Blockchain Consensus and Token Economics

In computers and Blockchain, a consensus mechanism is a fault-tolerant mechanism. The mechanism of consensus uses to achieve the necessary agreement on a single state or a single data value of the network among multi-agent systems or distributed processes, such as with cryptocurrencies. Most importantly, the mechanism is useful for keeping the record, among other things.

Understanding Consensus mechanisms:

In this paragraph, I’m going to discuss the centralization process. In a centralized system, the database handles by a central administrator, who has the key information about driving licenses in a country. During this process, the central administrator has the right of adding, deleting, and updating information. The sole in-charge of maintaining the records handled by the central administrator. Most importantly, this system can be quite dangerous. On the other side, other common people do not allow to interfere with what changes are going throughout the process. In conclusion, people can lose their valuable information and money too.

 

This is the only reason, why blockchain is a completely decentralized process. Without any single authority, the self-regulating system work on a global scale. Most importantly, the process involves the contributions of more than a thousand participants who work on the verification authentication of transactions occurring on the blockchain. To ensure that all the transactions occurring on the network are genuine these publicly shared ledgers need a fair, real-time, efficient, reliable, functional, and secure mechanism and all participants agree on the status of the ledger on a consensus.

Different kinds of consensus:

On different principles, there are different kinds of consensus mechanism algorithms that work.

Proof of Work:

In addition, the most popular cryptocurrency networks like litecoin and bitcoin use the proof of work (POW) is this consensus algorithm. Most importantly, It requires a participant submitted by them to qualify them to receive the right to add new transactions to the blockchain node to prove that the work. However, this whole mining mechanism of bitcoin needs a longer processing time and high energy consumption.

Proof of Stake:

Similarly, just like the POW algorithm, another consensus algorithm that evolved as a low-energy consuming alternative, low-cost, known as the proof of stake (POS). However, instead of spending another, it comes with the drawback that it promotes crypto coin saving.

Proof of Capacity:

Similarly, For allowing sharing of memory space of the contributing nodes on the blockchain network, there are other consensus algorithms like Proof of Capacity (POC). Most importantly, it grants for maintaining the public ledger, the more hard disk space or memory a node has the more rights.

Process of Consensus:

In a long-term consensus branch, the more confirmations your transactions received the more blocks founded extends, contained in your transaction. In this latency network, two minors competing to solve the proof of work puzzle. Most importantly, one who solves this puzzle fast and accepts in the block gets a reward. Moreover, by adopting a public blockchain, any node in the blockchain network can perform data auditing.

Token Economics:

If there is a perceived loss of value, Token economics may lead to a death spiral in the token economy. It is mainly based on mechanism designs, inappropriate. Most importantly, to stabilize the network operation, appropriate token economics should not only incentivize desirable behavior but also be available. Therefore, the Token Economics designs at the relative level (stabilization)as well as an absolute level (incentivization). In conclusion, some good and failing examples of Token Economics are the following examples demonstrate.

Token Functions:

In cryptocurrency Security Token for investment Utility Token:

1) payment

2) voting

3) transaction fee

4) unit measure

5) staking governance

Good Examples Bitcoin:

Between Bitcoins and blocks, bitcoin Token Economics determines the reward mechanism. In addition, At 50 Bitcoins per block, the reward started. In conclusion, the reward per block is 12.5 Bitcoins. Moreover, For every 10 minutes, bitcoin designs to create a new block approximately. The average time to create a new block would decrease as the number of block miners increases. Most importantly, to generate new blocks by keeping other factors constant, increases in computational power would also make it faster. Above all, Bitcoin uses a ‘difficulty algorithm’ to adjust the difficulty of the puzzle that needs solves to generate a new block successfully to keep block generation time consistent. These two features the difficulty algorithm and the token reward mechanism it forms Bitcoin’s Token Economics.

Bad Example FCoin:

Most importantly, with the PoT (Proof of Trading), FCoin comes up, which incentivizes the trading as mining. The coin price explodes when the volume increases sharply. In conclusion, the trading volume also decreases, when coin price drops, as there is no stabilization mechanism. Further drives down the coin price the reinforcement of trading volume.

Conclusion:

Incentives are one of the popular mechanisms used in blockchain. Proof of Work is something that can be understood in a simple process. Moreover, it is sure that Blockchain will surely create a positive impact in the future too. People will the power of this technology and the mechanism and process of it.

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