Ethereum's Consensus Puzzle: Solving the Trust Equation in a Blockchain Revolution
Tags: ethereum, blockchain, security, webdev
Published: 2023-07-17 06:53:49

we've been talking about "_consensus rules_" – these are the rules that everyone must agree on for a decentralized system to work properly. Consensus is all about reaching an agreement among different participants in a distributed system so they can all have the same view of what's happening.

When it comes to decentralized record-keeping and verification, it's not enough to just trust that everything is correct. This is a challenge in decentralized networks because there's no central authority to decide what's true. That's one of the reasons why blockchain platforms are appealing – they resist censorship and don't rely on a central authority for access to information. However, this lack of a trusted authority means that any disagreements or differences have to be resolved in other ways. That's where consensus algorithms come in – they help ensure security and decentralization can work together.

Consensus is really important in blockchains because there's valuable money involved. So, in the context of blockchains, consensus is about getting everyone to agree on the same information while keeping the system decentralized. It's like having a set of strict rules without any one person or organization in charge. Instead, power and control are spread across a large network of participants who benefit by following the rules and being honest.

The ability to reach consensus across a distributed network, even when there are challenges and no central control, is the main principle behind all open public blockchains. To tackle this challenge and maintain decentralization, the blockchain community is always experimenting with different ways of achieving consensus. This chapter explores these different approaches and how they impact smart contract blockchains like Ethereum.

>**Consensus algorithms are an important part of how blockchains work, but they operate behind the scenes, away from the everyday use of smart contracts. It's like the plumbing of the system that you don't need to worry about. Using Ethereum is similar to using the internet - you don't need to know how the data is routed to access websites or send emails. Similarly, you don't need to understand the technical details of consensus algorithms to use Ethereum and interact with smart contracts.**

## Consensus via Proof Of Work (PoW)

The person who created Bitcoin also came up with a consensus algorithm called _proof of work (PoW)_. PoW is a crucial invention that forms the foundation of Bitcoin. However, the term "_mining_" used for PoW can lead to a misconception about its primary purpose. People often assume that mining is mainly about creating new currency, similar to real-world mining for valuable resources. In reality, the main goal of mining (and other consensus models) is to secure the blockchain and keep control decentralized among many participants. The reward of newly minted currency serves as an incentive for those who contribute to the system's security, rather than the primary objective. The reward is a means to achieve decentralized security. 

In PoW, there is also a corresponding "_punishment_" in the form of the energy cost required to participate in mining. If participants don't follow the rules and earn the reward, they risk losing the funds they spent on electricity for mining. Therefore, PoW consensus involves finding a balance between risk and reward, motivating participants to act honestly based on self-interest.

Currently, Ethereum operates as a PoW blockchain, using a PoW algorithm called _Ethash_, which has slight differences compared to Bitcoin's algorithm. Ethash serves the same purpose of securing the blockchain and decentralizing control. However, Ethereum is also exploring the possibility of transitioning to _ProgPOW_, a more ASIC-resistant PoW algorithm. ProgPOW is still being developed at the time of writing.

## Consensus via Proof of Stake (PoS)

Before proof of work (PoW) became widely adopted, there were other consensus algorithms proposed, including variations of a consensus algorithm called _proof of stake (PoS)_. PoW was actually created as an alternative to PoS. After Bitcoin's success, many blockchains followed its lead and used PoW. However, the research on consensus algorithms has revived interest in PoS and greatly advanced the technology.

From the beginning, Ethereum's founders intended to switch its consensus algorithm to PoS. They purposely introduced a _difficulty bomb_ in Ethereum's PoW, which gradually makes mining more difficult, pushing the transition to PoS.

At the time of writing this book, Ethereum still relies on PoW, but the research on a PoS alternative called _Casper_ is nearly complete. The introduction of Casper has faced delays, requiring adjustments to prevent the difficulty bomb from rendering PoW obsolete.

In general, a PoS algorithm works like this: The blockchain maintains a set of validators, and anyone holding the blockchain's main cryptocurrency (e.g., ether in Ethereum) can become a validator by locking up their cryptocurrency in a deposit. Validators take turns proposing and voting on the next valid block, and the weight of their votes depends on the size of their deposit (or stake). It's important to note that a validator risks losing their deposit if the block they staked it on is rejected by the majority of validators. On the other hand, validators receive a small reward based on their stake for every accepted block. This system of reward and punishment encourages validators to act honestly and follow the consensus rules. The main difference between PoS and PoW is that in PoS, the punishment is intrinsic to the blockchain (such as losing staked cryptocurrency), while in PoW, the punishment is extrinsic (like losing funds spent on electricity).

## Ethash: Ethereum's Proof of Work Algorithm

Ethash is the proof-of-work (PoW) algorithm used in Ethereum. It combines Vitalik Buterin's Dagger algorithm and Thaddeus Dryja's Hashimoto algorithm. Ethash relies on a large dataset called the DAG, which is a directed acyclic graph. The DAG starts at around 1 GB in size and gradually grows with each epoch (30,000 blocks or approximately 125 hours).

