What Is Nakamoto Consensus?

Agreement algorithms in classic distributed systems were designed for small groups in which participants' identities are known. Nakamoto Consensus, on the other hand, overcomes the problem of multiplying votes with fake identities (Sybil attack) in a network that anyone can join and where identities are unknown, through a selection based on computing power. The right to add a block to the chain goes to the miner who first solves the Proof of Work puzzle; nodes, in turn, accept as valid the chain that represents the greatest amount of accumulated work.

If two valid blocks are produced at the same time in the network, a temporary fork occurs; whichever chain miners add the next block to becomes longer, and the other is abandoned. For this reason, finality is probabilistic: each new block added on top of a transaction reduces the likelihood of that transaction being reversed. This is why six confirmations are widely awaited for large amounts on Bitcoin. What steers miners toward honest behavior is economic incentives such as block rewards and transaction fees.

The system is protected against a 51% attack, in which an attacker who takes control of a majority of the network's total computing power could alter past transactions, by the high cost of such an attack. High energy consumption and the lack of instant finality are the method's main limits; many Proof of Stake-based networks therefore use different finality mechanisms.