Last Updated on May 10, 2023
Proof of work and proof of stake are consensus methods, or algorithms, that enable blockchains to function safely. Only real users can submit new transactions to blockchains, thanks to these consensus processes.
They work by requiring potential members to demonstrate that they have committed some resource to the blockchain, such as money or energy. This function assists in weeding out users who aren’t genuine or devoted to the network. The primary distinction between proof of work and proof of stake is how they select who is allowed to contribute transactions to the chain.
How proof of work and proof of stake came about
When Satoshi Nakamoto was creating the first cryptocurrency, Bitcoin, he needed to figure out a means to verify transactions without the involvement of a third party. When he built the Proof of Work system, he was able to do this.
Proof of Work is essentially used to determine how the blockchain achieves consensus. To put it another way, how can the network be certain that the transaction is legitimate and that no one is attempting to defraud the system by spending the same cash twice?
Proof of Work is based on a type of sophisticated mathematics known as cryptography. This is why cryptocurrencies such as Bitcoin and Ethereum are referred to as such! Cryptography relies on mathematical equations that are so difficult to solve that they can only be solved by supercomputers. Because no two equations are ever the same, the network knows that the transaction is genuine once it is solved.
Many other blockchains have cloned the Bitcoin code and, as a result, adopt the Proof of Work paradigm. Proof of Work is a fantastic invention, but it is far from flawless. It not only consumes a lot of electricity but it’s also limited in terms of the number of transactions it can handle at once. As a result, new consensus techniques have emerged, with the Proof of Stake model being one of the most prominent. Scott Nadal and Sunny King, two developers, initially established Proof of Stake in 2012. The inventors said that Bitcoin and its Proof of Work mechanism required the equivalent of $150,000 in daily electricity costs at the time of its inception. Since then, this figure has increased to millions of dollars.
Peercoin was the first blockchain project to adopt the Proof of Stake mechanism. Initial advantages include a more equitable and fair mining system, more scalable transactions, and reduced reliance on electricity.
Why is proof of anything needed?
When one entity manages a ledger of all transactions, it’s not difficult to avoid double-spending in a centralised manner. The manager of the central ledger simply takes $1 from Alice and gives $1 to Bob when Alice sends Bob $1. PayPal satisfies this requirement.
Cryptocurrencies, on the other hand, are not like that. The idea is not to have a single leader or entity in charge of the system, which complicates record-keeping.
Rather than having a single leader, the Bitcoin programme is managed by thousands of people all around the world. These “nodes” verify that the network’s rules are observed. This vast infrastructure must be linked together so that every software is in sync. If not, these nodes will become isolated islands.
As a result, Ethereum, the world’s second most popular cryptocurrency, is attempting to transition from Proof of Work to Proof of Stake. The Ethereum Proof of Stake deadline has not yet been set, but the team is working hard to meet it as soon as feasible. Because it turns out that getting these people all around the world to agree is difficult, decentralised money has been out of reach for researchers for a long time, until Bitcoin arrived.
Proof of Work (PoW) Vs Proof of Stake (PoS)
Understanding the differences might help you make better decisions about which cryptocurrencies to add to your portfolio, as those that use Proof of Stake may come with additional duties or rewards. In terms of blockchain ordering, energy utilisation, participation, and reward distribution, let’s compare proof of work with proof of stake.
A blockchain is a system that consists of a series of blocks (groups of transactions) that are arranged in chronological order based on transaction order.
The genesis block, also known as block 0, is the first block in a PoW blockchain and is hardcoded into the programme. This block does not, by definition, refer to a prior block. The succeeding blocks uploaded to the blockchain always refer back to the preceding blocks and contain a copy of the complete, updated ledger.
A PoS blockchain, like a PoW blockchain, is a system that consists of a series of blocks that are arranged in chronological order based on the transactions they contain. The genesis block is the initial block in a PoS blockchain that is also hardcoded into the programme. The succeeding blocks uploaded to the blockchain always refer back to the preceding blocks and contain a copy of the complete, updated ledger. It’s worth noting that in PoS cryptocurrencies, no one competes for the right to add blocks. As a result, rather of being mined, the blocks are frequently referred to as ‘forged’ or’minted.’
Through a competitive race in which some participants (miners) are encouraged to expend computational resources in order to submit legitimate blocks that match the network’s regulations, PoW algorithms select who can change the ledger.
The nodes (any computer running the Bitcoin software) then validate transactions, prevent double spending (when the same coins are spent to two different recipients), and decide whether proposed blocks should be added to the chain. Miners on a PoW network compete against one other to solve complicated mathematical problems in a process known as hashing in order to create a new block. These riddles are difficult to solve, but the network should be able to verify the correct solution quickly.
PoS blockchains, unlike PoW blockchains, do not decide who can submit blocks exclusively on the basis of computer power and energy use. PoS proponents frequently describe it as a “more energy efficient” system in which individual nodes are tasked with creating new blocks rather than competing with other nodes.
Because both PoW mining and PoS minting require energy, mining and minting nodes are encouraged to use the lowest source of electricity available, which is typically renewable energy such as hydroelectric power, wind, or solar rather than greenhouse-emitting sources such as coal.
Furthermore, PoS blockchains necessitate the employment of specialist gear (GPUs), which, like PoW mining equipment (ASICs) and other computer systems, necessitates the expenditure of resources. PoS miners must also keep their internet connections active, which consumes energy.
To generate consensus and secure the legitimacy of transactions recorded in the blockchain, a PoW protocol combines computational power with cryptography.
Miners compete to generate the correct answer to the mathematical problems during the hashing process in order to produce new blocks. Miners do this by guessing a hash, which is a string of pseudorandom numbers. This, when coupled with the data in the block and run through a hash function computer, must yield a result that matches the protocol’s established requirements. The winning hash is then broadcast to the network, allowing other miners to check whether the answer is correct. If the answer is accurate, the block is added to the blockchain, and the miner receives the block reward.
Users who want to be considered for adding blocks to a PoS blockchain must stake (or lock) a specific quantity of the network’s money in a unique contract. Their odds of being chosen as the next block producer are determined by the quantity of bitcoin they have staked. If users act maliciously, they may lose their stake as a result of their actions. PoS may include other determining elements in order to not always benefit the wealthiest nodes. The length of time a node has staked their money, as well as pure randomization, are examples of this.
The block reward refers to the fresh cryptocurrency that the blockchain awards to the miner for each valid and accepted block by the network.After a specific number of blocks have been found in some cryptocurrencies, such as Bitcoin, the block reward is halved. This is done to maintain a finite and deflationary total money supply.
The block reward in PoS refers to cryptocurrency granted by the blockchain to the person who submits a valid block, similar to the PoW mechanism.Because block selection is based on coin ownership, exchanges may offer staking services, which allow users to stake cash on their behalf in exchange for more consistent rewards.
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