2. Understanding Blockchain Technology

A consensus algorithm is a mechanism that allows users or machines to coordinate in a distributed setting. It needs to ensure that all agents in the system can agree on a single source of truth, even if some agents fail. In other words, the system must be fault-tolerant. In a centralized setup, a single entity has power over the system. In most cases, they can make changes as they please, there isn’t some complex governance system for reaching consensus amongst many administrators.

In a decentralized setup, it is important to have a consensus algorithm in place to reach an agreement on what entries get added. Overcoming this challenge in an environment where strangers don’t trust each other was perhaps the most crucial development paving the way for blockchains.

In cryptocurrencies, users' balances are recorded in a database - the blockchain. It's essential that everyone (or more accurately, every node) maintains an identical copy of the database. Otherwise, you'd soon end up with conflicting information, undermining the entire purpose of the cryptocurrency network.

Consensus algorithms ensure that all nodes agree on the state of the blockchain. The algorithm requires users that want to add blocks (validators) to provide a stake. The stake is some kind of value that a validator must put forward, which discourages them from acting dishonestly. If they cheat, they’ll lose their stake. Examples include computing power, cryptocurrency, or even reputation.

There is a reward available for validators. This usually consists of the protocol’s native cryptocurrency and is made up of fees paid by other users, freshly-generated cryptocurrency units, or both.

Transparency is also an essential factor in a consensus algorithm. We need to be able to detect when someone is cheating. Ideally, it should be costly for them to produce blocks, but cheap for anyone to validate them. This ensures that validators are kept in check by regular users.

There are two main types of consensus algorithms: Proof of Work (PoW) and Proof of Stake (PoS). PoW was first implemented in Bitcoin, and it requires validators (referred to as miners) to hash the data they want to add until they produce a specific solution. To compete with other miners, you would need a warehouse full of special hashing hardware (ASICs) to be in with a chance of producing a valid block.

In PoS, there’s no concept of miners, specialized hardware, or massive energy consumption. All you need is a regular PC. However, you still need to put some skin in the game. In PoS, you don’t put forward an external resource (like electricity or hardware) but an internal one – cryptocurrency. There’s generally a minimum amount of funds you must hold to be eligible for staking.

In conclusion, consensus algorithms are vital to the functioning of cryptocurrencies and distributed ledgers. They ensure that all nodes agree on the state of the blockchain, which is essential to maintain trust and security in the network. There are various consensus algorithms, but they all share common traits of stake, reward, and transparency.