Theory

A consensus algorithm is a procedure through which all the peers of a blockchain network reach a common agreement about the present state of the distributed ledger. The consensus protocol ensures that every new block added to the blockchain is the one and only version of the truth agreed upon by all the nodes in the network.

Some of the most common consensus algorithms include:
1. Proof of Work (PoW)
2. Proof of Stake (PoS)

Proof of Work is a consensus mechanism used in blockchain systems to validate and add new transactions to the blockchain. It requires network participants (miners) to solve complex mathematical puzzles—a process known as "mining." The first miner to successfully solve the puzzle broadcasts the solution to the network. If the solution is accepted by the majority of the network, the miner is rewarded with cryptocurrency, and the new block of transactions is added to the blockchain. PoW is renowned for its security and resistance to attacks, but it demands substantial computational power and energy consumption, which has raised concerns about its environmental impact.

Proof of Stake is a consensus algorithm used in blockchain networks, such as Ethereum 2.0. In PoS, participants—often referred to as validators—are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they "stake" or hold and are willing to "lock up" as collateral. Validators are selected to create blocks and validate transactions in proportion to their stake, and they are rewarded with transaction fees or newly created cryptocurrency. PoS is more energy-efficient compared to Proof of Work and encourages participants to act honestly, as they have something to lose (their staked funds) if they behave maliciously.