Proof of Work and Proof of Stake are the two main algorithms of the Consensus protocol. The purpose of both these algorithms is the same, but they both follow a different route to achieve the goal. You must have heard about Proof of Work since it’s already in use by the famous cryptocurrencies like the Bitcoin and Ethereum. On the other hand, Proof of Stake wants to eliminate all the flaws that the Proof of Work algorithm currently has. Ethereum is already planning to implement Proof of Stake and say goodbye to Proof of Work. In case you are wondering what this Proof of Stake is and why it’s better than Proof of Work, then let’s take a look at the answer in this beginner’s guide to Proof of Stake.
Why Proof of Stake was needed, what went wrong with Proof of Work?
On the Blockchain network, there is a number of nodes that solve the cryptographic puzzles to form a new block. The node that successfully forms a new block is rewarded in the form of Bitcoins. This process is called mining and through this process, new Bitcoins are mined. The total supply of Bitcoins is around 22 Million. This supply is supposed to reach its limit in the next 100 years. So every time new coins are mined, we take a little step towards hitting the supply limit of Bitcoin.
In order to mine the coins, the nodes, which are called miners, use the computers with a very powerful hardware. These computers utilize the latest available GPUs and CPUs. The computers run with the help of an electric connection.
The more powerful the hardware is, the more are the chances for a miner to solve the cryptographic puzzles to form a new block. The reward for forming a block is 12.5 Bitcoins. This reward was around 50 Bitcoins back in the year 2012. The reward reduces every 210,000 blocks.
Since the formation of Block depends on how much power a miner is, it becomes very easy for the crypto cartels to step in. There are miners who have connected thousands of computers to form extremely powerful mines. It’s very hard for small miners to solve the puzzles and form a block. Because the process of mining exhausts the GPUs, miners use fans to keep their computers cool.
Since the temperature in some countries is extremely hot, miners have moved to regions like Iceland for a suitable temperature for their mining rigs. The process of mining burns the electricity in the form of heat resulting in air pollution. Apart from the environmental disturbance, the money is being wasted on the expensive computer hardware.
Another great flaw in the Proof of Work protocol is the chance of 51% attack. If a miner owns more raw power than 51% of the entire network, he can easily manipulate the mining process to form new blocks.
These were the problems that make Proof of Work a little bit difficult to use. Proof of Stake wants to fix all these problems with the help of a new approach. Let’s understand what this Proof of Stake algorithm is.
Proof of Stake (PoS)
Just as the name of this algorithm suggests, the parties involved in Proof of Stake have to prove their stake in order to earn rewards.
In Proof of Stake, there are no miners. The users on the network, which are similar to the nodes in PoW, are called Validators here. In order to form a block, there are 4 different validators on a block. The Validator 1 has to own 38% of the stake in the block, the Validator 2 has to own 25%, the Validator 3 has to own 21% and the Validator 4 has to have 16% of the stake.
Thre more stake a Validator has in the block, more are the chances for him to be the winner. The winning Validator is rewarded with the transaction fees instead of coinage here. In the process of Proof of Stake, no new coins are mined.
There are no mighty computers involved here. No electricity is being wasted. There are no crypto cartels trying to manipulate the process. The parties involved have to prove their stake and that’s it for them.
Proof of Stake eliminates the chances of 51% attack as well. While in PoW, a bad actor can easily have more raw power than 51% of the entire network, the Proof of Stake requires the bad actor to own 51% of the total cryptocurrency in order to launch this attack. It is impossible for a user to own 51% of the total concerned cryptocurrency, that’s why it becomes impossible to manipulate the blocks.
Proof of Stake is extremely environment-friendly. It does not result in resource-wastage at all. It’s free of the mining mafia problem and the cryptocurrencies involved in Proof of Stake are thousand times more cost-effective as compared to those using the PoW algorithm.
Proof of Stake looks perfect, but it doesn’t mean it’s free of flaws. It still has a few problems to fix. Here are some of the disadvantages that this algorithm currently has.
- Nothing at stake problem
- Initial distribution problem
- Long range attack
- Bribe attack
- Coinage accumulation attack
- Pre-computing attack
Despite having the above problems, it is still a lot of better than the PoW. This is why the Ethereum CEO Vitalik Buterin has to say this about PoS:
“IN ORDER TO SECURE A BLOCKCHAIN… IT’S ESTIMATED THAT BOTH BITCOIN AND ETHEREUM BURN OVER $1 MILLION WORTH OF ELECTRICITY AND HARDWARE COSTS PER DAY AS PART OF THEIR CONSENSUS MECHANISM.WHILE PROOF OF WORK REQUIRES MINERS TO EFFECTIVELY BURN COMPUTATIONAL POWER ON USELESS CALCULATIONS TO SECURE THE NETWORK, PROOF OF STAKE EFFECTIVELY SIMULATES THE BURNING, SO NO REAL-WORLD ENERGY OR RESOURCES ARE EVER ACTUALLY WASTED.”
So, that’s all about Proof of Stake for now. I hope that the laymen’s terms guide helped you to understand Proof of Stake. In case you have something to add to this guide, drop it in the comments section below.