Proof of Work vs. Proof of Stake

Proof of Work vs. Proof of Stake

March 22, 2018.
Here’s all you need to know about the differences between Proof of Work and Proof of Stake protocols

The promise of decentralization, made possible by the emergence of the blockchain and cryptocurrencies, has undeniably revolutionized the way online transactions are carried out. With third-party intermediaries taken out of the equation, transactions through the blockchain network are faster, cheaper, and relevantly more secure.

The common question is, without trusted intermediaries like banks and financial institutions, how are transactions in the blockchain network validated and safeguarded from fraud and manipulation? The simple answer is through cryptocurrency mining.

Mining is the process of validating a block of transactions through a complex algorithm to prove the “correctness” and “validity” of a transaction and thereby adding this new block onto the blockchain. For a transaction to be considered valid, the person who solves the algorithm must present an “evidence” of some sort to prove validity. This evidence is called a Proof of Work (PoW).

However, new discoveries have been made in the blockchain industry and an alternative validation method came to be called Proof of Stake (PoS). Both PoW and PoS are protocols for validating cryptocurrency transactions, but their processes are different in a way.

Here we’ll talk about what a Proof of Work and a Proof of Stake are, their issues, and their differentiating features.

What Is Proof of Work (PoW)?

The Proof of Work protocol is a method of validation used by most of the mainstream cryptocurrencies we know today, such as Bitcoin, Litecoin, and most other types of altcoins. To have a better understanding of the protocol, we’ll first discuss how mining works:

– When a transaction is presented in the blockchain network, the information (wallet address, date, time, etc.) are pooled and bundled together into a transaction, and are broadcasted to everyone in the network (miners).

– The miners then have to solve a complex mathematical algorithm to validate the transaction; this algorithm puzzle is known as the Proof-of-Work problem.

– The first miner who solves the problem gets a reward, which is in the form of cryptocurrency coins. In turn, new cryptocurrency coins are “minted”, or mined, each time a block is created.

– For the transaction to be considered valid, the miner must present a Proof of Work.

– Verified transactions are then stored in the public blockchain, and the new block is linked to the previous blocks through cryptography.

In the PoW protocol, the capacity to solve the algorithm is determined by the cryptocurrency mining difficulty and the computing power of the miner’s mining hardware. The more the computing power you have, the higher is the chance of you arriving at a solution to the PoW problem and therefore validating the transaction.

However, higher computing power also translates to higher energy costs, which is in itself unsustainable and impractical. Another issue with the PoW protocol is that, because all the miners in the network have to compete with each other to solve the algorithm and present a PoW, it takes a considerable amount of time to validate the proof; for Bitcoin, the average validation time is 10 minutes.

What Is Proof of Stake (PoS)?

The Proof of Stake protocol attempts to solve the issues of high energy costs and long verification times by taking out the need for mining. Examples of cryptocurrencies who have adopted this type of verification protocol are Cardano and QTUM.

The PoS protocol works on the premise that all the cryptocurrencies in circulation have already been pre-mined or are considered non-mineable; therefore, no new cryptocurrency coins are created from the validation process. The participants in this protocol are hence called forgers instead of miners.

In the PoS protocol, the forger, who acts as a validator, is pre-determined by the amount of “stake” or coins he has and the respective “age” of the forger’s stake. This stake serves as a security deposit into the network, and in some sense, it functions as a collateral to vouch for blocks.

These validators then take turns in participating in a consensus algorithm to vote on the next block to be validated. The weight of the validator’s vote depends on how high his stake is; therefore, the higher the stake, the more validating power you have. As there is no mining involved, validators are given a percentage of the transaction fee instead of a block reward.

While PoS is considered more energy efficient and provides faster transactions times, its presents a huge disadvantage if a single entity monopolizes more than half of the circulating cryptocurrency and thereby possibly being able to control the system maliciously—the infamous 51% attack.

However the counterargument is that if someone controlled that much of the circulating cryptocurrency they would also be incentivized to preserve the cryptocurrency reputation by not acting maliciously.

Summary: Main Differences of Proof of Work vs. Proof of Stake

Proof of Work vs. Proof of Stake

Closing Thoughts

The Proof of Work and Proof of Stake protocols both offer valuable benefits to the blockchain industry; however, both also has their own set of limitations. As the technology behind cryptocurrencies is still at its early stages of development, we have yet to see more improvements in the near future.

– Article written by Tinny

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Categories: Blockchain, Cryptocurrency