The purpose of the DAG is to make Ethash PoW resistant to specialized mining equipment called ASICs. By depending on a large and frequently accessed data structure, Ethash aims to prevent the dominance of ASIC miners. The goal is to keep mining power decentralized and accessible to more people worldwide, using consumer-level graphics processing units (GPUs) instead.  This helps avoid the concentration of mining power in the hands of a few industrial operations, as seen in Bitcoin. Ethereum’s founders wanted to avoid centralization in PoW mining, where those with access to specialized silicon fabrication factories and big budgets could dominate the mining infrastructure and undermine the security of the consensus algorithm. However, the use of GPUs for mining Ethereum caused a shortage and price increase in 2017, impacting gamers and leading to purchase restrictions.

Until recently, the threat of ASIC miners on the Ethereum network was minimal. The Ethereum development team's plans to transition to proof of stake (PoS) likely deterred ASIC suppliers. However, with other cryptocurrencies using the Ethash algorithm emerging and Ethereum Classic remaining on PoW, ASIC mining may become more prevalent on the Ethereum network before the transition to PoS. This means ASICs designed for the PoW algorithm may still find use in mining other cryptocurrencies.

## Casper: Ethereum's Proof of Stake Algorithm

Casper is Ethereum's planned proof-of-stake (PoS) algorithm, designed to replace the current proof-of-work (PoW) algorithm. PoS is a different approach to achieving consensus in a blockchain network compared to PoW.

With Casper, the Ethereum blockchain will no longer rely on miners solving complex mathematical puzzles to validate transactions and create new blocks. Instead, the consensus will be achieved through a system where participants, known as validators, are chosen based on the number of cryptocurrency tokens they hold and are willing to "stake" as collateral.

Validators will lock up a certain amount of their cryptocurrency tokens in a deposit to show their commitment to the network. The weight of their influence in the consensus process will be proportional to the amount they have staked. Validators will take turns proposing and validating blocks, and the majority of validators need to agree on a proposed block for it to be accepted and added to the blockchain. Validators will be rewarded with additional cryptocurrency tokens for their honest participation, while dishonest behavior or attempts to attack the network can result in penalties, including the loss of their staked tokens.

One of the main advantages of Casper's PoS algorithm is that it requires significantly less energy consumption compared to PoW. Since there is no need for resource-intensive mining processes, the environmental impact is reduced. Additionally, Casper aims to improve the security of the network by making it more difficult and costly for attackers to compromise the consensus.

The transition to Casper is a significant milestone for Ethereum, as it will enable faster transaction confirmations, increased scalability, and a more secure and sustainable network. However, the implementation of Casper has faced delays and challenges, and the Ethereum community is actively working to address any remaining technical and economic considerations before its full deployment.

### Principle of Consensus

To better understand consensus algorithms, it helps to ask a few important questions:

1. Who has the ability to change what happened in the past, and how? This relates to the concept of immutability in the blockchain. It's important to know who can alter or manipulate past transactions and data.
2. Who has the power to shape the future, and how? This refers to the concept of finality. Understanding who can determine what happens in the future and how they do it is crucial.
3. What is the cost involved in making changes? There may be costs associated with modifying the blockchain, such as computational power or financial expenses. Knowing the cost can provide insights into the feasibility and security of the system.
4. How decentralized is the power to make changes? Decentralization is an important principle in blockchain technology. It's important to assess how power is distributed among participants and whether it is concentrated in the hands of a few.
5. How can we detect if something has changed, and how will we know? Transparency and accountability are essential in a decentralized system. It's important to have mechanisms in place to detect and verify any changes that occur.

Consensus algorithms are continually evolving, aiming to address these questions in innovative ways. Researchers and developers are working on finding solutions that enhance immutability, increase the security of the future, minimize costs, promote decentralization, and ensure transparency in the blockchain ecosystem.

## Controversy and Competition

You might be wondering why there are so many different consensus algorithms and which one is better. The truth is, there is no one-size-fits-all answer. The "best" consensus algorithm depends on various factors and involves trade-offs.

Different consensus algorithms excel in different areas, such as immutability, finality, decentralization, and cost. It's important to ask specific questions about what you want to achieve when determining which algorithm is better suited for your needs.

The design of consensus algorithms is a hotly debated topic in the blockchain industry, with billions of dollars at stake. It's an ongoing experiment where different approaches are being tested and compared. Ultimately, time will reveal which algorithms stand the test of adversarial conditions and deliver the desired results.

#### Conclusion

Consensus algorithms are essential in blockchain technology to ensure agreement among participants and maintain security. Different algorithms like proof of work (PoW) and proof of stake (PoS) have their strengths and weaknesses. Ethereum currently uses PoW but plans to switch to PoS with Casper. The choice of algorithm depends on factors like immutability, finality, decentralization, and cost. There is no one "best" algorithm, as it varies based on specific needs. The blockchain industry is constantly evolving, experimenting with different algorithms, and their effectiveness will be determined over time.