What Are The Most Common Consensus Algorithms Run By Blockchain Business Models?

In distributed systems, consensus algorithms enable users across the system to agree on a single decision as the system evolves. As a result, consensus algorithms play a key role in Blockchain-based businesses as they enable the underlying protocols to process transactions and make more important strategic decisions. The most important consensus algorithms are proof of work (Bitcoin, Ethereum 1) and proof of stake (Ethereum 2).

DefinitionConsensus Algorithms are fundamental mechanisms used in blockchain and distributed ledger technologies to achieve agreement among multiple nodes or participants on the state of a shared digital ledger. These algorithms enable decentralized networks to validate transactions, ensure data consistency, and establish a single version of truth across the network. Consensus is critical in preventing double-spending, fraud, and maintaining the integrity of the blockchain. Different consensus algorithms offer varying trade-offs between security, decentralization, and scalability, making them essential components of blockchain systems. They play a key role in determining how new transactions are added to the blockchain and how conflicts are resolved.
Key ConceptsDecentralization: The distribution of authority and decision-making across multiple nodes in a network. – Trustless System: A system where participants do not need to trust a central authority but rely on cryptographic processes and consensus mechanisms. – Validation: The process of confirming the accuracy and legitimacy of transactions before they are added to the blockchain. – Node: A participant or computer in a blockchain network that maintains a copy of the ledger. – Block: A group of transactions bundled together and added to the blockchain. – Immutable Ledger: A ledger that cannot be altered once data is added, ensuring data integrity.
CharacteristicsSecurity: Consensus algorithms are designed to provide security against malicious actors and attacks. – Decentralization: Many consensus algorithms aim to distribute decision-making power across the network. – Efficiency: The efficiency of reaching consensus can vary, impacting transaction throughput. – Scalability: Some algorithms are more scalable, accommodating a growing number of nodes and transactions. – Finality: The concept of finality differs among consensus algorithms, affecting how quickly transactions are considered confirmed. – Energy Consumption: Energy consumption can vary widely among different consensus mechanisms.
ImplicationsNetwork Security: The choice of consensus algorithm affects the security of the blockchain network. – Scalability: Scalability challenges may arise as the network grows, depending on the chosen algorithm. – Energy Consumption: Energy-intensive consensus algorithms can raise concerns about environmental impact. – Centralization Risk: Some algorithms may introduce centralization risks, especially when used by a limited number of powerful nodes. – Throughput: Transaction throughput and confirmation times are influenced by the consensus algorithm. – Developer Community: Different consensus algorithms may have varying levels of support and adoption within the developer community.
AdvantagesSecurity: Consensus algorithms prioritize security, making it difficult for malicious actors to manipulate the blockchain. – Decentralization: Many consensus mechanisms promote a decentralized network structure. – Trustlessness: They eliminate the need for trust in centralized entities or intermediaries. – Data Integrity: Consensus ensures that the blockchain maintains an immutable and tamper-proof ledger. – Transparency: Transactions and ledger updates are transparent and verifiable by participants. – Consistency: Consensus guarantees that all nodes have the same view of the blockchain’s state.
DrawbacksScalability Challenges: Achieving consensus in large networks can be resource-intensive and slow. – Energy Consumption: Some consensus algorithms, like Proof of Work, consume substantial energy resources. – Centralization Risks: Certain algorithms may lead to centralization tendencies due to concentration of power. – Complexity: Implementing and maintaining consensus algorithms can be complex and require technical expertise. – Variability: Transaction confirmation times and throughput can vary depending on the consensus algorithm. – Resistance to Change: Switching to a new consensus algorithm can be challenging due to network-wide coordination.
ApplicationsConsensus algorithms are primarily used in blockchain and distributed ledger technologies to achieve agreement on transaction validation and ledger updates. They are foundational in cryptocurrencies, smart contracts, and decentralized applications (DApps).
Use CasesBitcoin (BTC): Bitcoin employs the Proof of Work (PoW) consensus algorithm for transaction validation. – Ethereum (ETH): Ethereum is transitioning from PoW to Proof of Stake (PoS) for improved scalability and energy efficiency. – Cardano (ADA): Cardano uses a variation of PoS for achieving consensus and securing its blockchain. – Ripple (XRP): Ripple’s XRP Ledger uses the Ripple Protocol Consensus Algorithm (RPCA) for fast and efficient consensus.
Consensus AlgorithmDescriptionKey Insights
Proof of Work (PoW)Miners compete to solve computationally intensive puzzles to validate transactionsProvides security through computational effort but is energy-intensive.
Proof of Stake (PoS)Validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake”Reduces energy consumption compared to PoW but relies on participants having a stake in the network.
Delegated Proof of Stake (DPoS)Token holders vote for a small number of delegates who validate transactionsOffers faster transaction confirmation times and scalability but may centralize power among delegates.
Proof of Authority (PoA)Network participants with identified authority validate transactionsProvides high throughput and low energy consumption but relies on trust in authorities.
Byzantine Fault Tolerance (BFT)Nodes in the network communicate to reach consensus on transactionsResilient to malicious nodes but typically less decentralized than PoW or PoS.
Practical Byzantine Fault Tolerance (PBFT)BFT algorithm optimized for practical use casesAchieves consensus among nodes in a distributed system efficiently and securely.
HoneyBadgerBFTAn asynchronous BFT algorithm that achieves consensus even in the presence of adversarial nodesDesigned to be robust against various network conditions and attacks.
RaftA consensus algorithm for managing a replicated logOffers simplicity and ease of understanding for building fault-tolerant systems.
TendermintBFT-based consensus algorithm for blockchain applicationsCombines PoS with BFT for fast, secure, and scalable blockchain networks.
Practical Byzantine Fault Tolerance (pBFT)A simplified version of BFT for practical use casesSuitable for systems with known participants and low network latency.
Ripple Consensus ProtocolConsensus protocol used in the Ripple payment networkAchieves consensus across a distributed network of servers in a deterministic manner.
Federated Byzantine Agreement (FBA)A consensus model used in Stellar’s blockchain networkOffers fast transaction confirmation while maintaining decentralization.
Spacemesh ProtocolMesh-based consensus algorithm for blockchain networksUses verifiable random functions and proof-of-space-time to secure the network.
AlgorandUses a pure proof-of-stake consensus mechanismBalances decentralization, security, and scalability in a blockchain network.
AvalancheEmploys a novel family of consensus protocolsAchieves quick finality and scalability through repeated sampling and feedback.

