Bitcoin and Blockchain are pushing the world into a new direction. Right now, we have over 1400 cryptocurrencies in existence with Bitcoin being the king. All the cryptocurrencies have something different to offer. The technology behind some cryptocurrencies is really promising. The cryptocurrencies run on different protocols. The consensus protocol is the most popular term you would come across if you read about the algorithms being used by cryptocurrencies. This consensus protocol has different types including the Proof of Work algorithm and the Proof of Stake algorithm.
Now the consensus protocol makes clear sense. It’s about reaching a consensus to achieve something. The algorithms Proof of Work and Proof of Stake require the users to reach a consensus, but they both use different paths or different methods to make the users reach the consensus. In this guide, we will take a detailed look at what is actually the Proof of Work and Proof of Stake algorithm. We will also take a look at the difference between Proof of Work and Proof of Stake. Let’s go ahead and check out the Proof of Work vs Proof of Stake guide.
Proof of Work
Bitcoin uses the Blockchain technology to handle all the transactions. The Blockchain technology in the simplest terms is a chain of blocks which stores transactions. The blockchain is basically a public ledger. It lists all the transactions happening over the network. The first block that was added to the Blockchain is called Genesis Block. It was added to the Blockchain in the year 2009. This Genesis Block is exactly what gave birth to this term Proof of Work.
The Genesis Block
Once the Genesis Block was formed, more blocks were needed to form a blockchain in order to store handle all the transactions. Now, in order to add a Block to the Blockchain, the cryptographic equations or the puzzles in the Block are supposed to be solved, confirmed by the nodes and then written on the Block. Once done, a Block is added to the Blockchain.
The nodes present on the Blockchain are basically the computers with a very powerful hardware. The nodes are often called miners. These nodes are capable of handling resource intensive transactions. On a network, there is a number of nodes. The transactions over the network are grouped into a Block. Whenever a transaction is sent to a Block, all the nodes start trying to solve that puzzle or the cryptographic equation.
Nodes are Miners
The most powerful node successfully solves the puzzle and broadcasts it to the network. Once done, the other nodes stop trying to solve the puzzle and they start verifying the solution instead which was broadcasted by the most powerful node. After a certain number of confirmations for the solution, the Block is added to the Blockchain. The Block, before having the solutions verified by all the nodes, is called a Candidate Block. Once it has been confirmed, it becomes a part of the Blockchain.
This whole process of solving the puzzle, writing it on the Block and then adding the Block to the Blockchain is called Proof of Work. It is also called Mining. Through this process, the miners earn a certain amount of Bitcoin. The reward was around 50 Bitcoins/Block in the year 2012. As of 2018, the reward for solving 1 Block is 12.5 Bitcoin. It keeps halving every 210,000 blocks.
Here are all the problems that the PoW algorithm is currently facing:
Disadvantages of Proof of Work:
- Expensive hardware
- Mining Mafia
- Electricity wastage
- 51% attack
- Not environment-friendly
- Heavy resource wastage
Proof of Stake
Proof of Work algorithm worked fine, but the users realised that Proof of Work is a very resource incentive algorithm. At first, the users need computers with a very powerful hardware. The hardware is definitely eating a lot of money. To run the computers, they need electricity. The computers produce a lot of heat as well. To control the heat, miners use fans. The electricity is burned off as heat later on. So, there is a huge wastage of resources going on. This is the problem that the Proof of Stake algorithm wants to fix.
Ethereum wants to switch to Proof of Stake…
Ethereum, the 2nd most popular cryptocurrency, also uses the Proof of Work protocol. But now, the Ethereum developers are trying to adapt Proof of Stake to save the resource wastage and they have solid reasons for it. Let’s understand what this Proof of Stake algorithm does.
Miners vs Validators
In Proof of Stake, the nodes (miners) act as validators. For each block to be generated, there are 4 validators. These validators have a certain percentage of the stake to generate that block. Validator 1 has 38% of the stake, validator 2 has 25% stake, validator 3 has 21% and the validator 4 has 16% stake. The bigger is the stake, the greater is the chance of solving the block. Let’s say that Validator 1 has 38% chance of solving the block, he will win the transaction fees.
Proof of Stake is completely environment-friendly. Validators do not need an expensive and powerful hardware to take part in the Proof of Stake. No electricity is being burned in the form of heat. The resources are not going anywhere. Proof of Stake also puts the 51% attack to shame. In case you are wondering what is this 51% attack, then let us understand it as well.
The 51% Attack
Let’s say there are 100 nodes present on the network, a crypto-crook, who aims to launch the 51% attack, needs to control 51% of the network to succeed. In Proof of Work, the mobster needs to have a greater computing power, which should be more than the 51% of the entire network. In Proof of Stake, the 51% attack can be launched only if the crypto-crook owns or holds 51% of the digital currency. This is what makes the 51% attack impossible in the PoS algorithm.
In Proof of Stake, the validators do not mine new coins. With the Proof of Stake implemented in Ethereum, the developers want to make it deflationary and increase its value with time. Here is what Ethereum developer Vitalik Buterin has to say about Proof of Stake.
“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.”
Proof of Stake is great, but not perfect
Proof of Stake seems a great solution to get rid of the all the flaws of Proof of Work. It does not only eliminate the environmental issues, it also takes care of the mining cartels that have been crossing all the limits to mine the coins. Over the course of past few years, a number of websites, software, and applications have been caught trying to use a user’s computer to mine the coins. With Proof of Stake, this fear will be wiped off and the users will be able to trust their computers more.
While Proof of Stake looks great, it does not necessarily mean that it does not have any flaws. It does have a lot of disadvantages as well. Here are a few disadvantages that this algorithm suffers from.
Disadvantages of Proof of Stake:
- Nothing at stake problem
- Initial distribution problem
- Long range attack
- Bribe attack
- Coinage accumulation attack
- Pre-computing attack
Let’s have a look at Proof of Work vs Proof of Stake, in a nutshell, to understand the differences before we end this post.
Proof of Work vs Proof of Stake in a nutshell
|Proof of Work vs Proof of Stake|
|Nodes are Miners||Nodes are Validators|
|Resource intensive – requires computer hardware, electricity = Resource wastage||No computer hardware or electricity required = No resource wastage|
|New coins are mined||No new coins are mined|
|Coins are distributed among winners of the puzzle as a result of solving the block||Transaction fee is distributed among the validators with the largest stake in the block|
|Prone to 51% attack||51% attack impossible|
|Mining cartels||No mining, no mining cartels|
Both the Proof of Work and Proof of Stake algorithms are trying to achieve the same thing, which is to reach the consensus. Proof of Work and Proof of Stake come with their own conditions that the involved miners and validators have to follow. Proof of Stake is aiming to replace Proof of Work by solving the problems currently faced by PoW. There is no security issue or environmental issue in Proof of Stake algorithm.
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