Blockchain Consensus Protocols: How They power Smart Contracts, Oracles & Web 3.0

Blockchain Consensus Protocols: How They power Smart Contracts, Oracles & Web 3.0

An overview of consensus protocols, proof-of-work. proof-of-stake, and the most common programming languages on the blockchain.

Distributed ledger technology (DLT) has a broad range of applications.

Blockchain and the decentralization it provides are at the core. Consequently, we tend to overlook the drawbacks, especially regarding privacy. The question is, should we?

If we make an apples-to-apples comparison, we will notice they're far superior to current centralized systems; however, here's the whole story:

Nowadays, blockchain, a practical application of DLT, is used in payments, debt/equity issuance, trade finance, and post-trade processes. It is no news that the blockchain cannot be manipulated, seeing it is a decentralized ledger and immutable.

But if you've ever wondered how this is possible, you're about to discover something new.

Consensus Protocols.

Nodes agree on a given state, value, or piece of information using DLT's (Blockchain) consensus protocols.

Outcomes of these consensus protocols are critical to the smooth operation of the blockchain, smart contract, and, consequently, the entire dApp. We've put together this primer on consensus protocols to make this easy for you.

We took things a little further, and the scope of this piece goes beyond the standard proof-of-work. We will help you understand the role Oracles play, how smart contracts will evolve, and the future of web 3.0.

Primer on Consensus Protocols

There is a broad and expanding range of consensus mechanisms. The following are some of the most common examples of public blockchains in financial services:

Proof-of-Work (poW)

If you've been involved with cryptocurrency, especially Bitcoin (BTC), for a minute, there's a chance you're familiar with this concept. If not, here's what you should know:

PoW entails computers called "nodes" solving complex, asymmetrical mathematical puzzles to generate new blocks in a process known as "mining," thereby demonstrating proof of work.

The Bitcoin consensus protocol is designed to adjust the difficulty of these puzzles every 10 minutes to ensure that a new block is created. These puzzles are designed to be challenging to solve, but they are simple for the network to verify. Occasionally, several nodes may solve the puzzle, resulting in parallel blocks, known as "forking."

If this happens, the forks are usually only temporary, and all nodes eventually migrate to the longest chain while the protocol discards the other chains.

Some of the well-known use cases are Bitcoin, Litecoin, and DogeCoin.

Proof-of-Stake (poS)

An algorithm randomly selects validators for block creation in a PoS consensus mechanism based on the amount that token holders stake from their crypto-asset ownership.

The first step is to choose a proposer, followed by a proposed block, and finally, validate the proposed block.

Holders with a more significant stake in the native token have a better chance of being chosen—similar to playing the lottery. Even though everyone who buys a ticket has a chance of winning and the winner is selected at random, those who buy the most tickets have the best chance of winning.

By eliminating the need for energy-intensive mining operations, PoS addresses some of the shortcomings of PoW consensus mechanisms, such as high energy consumption, while maintaining network security. This reduced energy consumption also reduces the need to create many new coins to incentivize nodes to participate in the network.

Additionally, It reduces the risks of a 51 percent attack. While carrying out a successful 51 percent attack in a sizeable PoW-based blockchain is difficult and expensive, doing so in a large PoS-based blockchain is even more difficult and costly.

Using this consensus, famous examples of blockchain include Cardano, Tezos, and soon Ethereum 2.0.

Delegated Proof-of-Stake(DPoS)

DPoS adds a democratic element to the PoS consensus mechanism by outsourcing the validation process. Block validation, like PoS, is randomized, and individuals or entities (stakeholders) who stake the most in a particular crypto asset are more likely to win the chance to validate a block and generate a reward.

The DPoS model employs a voting system where the stakeholders selected to validate a block can delegate their work to a third party. These third parties are called "witnesses," and they are in charge of achieving consensus during the generation and validation of new blocks. The rewards are divided among the witnesses and the stakeholders.

