Proof of Work vs. Proof of Stake: Guide
Proof-of-Work and Proof-of-Stake pertain to how mining works and how transactions are verified on the Ethereum Blockchain. Before we dive into the technical aspects of both of these philosophies, let’s get a little background on the ETH Blockchain. Essentially, Ethereum is an open source platform based on Blockchain tech that allows developers to create their own fully decentralized applications and to deploy smart contracts.
Let’s dive into the PoW and PoS concepts, then shall we?
What is the Proof-of-Work Concept?
The Proof-of-Work concept existed before the inception of Satoshi Nakamoto’s bitcoin. Bitcoin was originally developed in 1993, but not acquiring its name until 1999. PoW’s primary goal was to protect computer and network systems from DoS or denial-of-service attacks.
PoW allows for distributed and trustless consensuses. This means that if you want to receive or send assets to someone, there is no need to rely on third parties or intermediaries to verify the transaction.
For example, in your day to day affairs, every time you make a payment or buy something, you always rely on a third party such as a banking institution or PayPal. These intermediaries possess information pertaining to you and your transactions, all of which is stored in their private databases.
However, with cryptocurrencies like ETH and BTC, all transactions and exchanges are stored on a publicly accessible Blockchain on which all transactions can easily be verified and are immutable. Thus, there is no need for a third party.
Diving Deeper Into the Technicalities of PoW
The Proof-of-Work concept is utilized by miners when they use computer hardware to solve complex mathematical calculations in order to verify Blockchain transactions and get a reward for completing a block on the network.
Every single transaction pertaining to a Blockchain is stored or recorded on blocks; like pieces of 8 x 11 paper that is filled with transaction data. Each block has information pertaining to the previous block and information is input via a linear sequence. Blockchain transactions are added to blocks by miners.
Now, let’s go through the PoW process in terms of mining. All of the transactions on a Blockchain are grouped together in what is known as a block. In order for these transactions to be deemed legitimate, they must be verified by miners. As was mentioned before, this is done by solving mathematical algorithms, which are also known as proof-of-work problems. Following this, a miner that solves the PoW problems of a whole block gets rewarded in some cryptocurrency, hence the term Proof-of-Work.
Once a Blockchain miner successfully completes a block, he announces it to the whole network. The Proof-of-Work philosophy is used in multiple Blockchains, not just Ethereum.
However, there is a big issue with PoW mining. For example, if someone controls over 50% of a networks computation power, even 51%, that individual could possibly make all of the network's transactions invalid. This bad actor could then go on to create fake blocks which would make all of the other blocks on the network go out of sync.
Let’s move on to Proof-of-Stake.
How Does Proof of Stake Differ from Proof of Work?
PoS is simply a different method for authenticating transactions on a Blockchain ledger. It is still a highly-complicated algorithm, just like PoW. In a PoS system, new block creators are chosen based on their wealth, hence the word ‘stake.’ In a system that operates under PoS standards, there are no block rewards. Instead, miners receive transaction fees. This means that traditional miners are gone in a PoS system.
However, to take part in a PoS system on the Ethereum, for example, you would have to “donate” a certain amount of ETH to the Casper (to be discussed later) contract. The chance of successfully validating a block in a PoS system correlates positively to the number of funds sent to the Casper contract.
Additionally, once you stake your coin, you can no longer access it while you are mining. As soon you wish to stop mining, you can withdraw your funds, though, there will be a bit of a wait until you receive them. This is done in order to minimize the threat of attacks on a network, as well as fraud.
Generally, a PoS system is much more cost-efficient than a PoW system, due to there not being a need for miners and high energy consumption. Competition, in terms of mining, is also eliminated. In order for a PoS system to work, however, it must be as secure as possible.
For example, in a PoW network, it’s quite difficult for bad actors to screw up the system and the transaction validation processes because massive amounts of computing power are needed in order to disrupt the network. Thus, more money would probably be spent trying to compromise everything that would be gained in the end.
A PoS system would generally be easier for bad actors to compromise. Thankfully Vitalik Buterin has come up with a grand solution, the Casper protocol.
The Casper protocol basically requires any validator in a PoS system to make a deposit in order to start participating in consensuses and producing new blocks. What this means is that if a block validator does something invalid, his deposit is lost as well as his right to participate in the networks consensus system. If someone misbehaves on the network, they will lose their stake.
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In conclusion, let’s go over the pros and cons of both PoS and PoW. In a PoW system, large amounts of electricity are required in order to power computing hardware. So, in addition to having high overhead, the computer equipment necessary in a PoW system costs quite a significant amount of money. Additionally, if a certain Blockchains coin doesn’t provide as good as a reward as do some others, miners might leave that network and transition to mining another coin. Therefore, miner loyalty comes into question. Also, entry barriers for PoW systems are significantly higher than in PoS systems. It means PoW would require a lot of money and computing power in order to be compromised.
A PoS system does not require expensive computer hardware in order to carry out transaction validation operations on a Blockchain. It’s also much more energy efficient and better for the general environment than a PoW system. Loyalty is also greater in a PoS since the ones who validate Blockchain transactions actually have their own coins at stake. PoS also provides for faster transaction validation times.
In general, PoS is better than PoW because anyone can join a Blockchain network and start validating transactions. Ultimately, transitioning to a Proof-of-Stake validation system, from Proof-of-Work, is much better for a Blockchain ecosystem because it brings fair competition back to the mining game, is faster, and is less harmful to the environment.
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