permissioned network built as a fork of the Ethereum source code that features a **privacy manager and on-chain private transactions**. This allows breaking the links between the sender and the receiver from the perspective of third parties and encrypt the transaction output (e.g., additional sensitive information added to the transaction).

## Similarities and differences between public and private blockchains

In this section, we broke down differences & similarities between permissionless and permissioned blockchains in regards to ten different points.

* consensus mechanisms
* decentralization
* the distributed property
* scalability
* energy consumption
* smart contracts
* network governance
* whether a token is required
* whether the network is permissioned or permissionless
* whether privacy features can be implemented onto the ledger

|  | Public | Private |
| --- | ------ | ------- |
| Consensus | Proof of Work (”PoW”)/Proof of Stake (”PoS”)/Proof of Authority (”PoA”) | Proof of Authority (”PoA”) |
| Decentralization? | High to low | Low |
| Distributed? | High to low | Low |
| Scalable and fast | Fast to slow | Fast |
| Energy consumption | High (”PoW”) to low (”PoS”) | Low |
| Smart contracts | Possible | Possible |
| Network governance | On-chain/distributed or with central operators | Central operators only |
| Needs a token? | Yes | No |
| Permission attributes? | Permissionless or Permissioned | Permissioned |
| Privacy features | Possible | Possible |

## Should I use a private blockchain?

Blockchains were originally **meant to be public and fully transparent for everyone**, as illustrated by Bitcoin and Ethereum. However, privacy requirements have led to the growth of enterprise-focused distributed ledger solutions that were fully private. Initially, the primary rationale was that no enterprise would want to store sensitive information on a public network where anyone could access it.

However, in practical terms, private blockchains have a limited scope. For instance, any distributed ledger with at least two enterprises would require at least some privacy, leading to **privacy requirements at the transaction level**.

As an extension, private blockchains are always permissioned networks (while the reverse is not true) and allow higher transaction output while being often more scalable than permissionless networks.

For any enterprise use-case that would involve any other party that cannot be trusted, the use of privacy managers and confidential layers remain a central aspect that needs to be implemented (e.g., [Quorum's privacy manager](https://flyingblock.com/article/what-is-quorum)).

Recently, the growth of hybrid networks, the use of second-layer solutions on public permissionless systems, and other corporate solutions like the [Baseline Protocol](https://flyingblock.com/article/what-is-baseline-protocol), seems to indicate an underlying **trend toward leveraging the core properties of open networks** (e.g., distributed & decentralized) as the base layer to create more specific applications on top of it.

Private blockchains prevent non identified parties to monitor the network. Find their differences with public blockchains.

Public vs. Private Blockchains

While Bitcoin and Ethereum are both permissionless networks, they are also public blockchains where anyone can operate a node to synchronize the entire history of their ledgers. Yet, permissioned networks can also be public, which has commonly led to confusion from everyone in the space.

This article defines both permissionless and permissioned blockchains and focuses on their differences and similarities. Finally, this article concludes with a brief summary regarding what permissioning features may make the most sense to cater to your needs.

## What is a permissionless network?

> A permissionless network is a network where any party can participate in the consensus process without any requirement to validate their identity from a central authority.

Blockchains like [Ethereum](https://flyingblock.com/article/what-is-ethereum), Bitcoin, or Cosmos are permissionless networks and allow any party to operate a node without any restriction, besides hardware, software, (and sometimes balance) requirements.

For instance, an individual has been able to mine Bitcoin since the launch of the network. Yet, it has become extremely competitive to mine Bitcoin owing to the centralization benefits (economics of scale with ASIC machines). However, many other cryptocurrencies can still be mined by a GPU/CPU (e.g., Monero, DigiByte). These cryptocurrencies all operate on a permissionless network.

## What is a permissioned network?

> A permissioned network is a network where only pre-selected parties can validate transactions and perform other operations.

Permissioned networks do not allow a non-certified/pre-approved individual to act as a validator.
To prevent so, a dedicated layer is built in to allow specific actions to be performed only by identifiable participants.

Only a pre-selected set of operators is to be eligible for the validation of transactions and in charge of maintaining the consensus of the distributed network. However, in permissioned networks, standard nodes may (or may not) be operated. In contrast, anyone can start mining or apply to become a validator in permissionless networks, without any KYC requirement.

In this regard, permissioned networks mostly rely on **Proof-of-Authority ("PoA") consensus mechanism**.