Proof of Work vs. Proof of Stake


Proof of Work In A Nutshell

A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result, they get rewarded in coins.

Proof of work was the major and most successful consensus algorithms that resulted from Bitcoin’s underlying Blockchain. Indeed, this was first envisioned in Satoshi Nakamoto’s White Paper (the practical application, as the theory behind it, was developed a few decades earlier).

Bitcoin was the first digitalized and decentralized cryptocurrency, released as open-source software in 2009. It uses an underlying technology called Blockchain, which works as a digital, distributed ledger, that can be used as a mechanism for disintermediating trust in transactions.  

The proof of work consensus algorithm would also become the foundation to Ethereum 1, the first iteration of Ethereum. However, as Ethereum is rolling out at scale, a Proof of Stake algorithm between 2022 and 2024 will make Ethereum transition toward a more hybrid model, relying on both proof-of-work and proof-of-stake.

Ethereum is a cryptocurrency currently ranking at number two in market capitalization after Bitcoin, which is at the top. However, in terms of being used actively, Ethereum is ahead of Bitcoin. While Bitcoin is sent, received, and held only in a singular form, Ethereum allows entities to create different ledgers. These can even be used to create additional cryptocurrencies. The use and transactions using Ethereum have grown consistently over the years ever since it began operations half a decade ago.

Proof of Stake In A Nutshell

A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of the security, reduced risk of centralization, and energy efficiency.

Other blockchains that leveraged proof-of-stake consensus algorithms comprised Steem, which used to own the Steemit site, then took over by TRON.

In a Blockchain Economy, a good chunk of value is at a protocol level. Therefore, you will have a Blockchain Protocol (in this case Steem is the protocol) which has a set of underlying rules. The Steem protocol reaches consensus, and it follows a proof-of-stake (contrary to Bitcoin where there is a proof-of-value mechanism). On top of the Steem protocol, several applications can be freely built. Those applications will be decentralized, as they will be based on a decentralized network in the first place. In the Steem Blockchain context, Steemit is among the largest and most important (Steemit was the first application launched as a use case for the Steem Protocol).

Other consensus algorithms

Other consensus algorithms comprise proof-of-activity, proof of authority, proof of burn and a few more.

Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

Learn More From The Book Blockchain Business Models


Read Next: EthereumBlockchain Business Models FrameworkDecentralized FinanceBlockchain EconomicsBitcoin.

Related Blockchain Business Frameworks


Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.


The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake


Proof of Activity

Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.


Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).


A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.


An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.


Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.


Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.


In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.


Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.


BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

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