For those following the development of leading cryptocurrencies, such as Bitcoin and Ethereum, might have been familiar with these two; Proof-of-Work (PoW) and Proof-of-Stake (PoS). Technically, PoW and PoS are consensus algorithms in blockchain networks.
As everyone well aware, the process of verifying the transactions on the blockchain requires consensus from every computer that participating in the network. Therefore, both PoW and PoS are algorithms for reaching consensus in blockchain networks, but with different methods.
Proof-of-Work, or PoW is the original consensus algorithm in a blockchain network that is used to confirm transactions and produce new blocks to the chain. This responsibility bears on special nodes called miners, a process is called mining. With PoW, miners will try and compete against each other to find solutions for complex mathematical puzzles, in order to complete transactions in the network and get rewarded.
Mathematical Puzzle, What do You Mean?
It is an issue that requires a lot of computational power to solve. For instance:
- hash function, or how to find the input knowing the output;
- integer factorization, or how to present a number as a multiplication of two other numbers;
- guided tour puzzle protocol. If the server detects a DoS attack, it requires a calculation of hash functions, for some nodes in a defined order.
Finding a solution is not as easy as ABC and involves a lot of guesswork, but to make sure the solution is right is uncomplicated — the answer to the mathematical problem is called hash. However, it requires a great deal of investment to solve the puzzles. As the network is growing, it is facing more and more complexities. The algorithms need more and more hash power to solve.
The main controversy facing through this method is it involves a large number of computers and high electricity consumption. An enormous amount of electrical power is needed to ensure that multiple computers in a group can operate at all times to find and examine each of those mathematical problems. Ecologically, this method is ineffective as miners generate higher electricity costs. In fact, it will affect the environment in the future.
Due to the aforementioned circumstance, the community of miners is considered exclusive and their number of participants is limited. Hence, the main feature of blockchain technology, which is decentralization is not achieved as the community has the potential to control transactions verified through a 51% attack.
51% Attack occurs when a miner, or precisely, the community of miners called mining pools, controls 51% of computational power in a blockchain network. Imagine like a major shareholder of a company, this group has the power to do everything, including easily cancel transactions that have reached consensus and also double-spending.
Double Spending, which is prohibited in a blockchain network can be accessed through the mining pool. How can it happen? The miners create a new fake block and instantly verifying it, so that other transactions approved by the other community of miners will be cancelled.
Here is where Proof-of-Stake could help to solve the matter. With PoS, it is impossible for a miner to declare an attack against whatever that they have authorized, even if one holds 51% power on cryptocurrencies.
In addition, others will not be interested in getting that 51% power, due to high costs. According to game theory, those who hold the biggest power in cryptocurrency will definitely want a secure network. If it is under attack, cryptocurrencies values will drop and their power will automatically decline.
Proof-of-Stake is an alternative type of consensus algorithm in blockchain network aims to solve the problems of the current most popular algorithm in use — Proof-of-Work.
With PoS, miners will set aside a certain amount of cryptocurrencies in their savings to validate transactions, just like deposits. The mathematical problems of PoS networks are easy to solve: one has to prove that they have a certain percentage of each token in a given cryptocurrency. For instance, if you have 2% of the total ETH (Ether) available on the market, you can mine 2% from every transaction on Ethereum.
PoS has the potential to be an equitable system compared to PoW, as it gives the opportunity for everyone to be a miner. PoS system offers a linear scale to determine the percentage of the block that can be verified by miners, since it is based on the amount of stake or investments that miners are investing. This means a miner can own ten times token than other miners (eg. $10,000 vs. $1,000). However, in the PoW system, spending ten times as much on mining hardware will result in a huge advantage over one miner compared to other miners.
Based on the explanation above, we can summarize that:
- The advantages of mining or validating transactions are with miners that hold great (and expensive) computational power;
- Double spending risk — an instant confirmation with a high fee transaction cancels the same low fee transaction.
- The advantages of mining or validating transactions are based on the total percentage of deposit (stake) deposited by a miner;
- There is no risk of a 51% attack ad there is no incentive to sabotage something that is in control.
In conclusion, the transition to PoS can increase public engagement in the Ethereum network, as well as ensure decentralization is maintained. The power of the mining pool can be restored and evenly distributed to everyone in the network, transforming the previous oligopoly system into a democratic system.
Additional information: For those interested in knowing what is mining and how to mine cryptocurrencies, can read more our previous post on What is Cryptocurrency Mining.
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A keen researcher who believes in enriching her knowledge. For Shuhada, the crypto world intrigues her sense and offers plenty of high delicious 'crypto cuisines'.