Decentralized crypto infrastructures, which operate without the intervention of a centralized authority such PayPal, must guarantee that the same money is never spent twice. Because all computers in the crypto network must agree on what transactions are acceptable, the consensus process is utilized to achieve this purpose.
Cryptocurrencies that use consensus procedures represent the vast majority of the available options. Proof of stake is the more recent of the methods, and it is used in projects such as Ethereum and Bitcoin. In case you’re not acquainted with Proof of Stake (PoS), it’s the consensus process that underpins the Ethereum blockchain. If you’re interested in learning more about the ideas of the proof of work and proof of stake, our explanations of the two concepts are an excellent place to start.
What does “Proof of Work” Mean?
In the early days of cryptography, proof of Work was the only way to establish an agreement. Mining and the evidence of human Work are inseparably connected. As a result, the network is referred regarded as “proof of work” since it requires substantial computing power. To protect and verify Proof-of-Work (PoW) blockchains, virtual miners across the globe compete to solve a mathematical puzzle. Bitcoin will be awarded if the winner successfully updates the blockchain with the most recent confirmed transactions.
Although Bitcoin is one of the most valued digital currencies globally, proof of Work may still have a significant impact. It’s been demonstrated repeatedly that a decentralized blockchain can be secure using this method. More people join the network as the value of the cryptocurrency rises, boosting the network’s power and security. For someone to tamper with a valued cryptocurrency’s blockchain, they would need a massive amount of computing power.
Ethereum-compatible blockchains can be used to process a large number of transactions. However, this process is very energy-intensive and may not keep up with increasing transactions. Since this change, the most generally utilized option is to employ proof of stake.
What does “Proof of Stake” Imply?
There was no doubt that proof of Work would restrict Ethereum’s scalability from the outset. Because Ethereum-powered decentralized finance (DeFi) has become more popular, fees have risen as the demand grows.
Similar to a big checkbook as in Bitcoin, the Ethereum blockchain is necessary to manage a broad range of DeFi transactions, stablecoins smart contracts, and NFT minting in addition to any other innovations that developers may design.
A new Ethereum blockchain is being built, and it is expected to be completed by the end of 2022. The next version of Ethereum will have a new consensus method known as proof of stake. Other cryptocurrencies like Cardano and Tezos employ proof of stake consensus mechanisms to increase speed and efficiency while reducing costs.
According to a proof-of-work system, the process of staking determines who receives credit on the blockchain for adding new transactions, as well as their compensation.
Validators (or “stakeholders”) engage in blockchains that employ the Proof of Stake (PoS) architecture in return for the power to verify new transactions and get compensation. Each project has its own unique set of mechanics.
To select a winner, it is important to know how much bitcoin each validator in the pool has and how long they have kept it.
Afterward, other validators may verify the validity of the most recent block of transactions and confirm that it is legitimate. The blockchain network updates the ledger when sufficient attestations are received.
As a result, the native currency is divided into all validators on the network according to their ownership.
Paying out rewards for idle cryptocurrencies is possible, even if you don’t want to be in charge of keeping your staking pool up and running. It’s called “delegation,” and the Coinbase exchanges may make it easy and painless to do so using their tools.Proof of work vs proof of stake
While both Proof of Work (PoW) and Proof of Stake (PoS) may be used to verify transactions on blockchains, there are significant distinctions between how they are implemented.
Consensus-Building Mechanism
Proof of Work (PoW) and Proof of Stake (PoS) are two techniques for maintaining an immutable, trustless, and distributed network (PoS). Because of this consensus process, transactions may be confirmed without the involvement of a third party or an intermediary.
Consensus must be reached on every transaction before recording and enforcing in a truly trustless manner. It is necessary to employ the PoW approach to safeguard Bitcoin transactions, which uses a lot of energy and can only process a limited number of transactions at a time. PoW is used to protect transactions in Bitcoin. The Proof of Stake (PoS) consensus technique has been implemented in Etherum 2.0 as a more efficient and scalable consensus approach.
