Distributed Ledger Technology & Law 101 Series | What is Consensus Algorithms in Blockchain?

“Bitcoin is not “unregulated”. It is regulated by algorithm instead of being regulated by government bureaucracies. Un-corrupted.”

- Andreas Antonopoulos

INTRODUCTION

One of the key features that made Blockchain famous is the concept of a distributed decentralized network that provides immutable records, enhanced privacy, security, and transparency in its transaction. Whilst there is no central authority present to validate and verify the transactions (making it more credible and less susceptible to manipulation), blockchain-based transactions are at the same time unique in that transactions are both secured and verified.

The key to blockchain’s success lies in its consensus protocols which is at the heart of each and every blockchain network.

As you plan on where to have your next market, don’t forget to follow our Distributed Ledger Technology 101 series at the subscribe link provided. Your journey to Blockchain and Law begins here.  

CONSENSUS ALGORITHMS | WHAT AM I?

A consensus algorithm is the process by which all the peers of the Blockchain network reach a common consensus about the present state of the distributed ledger. It is consensus (whereby everyone part of the network will need to agree with witnessing an event before a block is added) which ultimately gives blockchain its immutability reputation (this is as compared with traditional data keeping whereupon a hacker can simply alter a data set upon gaining entry to a system in a centralized system).

SUMMARY OF THE DIFFERENT FORMS OF CONSENSUS ALGORITHMS

The Internet of Money, bitcoin, is releasing 50 years of pent up innovation in finance, because it offers innovation without permission.

- Andreas Antonopoulos

Accordingly, it is important to note the following forms of consensus algorithms and how each unique attribute may affect how blockchain is used (both in transactions and in the future of legal practices):

  1. Proof of Work: this is a system where a transaction is documented by minders/supercomputers resolving to solve a problem to verify the fact. In another word, it is a unforgeable record of expended time and resources.
  2. Proof of Stake: this is a process by which an individual can mine/validate block transactions according to how much asset they hold.
  3. Delegated Proof of Stake: this is a process similar to proof of stake but with the ability where users with more tokens will get to vote and elect witness to the process.
  4. Leased Proof of Stake: this is a variation of proof-of-stake consensus mechanism which allows token holders to "lease" their tokens to full nodes and earn a percentage of the playout as a reward.
  5. Proof of Elapsed Time: this is a system designed to prevent high resource utilization and high energy consumption and keeps the process more efficient by following a fair lottery system. The consensus algorithm uses a randomly generated elapsed time to decide mining rights and block winners on a blockchain network.
  6. Practical Byzantine Fault Tolerance: a form of proof of stake, this system uses a particular sequence (usually in partial asynchronous networks) to keep rogue users at bay.
  7. Directed Acyclic Graphs: more commonly known as DAG, DAGs don’t have blockchain data and can handle asynchronous transactions.
  8. Proof of Activity: this systems utilizes both proof of stake and proof of work to ensure reward points are allotted on time.
  9. Proof of Importance: this is a system which is used to determine which individuals are eligible to perform the necessary calculations to add new blocks to a blockchain and receive the associated reward.
  10. Proof of Capacity: this is a consensus mechanism whereby an algorithm is used in the blockchain to allow a mining device in the network to use their available hard drive space to decide mining rights and validate transactions.
  11. Proof of Burn: designed to address high energy consumption issues associated with proof of work process, it is implemented by a blockchain network to ensure that all participating nodes come to an agreement about the true and valid state of the blockchain network. This algorithm is implemented to avoid the possibility of any cryptocurrency coin double-spending.
  12. Proof of Weight: this is a consensus mechanism that gives users a 'weight' based on how much cryptocurrency they are holding. Each time a transaction is made using the Proof of Weight mechanism, the network creates a committee of random network members and assigns each of the randomly selected member their 'weight' which centralizes the consensus process within the random committee.

CONCLUSION

Bitcoin is a currency, bitcoin is a network, bitcoin is a technology and you can’t separate these things. A consensus network that bases its value on the currency does not work without the currency.

- Andreas Antonopoulos

Different consensus algorithms provide different benefits. It is therefore important to understand the underlying commercial dealing and structure before a consensus algorithm is chosen.

Applying in the legal practice, specifically, Common Law (including countries the likes of USA, UK, Hong Kong, Australia and various Indo-Pacific states), the fact that our various laws are built upon confirmed precedents is in effect a form of consensus programming (though much of the system is built upon non-technological means).

In an age of ever-growing big data, it remains to be seen how consensus algorithms can be applied to automate common law, thereby using technology to assist in the continued delivery of justice. With ever booming populations on Earth, which tends to create more disputes, the use of technology may be the ultimate trump card in alleviating our otherwise overstretched judiciary. 

We hope you enjoyed the latest of our Distributed Ledger Technology 101 series. To stay tuned for more content, hit the subscribe link provided. Until next time.

Jurisdictions

Solicitor, ONC Lawyers

Joshua Chu is a Litigation Solicitor qualified to practice in Hong Kong. Before becoming a lawyer, Joshua worked in the healthcare industry serving as the IT department head at a private hospital as well as overseeing their procurement operations.

Since embarking upon his legal career, his past legal experience includes representing the successful party in one of Hong Kong’s first cryptocurrency litigation cases as well as appearing before the Review Body on Bid Challenges under the World Trade Organization Government Procurement Agreement concerning a health care industry related tender.

Today, Joshua’s practice is mainly focused in the field of dispute resolution and technology law.

Aside from his legal practice, Joshua is currently also a Senior Consultant with a regulatory consulting firm which had been founded by ex-SFC Regulators as well as being a management consultant for the Korean Blockchain Centre.

Managing Director, Prosynergy Consulting Limited