Consensus Mechanism

Posted By Darren Winters on Aug 14, 2021


Consensus Mechanism

The transactional part of the secure blockchain network, the consensus mechanism, could be the investor’s holy grail to a fortune.

Without further ado let me set the stage. Cryptocurrencies are back on the radar as the White House backs crypto tax amendments endorsing proof of work in the infrastructure bill.

White House Backs Crypto Tax Amendment Endorsing Proof-of-Work in Infrastructure Bill – (stalkcryptos.com)

Why does the US government prefer proof of work over proof of state consensus mechanism? 

“The Administration believes this provision will strengthen tax compliance in this emerging area of finance and ensure that high-income taxpayers are contributing what they owe under the law … we believe that the alternative amendment put forward by Senators Warner, Portman, and Sinema strikes the right balance and makes an important step forward in promoting tax compliance” wrote Andrew Bates, the White House’s deputy press secretary in a statement. 

Reading between the lines, cryptocurrencies have made it to the White House. Cryptos are now legitimate in the eyes of the government, bearing in mind that this emerging area of finance is viewed as a taxable asset.

So, I believe it would be reckless of any wealth manager, private investors if they did not have some exposure to cryptocurrencies in their portfolio today.

Now let’s zero in on the consensus mechanism of the secure blockchain network to spot what I believe could be the best trade/ investment of the century

Consensus Mechanism

The consensus mechanism can be either proof of work or proof of state. Both protocols confirm that a transaction took place on the blockchain without the need for a third party. 

What is the difference between a proof-of-work and proof of state consensus mechanism?

Proof of work requires members of a network to solve arbitrary mathematical puzzles using computers to prevent anyone from gaming the system.Hashes, long strings of numbers serve as proof of work.

Transactions are posted on a distributed ledger, which is arranged in sequential blocks. This ledger is public or distributed and any alternative ledger would be rejected by members, thereby preventing double transactions or bad actors.

The key takeaway is that proof of work is the most difficult consensus mechanism to hack

This is because it requires a bad actor to monopolize the network’s computing power. Machinery and power required to complete the hash functions are expensive.

Regarding the Proof of Stake consensus mechanism, there are no complex mathematical equations to solve using computer hardware and encryption software.

Instead, token holders participate in blockchain creation. Token holders participate in the consensus by “staking” their tokens.

Proof of State is a learner more scalable consensus mechanism but it is 50% more prone to being hacked than proof-of-work

For high volume low value, daily transactions proof of work could be the future global internet payment system. I believe the geeks can resolve taxation issues with the government. A user’s email address is aligned with a digital ID passport and the problem is solved. 

But where I see mega value is in proof-of-work tokens

A high-value transaction using smart contracts will be conducted on a proof-of-work consensus mechanism. When booming demand, meets restricted supply that can only mean one thing for prices

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