For instance, a permissioned network could be a network of financial institutions where each company relies on the blockchain to settle derivatives transactions. In this scenario, the network would be private, with an additional privacy feature to omit transactions from all chain members. If the blockchain was comprised of hundred financial institutions, on-chain information would require encryption not to be readable by every institution. For instance, volumes of transactions between one buy-side entity and a broker are information that are not meant to be shared.

In the context of permissionless networks, the operation of a full node often differs from the validation of transactions. Typically, a network can be public, where anyone can decide to independently verify the transactions without the opportunity to validate pending and future operations. For more details, please visit our page underlying the differences between private and public blockchains.

## Similarities and differences between permissioned and permissionless networks

In this section, we broke down differences & similarities between permissionless and permissioned blockchains in regards to ten different points.

* consensus mechanisms
* decentralization
* the distributed property
* scalability
* energy consumption
* smart contracts
* network governance
* whether a token is required
* whether the network is public or private
* whether privacy features can be implemented onto the ledger

The results are summarized in the below table.

|  | Permissionless | Permissioned |
| --- | -------------- | ------------ |
| Consensus | Proof of Work (”PoW”)Proof of Stake (”PoS”) | Proof of Authority (”PoA”)Proof of Stake (”PoS”) |
| Decentralization? | As high as the number of the validators and their respective power on the network | Low |
| Distributed? | High | Usually low, only amongst the distributed nodes |
| Scalable and fast | Low to medium | Fast |
| Energy consumption | High (”PoW”) to low (”PoS”) | Low |
| Smart contracts | Possible | Possible |
| Network governance | On-chain/distributed | Central operators |
| Needs a token? | Yes | Usually no but possible. |
| Private? | No by default | It depends on whether third-party nodes can still be operated. |
| Privacy features | Possible | Possible |

The following table illustrates some permissioned networks and permissionless networks.

|  | Permissionless | Permissioned |
| --- | -------------- | ------------ |
| Public | Ethereum, Bitcoin | POA Network, Chiliz |
| Private | - | Hyperledger Fabric, Quorum, Corda |

For a thorough explanation about the difference between public and private blockchains, [please visit our dedicated page](https://flyingblock.com/article/public-vs-private-blockchains).

## Should I use a permissioned or a permissionless blockchain?

The debate between permissioned and permissionless for business use cases has been long-standing in the blockchain industry since the release of [Hyperledger](https://flyingblock.com/article/what-is-hyperledger) and Corda in 2015. Part of it relies on the general misconception that private networks are synonyms of permissioned ones.

In general, permissioned blockchains have allowed higher transaction outputs per second (so-called "TPS"), making it more scalable than permissionless networks for business needs. However, this greater scalability came with a tradeoff: it resulted in lower distribution and decentralization of the network, which sometimes defeats the purpose of using a blockchain in the first place.

Yet, the growing popularity of **second-layer networks is likely to challenge the status quo**. Since everyone has well acknowledged the lower transaction output of permissionless programmable blockchains, second layers have built on the first layer's decentralization/distributed properties (e.g., Ethereum, Bitcoin) while providing greater flexibility in the output built on top of a distributed network.

Unfortunately, the debate between permissioned and permissionless network is not likely to end anytime soon. However, permissionless networks (like [Ethereum](https://flyingblock.com/article/what-is-ethereum)) could serve as the general base layer, where a growing range of permissioned networks and other second layers would be built on it, each serving different use cases. This has been illustrated by the launch of the Baseline Protocol, built on Ethereum.

To conclude, in regards to business use-cases, the choice of the permissioning property of a network must always be considered in tandem with **a thorough understanding of the differences between private and public systems**.

Permissioned networks restrict the set of  validators of a blockchain to a set of identifiable parties. Find the differences with Bitcoin and Ethereum.

All articles about technical discussions

Ethereum and Bitcoin are often hard to understand for new users. Discover how blockchains work and learn differences between their characteristics.

A Guide to Consensus Algorithms

Proof of Work, Proof of Stake, and Proof of Authority are the most popular consensus algorithms. Discover them.

Public vs. Private Blockchains

Private blockchains prevent non identified parties to monitor the network. Find their differences with public blockchains.

Permissioned vs. Permissionless Networks

Permissioned networks restrict the set of validators of a blockchain to a set of identifiable parties. Find the differences with Bitcoin and Ethereum.