Energy savings, increased decentralization, and positive participant behavior are all advantages of DPoS. DPoS encourages greater democratization by allowing all token holders to participate in the network's operation. Worthy of note is that voting in many blockchain models that use DPoS is proportional to participants' amount of stake.

DPoS also aims to encourage participants to engage in positive behaviors. Witnesses who add value to a network and are good network citizens are more likely to be voted in again and again; any witness who loses credibility, does not participate, or appears to be engaging in fraudulent activity is expected to be voted out. This procedure ensures that witnesses act in the best interests of the network.

DPoS also employs "delegates," who are elected to govern the system and propose any significant changes. Delegates, like witnesses, are elected through voting, and they can be removed through a vote if they are deemed unfit to serve the network's needs.

Evolution Of Smart Contracts on Algorand Blockchain

Algorand offers a standardized, scalable, and interoperable smart contract platform.

It can accelerate application development, increase iteration, generates results in faster deployments, and is environment-friendly. Not to mention how much more cost-effective it is.

Here are Algorand Smart Contract supported programming languages:

Reach

Reach provides the ease of use, accessibility, and security guarantees needed for smart contracts to become mainstream in a way that no other language has been able to provide.

Reach specifies entire dApps using a subset of JavaScript:

  • The smart contract.
  • The front-end clients.
  • The back-end servers.
  • The communication between all of the pieces.

The entire specification is written in a single language, allowing developers to create, reason about quickly, and deploy dApps. Furthermore, the compiler employs type-checking, information-flow security, and end-point projection to derive each component from a single specification correctly.

Python

Algorand provides Python language bindings to the AVM. Developers write their code in Python and use a supplied library to access AVM opcodes without writing directly in Teal. While Teal will continue to be supported for those who prefer direct interaction with a stack-machine language, we will recommend switching to a higher-level language to write more intuitive smart contracts.

Clarity

Clarity is a decidable language, which means that you can predict what the program will do from the code itself. Clarity is intended to maximize predictability and security. It takes the "what you see is what you get" approach, making smart contract behavior, cost, and performance easier to reason about. It enables static analysis of a smart contract's entire call graph.

Clarity's type support and type checker can eliminate entire classes of bugs such as unintentional casts, reentrancy bugs, and reads of uninitialized values.

Algorand, the Stacks ecosystem, and Hiro PBC are all the Clarity open-source project supporters. Clarity allows developers to create and call contracts in real-time using a widely used, decidable, secure, highly analyzable, and open-source language.

Practical Application of Algorand smart contract

  • Decentralized Marketplaces.
  • Margin Trading.
  • Prediction Markets.
  • Payment Solutions.
  • Alternative Savings.
  • Exchanges and Liquidity.
  • Credit and Lending.
  • Stablecoins.
  • Synthetics.
  • Escrow.

One crucial detail bears mentioning. And that is, smart contracts require off-chain data to make real-time transactions.

The first challenge. It is impossible to store these petabytes of data on the blockchain, and there's simply no capacity for that yet. Secondly, the bulk of this data is generated every second.

Hence, there's a need for Blockchain Oracles, or Oracles for short.

What is an Oracle, and Why are they Important?

To interact securely with off-chain systems from a blockchain, an additional piece of infrastructure known as an "oracle" must be used to bridge the two environments.

Smart contracts are unable to interact with data or systems that exist outside of their native blockchain environment. External resources are referred to as "off-chain," whereas data that has already been stored on the blockchain is referred to as "on-chain."

Blockchains gain the most valuable properties by being purposefully isolated from external systems, such as strong consensus on the validity of user transactions, the prevention of double-spending attacks, and the mitigation of network downtime.

Algoracle is a blockchain-based decentralized abstraction layer oracle network built on the Algorand Blockchain. It allows globally connected decentralized node networks to interact as independent sources to provide critical off-chain securely, real-time external data feeds required by complex Smart Contracts.

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