Because Bitcoin makes extensive use of the Proof of Work algorithm, it has gained substantial notoriety (PoW). Even before the advent of Bitcoin, this technology was already in widespread usage. Cynthia Dwork and Moni Naor created it in 1993 to combat spam emails and distributed denial-of-service (DDoS) attacks on the network. Ethereum, like Bitcoin, is based on the Proof of Work algorithm.
The network participants will recognize the chain of blocks with the longest length as authentic. It is recommended to default to the longest chain to prevent a proliferation of chains with varying histories living in the same space. The length of the consensual version is proportional to the amount of authority and resources necessary to amend the transaction.
The PoW consensus approach is almost comparable to the mining process in terms of functionality. Mining is a process in which network users compete against one another to solve cryptographic problems to validate new blocks, which is referred to as mining. The network is safeguarded in this way, but it comes at the expense of resources. It is intended that adding blocks to the chain will be both time-consuming and costly due to this design. The contender who submits the first suggestion for improving the blockchain will be rewarded a predetermined amount of bitcoin. It is referred to as the block reward, and it serves as an incentive for gamers to continue playing.
The genesis block is the first block in a Proof-of-Work (PoW) blockchain. This block is hardcoded since the previous block is not referenced anywhere else in the program. To guarantee that the ledger is constantly updated, the following blocks will refer to the block that came before them.
Significance of Proof of Stake Consensus
There is significant worry about the scalability of the Proof-of-Work consensus process. However, although Ethereum was initially intended to be a Proof of Work (PoW) protocol, the network has evolved into a Proof of Stake (PoS) network. The term “mining.” does not appear anywhere in the PoS. It is the process of making new blocks, rather than the act of “minted” or “forged,” that is denoted by the terms “mining” and “forging.” Users must have a certain amount of bitcoin, the money native to the blockchain, in their hands for transactions to be accepted as genuine. Staking is a strategy that allows anyone who wishes to make bitcoin contributions to do so securely and anonymously.
A user’s cryptocurrency must be staked for new transactions to be verified, the blockchain updated, and a reward to be received. A validator is someone who participates in the proof-of-stake (PoS) mechanism in return for a monetary reward. It is determined who will be the winner by a network algorithm that considers the quantity of money invested and the length of time that the cryptos have been staked on the network.
When the block has been verified, the other validators will testify to the validity of the information contained inside it, and the block will be considered complete. Before the network may update the blockchain, it must first complete a threshold attestation process. As a result of their participation in the game, validators are rewarded in proportion to the amount of money they stake. By reducing the amount of money that has been staked, the network is more resistant to malicious attacks on its infrastructure.
Energy Usage in PoW
Proof of Stake and Proof of Work are two of the most prevalent consensus mechanisms employed by cryptocurrencies today, and they are both based on the proof of stake algorithm.
There is a significant difference in the energy usage for proof of stake and proof of work. Miners must compete against one another to solve difficult mathematical riddles for the proof of work system to operate properly. When a solution is discovered, the first miner to identify it will be awarded the opportunity to contribute a block of transactions and collect rewards. Thus, mining equipment throughout the globe is attempting to tackle the same challenges simultaneously as they use an enormous quantity of electricity.
Proof of stake is a more ecologically friendly method of certifying transactions than other methods since it does not need complicated equations by all validators.
Purpose of Proof-of-Stake Consensus
Proof-of-Work was developed to remedy the alleged flaws of the method. Evidence of Stake does not need the large energy consumption levels required by Proof of Work. This is because funds are only stored in a single, smart contract on the blockchain instead of several smart contracts in Proof of Work. Consequently, some skeptical people of Bitcoin’s consumption of power prefer the Proof-of-Stake consensus process over the classic consensus algorithm.
When it comes to whether or not Proof-of-Stake (PoS) is more economically secure than Proof-of-Work (PoW), the debate has gone back and forth with no clear result (PoW). Although Bitcoin has never been compromised, the argument that PoS is more secure than POW has remained theoretical. There is no practical evidence to support this claim.
Advantages of Proof of Work (PoW)
The certainty that Proof of Work gives is the fundamental advantage of using it. Because miners are required to invest in the network (in the form of hardware and energy), anybody wishing to attack the network and double-spend coins would need more than 50% of the network’s overall hash power. It’s referred to as a 51 percent attack on the system. According to the Bitcoin Foundation, despite the attention paid to Bitcoin’s high energy consumption (which has been extensively criticized), it is a critical component of the network’s security and the ability to process billions of dollars in transactions each year.
