Gain a deeper understanding of a common – but now widely misunderstood – concept in blockchain technology: consensus algorithms.

Cointelegraph is tracking the development of a brand new blockchain from the beginnings to the mainnet and beyond through its Inside of the Blockchain Developer’s Brain series. In the previous sections Andrew Levine from Koinos team discussion some challenges The team it has faced since identifying the main issues it wants to solve and outlines three of the “crises” that are hindering the adoption of blockchain: Upgradeability, Expandability, and administration. This series focuses on the consensus algorithm: Part 1 is about Proof of Work, Part 2 is about Proof of Stake and Part 3 is about Proof of Stake.

In this article I would like to use my unique perspective to deepen my understanding of a common concept in blockchain technology, but also a unfortunately misunderstood concept: the coin algorithm.

In order to gain an insight into this component of the blockchain, I always like to take a step back in these articles and look at the big picture, because the consensus algorithm is only part of the larger system.

Blockchains is a game where players compete to validate transactions by grouping them into blocks that match blocks of transactions generated by other players. Cryptography used to hide data could allow these people to commit fraud. A random process is used to distribute digital tokens to players who follow the rules and generate blocks that match blocks of others. These blocks are then linked together to create an auditable record of all transactions that have ever occurred on the network.

When people create new blocks with different transactions we call this a “fork” because the chain is currently moving in two different directions. That’s exactly the opposite of what we want. The entire value of a blockchain comes from the fact that everyone agrees – will agree – when transactions take place. Hence, consensus algorithms aim to solve the fork.

Satoshi’s true innovation

Ultimately, if they fail to do so, they will be penalized for having everyone update their databases accordingly. Logs contain rules for streamlining transactions, but if violating these rules does nothing, they are invalid. The real innovation that Satoshi Nakamoto presents in his whitepaper on Bitcoin (BTC) is the elegant use of economic incentives.

Satoshi Nakamoto did not invent the idea of ​​“cryptocurrency”. He created an elegant system to combine cryptography with economics, to leverage cryptocurrencies now known as cryptocurrencies, and to use incentives to solve problems that the algorithm alone cannot solve. Its design forces people to sacrifice money to mine blocks of transactions. People would have to sacrifice this money over and over again by playing by the rules of the system and trying to organize transactions into blocks that everyone else on the network can accept. If they do this long enough, they will be rewarded in the platform’s currency.

Of course, the blockchain cannot know that the money was issued in the form of USD, Yen, or Euros, so it uses proxies as pointless work. It made it unnecessarily difficult to mine blocks, so anyone who successfully mines a block will necessarily spend money on hardware and energy to run that hardware. So each successfully mined block is supported by the amount that was sacrificed not only for the hardware, but also the energy required to run that hardware and generate that block. Whenever there is a fork, Proof-of-Work (PoW) consensus algorithms are an automated system, with the fork that is supported by most of the work being the “correct” fork.

Related: Evidence-of-Stake vs. Evidence-of-Function: Explained Differences

This means that anyone who continues to produce blocks during that junction will continue to receive rewards, and anyone who continues to produce blocks on another junction will not receive any rewards. Since these people spent their money buying hardware and running it to produce blocks, the punishment was easy as they were already being punished with money. They’ve spent their money, so if they want to keep producing blocks in the wrong chain, that’s fine too. They will not earn rewards and will not get their money back. You will not sacrifice this money for anything. Your blocks are not accepted by the network and You will not receive tokens.

This proof-of-work system ensures that someone who disobeys the rules, a malicious actor, procures and operates more hardware than everyone else combined, for example by carrying out a 51% attack.

That is the luxury behind the proof of work. The system cannot work without sacrificing more and more capital. Satoshi combined cryptography and economics to create a transaction book that is incredibly reliable.

However, there are different consensus algorithms that work in slightly different ways. The best known of these is the Proof of Stake (PoS), which I will discuss in the next article in this series. Then I’ll discuss the algorithm we’ll be using in koinos, which is the first on a general-purpose blockchain.