Any Blockchain technology enthusiast must have heard or read about the cryptocurrencies consensus algorithm. The chatter has increased on which is best between the Proof of Work (PoW) consensus system and the Proof of Stake (PoS) system.
In a Blockchain network, the fundamental consensus algorithm is the Proof-of-Work (or PoW). The PoW is an algorithm used for confirming transactions and producing new blocks on the network. Here, miners on the network compete with one another to verify and complete transactions for a reward.
While the proof of work is the original algorithm in Blockchain, the proof of stake (or PoS) was created to improve on the PoW. It is an algorithm by which a blockchain network is aimed at reaching a distributed consensus.
Proof of Work provides miners the incentive of owning the cryptocurrency they are validating, while a profitable proof of stake mining is ensured for miners. This is so because miners must already own a share of the currency.
Proof of Work (or PoW)
It is a system that has the goal of preventing cyber-attacks. Users in a network send one other digital tokens, which is a decentralized ledger that gathers all transaction data into blocks on the chain.
There are special nodes that carry out this task called miners. The mining process involves a complex mathematical puzzle and a proof of its solution. A huge amount of computational power is usually required to solve the puzzles.
As the chain network grows, it faces more difficulties in that the algorithms become more complicated, hence more computational power. The processing speed and accuracy of the blockchain is dependent on the computation.
Block creation can take considerable time than usual if the puzzle is too difficult, causing slow transaction execution. But a simple puzzle can also be prone to attacks by spams and DoS. Basically, the miners solve the problem, generate the new block in the chain and prove the transactions.As more transactions are validated, crypto assets management professionals are happy as they have more tokens and coins to manage.
The solution to the Proof of Work puzzle is called a Hash. The solution of each block contains that of the previous blocks, thus preventing block violation. As a miner solves the problem, a new block is created and the transactions are placed in it.
Bitcoin employs the Proof of Work system, as well as many other cryptocurrencies out there. Satoshi Nakamoto, the fabled creator of Bitcoin used the PoW system of consensus, which laid the foundation for its use. The puzzle itself is called HashCash.
The time it takes to form a block on average is 10 minutes for Bitcoin and other digital coins based on its model. Ethereum and its affiliated projects also uses the Proof of Work consensus model. Altogether, one could say the PoW model is the most widely used.
- DoS attacks: Proof of Work places limits on actions in the chain network. Since the actions require a lot of effort for execution, successful attacks will require a lot more computational power and time for the calculations. As a result, attacks are improbable when the costs are considered.
- Mining possibilities: The amount of the coin in your wallet does not really matter for earning more coins. The only thing reqiured is the large power required to solve the PoW problems and create new blocks.
Hence, holders of coins do not have an advantage over others in earning the cryptocurrency in a network.
- Huge expenditures: Mining needs expensive high-end hardware to run the complex algorithms. This highly expensive costs has made mining untenable, except for some specialized pool.
The huge amount of power consumed by this machines also raise the cost of running the algorithms. Large costs threaten to centralize cryptocurrency the system since only a few can mine.
- A majority attack (51 percent attack): This is a situation in which a user or a group controls the majority of the mining power. These attackers have enough power to decide events happening in the network.
Monopolizing the generation of new blocks, receiving rewards and preventing other miners from competing are some of the things the group can do. They can also reverse transactions.
A 51 percent attack is really not a profitable venture. Enormous amount of energy is required. In addition, once the attack is made public, the network is labeled as fraudulent, resulting in an outflow of users. Consequently, the coin value goes down on the market.
Proof of Stake (or PoS)
The concept follows that a user can validate blocks according to the number of coins he has. That is, the more cryptocurrency a miner owns, the more mining power he has.
As a transaction is set off, the data is placed in a block with a capacity of 1 megabyte. The block is then duplicated on multiple computers across the network. The computers are nodes which is the body of blockchain that verifies transactions in each block.
A transaction is verified as described in the Proof of Work system above. But as stated, huge amount of energy in computational power and time is required to execute the verification.
The proof of stake (PoS) is targeted towards addressing this issue of power. Mining power is assigned to a miner in proportion of the coins held. In this way, the PoS miners are restricted to mining several transactions which is reflective of their ownership stake in the coin.
As against the use of energy to solve the complicated PoW puzzles. Theoretically, a miner with 1 percent of a cryptocurrency available will be able to mine 1% of the transaction blocks.
Proof of stake is another way to validate transactions through the distributed consensus. It is also an algorithm with the same purpose as the proof of work. The only difference is the path taken to reach the goal.
The first digital currency to use the proof of stake is the Peercoin in 2012, after the idea was first pitched in 2011. Here, the block creators are selected in a predetermined manner based on the wealth (or stake) of the miner.
Since all the digital currencies are initially created, there is hence no reward for block creation. Miners on the PoS system take the transaction fees instead of the newly created coin in PoW system. As a result, miners in PoS are called Forgers.
All thanks to the PoS, the validators no longer use computing power to influence their mining capabilities. The only factors responsible for that are the percentage of the coins they own and the current level of mining difficulty of the network.
The benefits of the Proof of Stake system over Proof of Work include:
- Energy savings;
- Safer network – Carrying out attacks become a lot more expensive. The market reacts to any user trying to buy 51% of the total coin stake, making the coin even more expensive for the hacker.
With the Proof of Stake designed to solve the energy consumption problems of the proof of work, quite a few criticisms of the system have been voiced. Some have argued that it is not the ideal distributed consensus system it claims to be.
For example, the ‘nothing-at-stake’ problem in which block generators lose nothing by voting multiple chain history, hence preventing a consensus from being reached. Many attempts have been made to solve the problem by emerging cryptocurrency networks.
All computer systems are designed to be impregnable. The proof of work protocol was programmed to make attacks very expensive, thanks to technological and economic measures.
For the PoS to be generally accepted as a safer alternative to PoW, the algorithm must be as impregnable as its predecessor, or even a lot more.