Proof of Work vs Proof of Stake

Proof Of Work vs Proof Of Stake

Proof Of Work vs Proof Of Stake

Although there are more than thousand different cryptocurrencies offering various solutions and improvements in existence today, they all function on the same principle. That principle is called blockchain, a decentralized tracker of various information that utilizes the principles of distributed information database and consensus. However, they do differ in some things, such as ways of generating new blocks and prevention of DoS attacks, as well as double-spending of coins. There are several methods for addressing these issues in use, but two of them are most prominent – proof of work and proof of stake. Each of them has its advantages, as well as potential flaws, and we’ll be analyzing each of them in details in this Proof of Work vs Proof of Stake analysis. There are some cryptocurrencies that are utilizing a combination of these methods – we’ll see if this might be the best road ahead. Stay with us and learn some valuable information!

Proof of Work vs Proof of Stake | Power of computers

Proof of work or PoW is a term for an effort, usually made with the use of computing power, of certain difficulty that is used for generation of new blocks on the blockchain. That effort has to be time-consuming, but feasible, and the output has to be easily verifiable by network participants. The ideal example, actually used as a method for block generation or mining, is solving complex mathematical puzzles. Specifically, miners are requested to find the solution to a complex hash function and prove it is the right one. Hash functions give completely different outputs, in a shape of long strings consisted of numbers and letters, for even the slightest changes in input data. Therefore, computer power is used to execute a vast amount of trials and errors, until finally reaching the correct solution. Due to the one-way nature of a hash function, reverse engineering the input value through output is impossible, so it can only be used to verify that hashed output data is matching the input. This verification is done by other nodes running blockchain, and after reaching the consensus, a new block is added. Since hash generation is fairly trivial for modern-day computers, the PoW is formed by adding certain conditions that hashed function must meet, called difficulty. This is done by requesting a hash function to start with a certain number of zeros. A hash difficulty is dynamically changed based on the available computing power, in order to keep the block generation time the same. For instance, Bitcoin blocks are generated every 10 minutes, Litecoin blocks are being created every 2.5 minutes, while Ethereum’s block generation time is as low as 14 seconds.

Since PoW is an ongoing process that keeps the blockchain network alive, it’s reasonable to expect that miners will get rewarded for their effort. The reward comes in a form of newly generated coins, as well as fees paid by users for each transaction contained in a newly generated block. The amount of the reward varies depending on the cryptocurrency but is always high enough to keep the incentive for mining high. These are basic concepts of proof of work system. It does have its flaws and uncertainties, which we’ll be analyzing a bit later. For now, let’s take a look at the alternative way of ensuring decentralized consensus in the next part of this Proof of Work vs Proof of Stake analysis. Stay with us!

Proof of Work vs Proof of Stake | Power of savings

Unlike proof of work, proof of stake system tends to facilitate a decentralized environment, as well as ensure the creation of new blocks based on the number of coins in possession of each network participant. There is no need for the development of special computer systems or executing any heavy calculus – the only factor that determines mining possibility is the percentage of a total coin supply controlled by a specific user. In other words, the more coins you have, the higher the chances are for successfully mining a new block. In order to participate in a proof of stake system, you simply need to deposit your coins to your wallet – much like depositing your fiats to a bank savings account and just leave them be. However, the logical question is: if one address contains a large amount of total coin supply (let’s say more than 50%), won’t that user be able to mine a majority of blocks, thus collecting all rewards? That potential issue is solved through various implementing various methods – let’s take a look at them.

A majority of proof-of-stake cryptocurrencies tend to choose which user will be the next to mine a block through the means of random selection. That way, each user gets the chance to mine the block, regardless of the number of coins they own. Peercoin, a cryptocurrency that pioneered the use of PoS system back in 2012, introduced the concept of coin age combined with random selection. Coin age is actually a number of coins in a single transaction to a wallet, times the number of days that passed since the transaction has been validated. Larger and older coin sets have a higher chance of generating a new block – this incentivizes users to keep their coins intact for a long period of time, thus making the network stronger. Peercoin recognizes coins older than 30 days to be eligible for minting, while mint probability reaches maximum value with coin age of 90 days. This way, very large and very old coin sets are prevented in attempts to monopolize the network. Regardless of your succession in block generation, staking will earn you a percentage of your staked coins as an annual reward. There are some other modified concepts as well, such as delegated proof of stake or DPoS. In this system, each user who wants to stake his coins is required to choose a delegate through the voting system. Each delegate will generate blocks, distributing part of the mining reward to all participating users who voted for him. That way, users are tempted to stake a majority of coins in their possession, which earns them reasonable interest amount, as well as makes the cryptocurrency stronger. Peercoin, as well as some other cryptocurrencies utilize the hybrid PoW/PoS system for block generation. The difference is, however, that blocks created by mining rewards miners with new coins and transaction fees, while minted blocks have only transaction fees as an award. That way, users can choose the option that suits them best.

That’s about it when it comes to proof of stake. Developed as an alternative to PoW, it now becomes more and more popular among both old and new currencies. However, both approaches have their pros and cons – let’s analyze them now!

Proof of Work vs Proof of Stake | Pros and cons

As you may assume, PoW cryptocurrencies require a vast amount of computing power to continue generating new blocks, thus subsequently spending huge amounts of electricity. Also, due to the increasing mining difficulty, more advanced and expensive computers are needed in order to mine successfully. This also raises the probability of executing something known as 51% attack, where a company or a mining pool owning more than half of computing power could centralize the network and begin dictating the price. However, this effort exists only as a theory, as the effort to do it would be extremely costly. On the other hand, block rewards are pretty tempting, which is fairly enough to keep the investment in mining gear rising.

On the other hand, PoS is more cost-effective, since it doesn’t rely on hardware strength or energy consumption. Also, it’s technically easier to stake than to mine coins, and staking could eventually result in a higher price of cryptocurrency if the demand for it rises. However, the system could suffer from a “nothing at stake” attack, where attackers are purposely staking nothing in order to break the consensus. Also, double-spending attacks are also possible, since it is not costly to work on several PoS blockchains. Currently, it’s hard to decide which approach is optimal, particularly because new solutions are being constantly developed. Since the whole technology is still in its early stage, only time can tell. That being said, we can now wrap up our analysis.

Proof of Work vs Proof of Stake | Conclusion

As you have seen in this Proof of Work vs Proof of Stake review, both methods have its pros and cons. PoW generates high revenue to miners but is extremely costly and a bit hard to set up. On the other hand, a PoS method is less expensive and hardware-dependent but also have some potential threats. The solution might be a hybrid of these approaches, advancements in PoW system that makes it less expensive, or creation of a completely new approach. And that’s it! Be sure to keep a track of our future posts, as we will be writing more about new technologies regarding blockchains and the exciting world of crypto!

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Author: Ben Prescott
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