Consensus Layer

Let’s start off with the first consensus mechanism that defines the cryptocurrency industry, the proof-of-work (PoW) consensus mechanism, which is the consensus mechanism of Bitcoin. Since it is the first consensus mechanism, it is also known as the original consensus mechanism. 

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Here’s how it works:

1. Imagine Vince, Josh, Andrea, Chelle, and Mitchie play a game where they all have to solve a puzzle.
2. This puzzle is really hard to solve and takes a lot of time and energy to figure out.
3. But once any one of them solves the puzzle, that person gets a reward.
4. The person who solves the puzzle first gets a reward.

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In a nutshell, this is how proof of work works. Computers (miners) around the world solve really hard puzzles to make sure that all the transactions in the network are real and not fake (the act of validating transactions), and the miner that solves the puzzle first gets a reward.

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However, the cost of this entire process is quite steep since the miners need to consume electricity and have the proper hardware. It's called 'Proof-of-Work' because when miners solve a puzzle, the electricity and computing power used to find it prove that the miner carried out actual work.

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This table summarizes the advantages and disadvantages of a PoW consensus mechanism.

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The PoW is the first blockchain consensus mechanism, but did you know most cryptocurrencies are actually operating with another type of consensus mechanism? This next consensus mechanism is called proof-of-stake, which requires little to no hardware in order to validate transactions.

Proof-of-Stake (PoS) consensus mechanisms are mechanisms that mostly require “staking” a network’s tokens in order to validate transactions in the network. 

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To explain how PoS works, we will using our steps from earlier:

1. Imagine Vince, from our group of friends, wants to solve a jigsaw puzzle with many pieces, and he wants to make sure all the pieces fit together correctly.
2. But Vince can’t do it all alone so he asks his friends to help him, and they all bring their own puzzle pieces to add to the mix.
3. The more puzzle pieces they bring, the more say they have in how the puzzle is solved and how the reward will be shared.
4. They all work together to try and solve the puzzle, and when it's finished, they all get a reward based on how much they contributed.

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In a similar way proof of stake works by people contributing their tokens to help solve the puzzle of validating transactions, and the more tokens they contribute, the more say they have in how the network works and how rewards are distributed.

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The ones who validate transactions are called validators instead of miners. Validators deposit a minimum amount of cryptocurrency into a protocol (staking) instead of using hardware and electricity. Several cryptocurrencies, such as Ethereum, Near, and Flow, have PoS as their consensus mechanism. 

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The next consensus mechanism is arguably a potential improvement of the PoS consensus mechanism. By making the validation process less random, participants in the network (nodes) can be more efficient, and the network can focus on scalability. 

Delegated Proof-of-Stake (DPoS) is similar to PoS, with a slight change in how they function. 

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Here’s how it works:

1. Imagine our group of friends are playing a game where they have to build a tower out of blocks.
2. In building the tower, you have to have an architect to design how the tower is built. Our group of friends choose Josh and Mitchie for this role. 
3. Josh and Mitchie were voted and chosen by the rest of the group. Vince and Chelle voted for Josh while Andrea voted for Mitchie. Since Josh has the most number of votes, he has the most say when it comes to decisions. 
4. The group all works together to build the tower, and when it's finished, they all get a reward based on how much they contributed.

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This is how delegated proof of stake works. People can choose a representative to help make decisions about verifying transactions, and the representative who is chosen by the most people will have the most say in how the token works and how rewards are distributed. Transaction times vary from each DPoS network to another. However, they are generally shorter than PoS networks. Now, let’s proceed to our final consensus mechanism for this module which is also related to PoS.

Proof-of-Authority (PoA) is a variant of PoS. 

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Going back to our group of friends:

1. Our group of friends are playing another game and they need to decide who gets to be the leader.
2. Like in our previous games, our group of friends trust Josh to be the leader because he is really good at the game and always follows the rules.
3. Josh has the power to make decisions and keep everyone on track while playing the game.
4. Because Josh is trusted by everyone, he is responsible for making sure the game is fair and that everyone follows the rules.

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In PoA, a small group of trusted validators are chosen to create new blocks and verify transactions on the blockchain. They are responsible for making sure the blockchain is secure and that all transactions are valid. Because they are trusted, they have the authority to make decisions that keep the blockchain working well. 

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This model is best suited for hybrid blockchains. VeChain (VET) is a cryptocurrency that uses PoA. 

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Interestingly, the majority of cryptocurrencies in the space do not actually use a single one of the consensus mechanisms mentioned above. Most of them use lesser-known consensus mechanisms and even a combination of consensus mechanisms to innovate and try to improve upon the existing consensus mechanisms' flaws. These combinations give rise to newer consensus mechanism archetypes that might even be the new norms in the near future.