Furthermore, Proof of Work is critical to decentralizing a bitcoin network’s operations. The transactions are processed by a network of nodes rather than a single central authority. Each node competes with the others to submit valid blocks to be processed. This method makes it feasible to reach an agreement in a situation where there are considerable incentives for dishonesty to occur.
Anyone with hashing power may join the network and earn block rewards by contributing data to the network. In the early days of Bitcoin, when the block reward was a substantial 50 BTC, home computers were utilized to mine the cryptocurrency. With the introduction of industrial-scale mining, the odds of an amateur miner becoming the first to submit a legal block have all but evaporated, and it is now almost impossible. Decentralization in Bitcoin and other Proof of Work networks is based on proof that Work is real.
Disadvantages of Proof of Work (PoW)
Using Proof-of-Work has a lot of drawbacks and costs associated with it. Even though it seems to have defects, the network and its incentive structure reap the benefits of these characteristics.
Because a Proof-of-Stake network does not need as much processing power as a traditional network, it may be possible to save a significant amount of money on energy. While many Bitcoin detractors refer to the cryptocurrency’s high energy consumption as a negative, supporters of rival cryptocurrencies believe that their token will ultimately displace bitcoin as the dominant cryptocurrency.
The ultimate security of Bitcoin is either overlooked or underappreciated by both participants in the transaction. It is impossible to find a cryptocurrency, fiat currency, or even commodity-based money that can equal the immutability and security provided by Bitcoin’s blockchain. Security and reliability are usually more important than speed when it comes to high-value transactions. Because there is a high demand for transactions on the Bitcoin blockchain, the energy consumption of Bitcoin is justifiable. Because Proof-of-Work converts energy into security, no cryptocurrency that has attempted to copy Bitcoin while simultaneously reducing its energy requirements has been able to achieve acceptable security and decentralization, as has happened with Bitcoin.
To complete the project, physical machines and considerable computing will be necessary. For this process, miners use specialized gear rather than normal laptops and general-purpose PCs to increase energy efficiency and reduce costs. Bitcoin mining is the only function of these specialized computers, referred to as ASICs in the technical jargon.
Advantages of Proof of Stake (PoS)
If you compare proof of stake to proof of Work, the former has a huge edge in terms of energy consumption.
According to the Ethereum team, transitioning from Proof of Work to Proof of Stake will result in a 99 percent reduction in the network’s overall energy consumption.
In contrast to Proof of Work, Proof of Stake does not need specialized hardware. Most Bitcoin Proof of Work miners uses ASIC (Application-Specific Integrated Circuit) mining rigs, which are expensive and fast obsolete due to their high power consumption. The use of Proof of Stake validators is a fantastic solution when it comes to securing the network from malicious hardware.
A Proof of Stake mechanism is necessary for the scaling solution of sharding, which would significantly increase throughput on the Ethereum base chain.
Disadvantages of Proof of Stake (PoS)
There are several disadvantages to Proof-of-Work, including the need for costly equipment and energy use. The benefits of Proof-of-Work are lost due to omitting these aspects from the Proof-of-Stake protocol.
In a Proof-of-Stake system, the token holders acquire power over the network. A considerable amount of tokens may be controlled by a single individual, and this individual can then exercise influence over the network’s rules. They may also get a bigger percentage of the token due to staking. The accumulation of funds held by exchanges and other big institutions may be facilitated due to this positive feedback loop.
On the other hand, Proof-of-Work systems are not affected by this issue at all. Owners of bitcoins have little influence on the ruleset of the Bitcoin network, which is managed by nodes and miners rather than by the Bitcoin community.
Proof-of-Stake systems are characterized by the fact that control of the network is only controlled by money, which is substantially more concentrated than control over labor and affordable energy. The Proof-of-Stake system is thus vulnerable to centralization and capture. If 10% of tokens are staked, any firm with $10 billion to spare may take over the $100 billion proof-of-stake network and make it their own. An attacker needs to transfer $10 billion in tokens to a staking contract to launch an attack.