PoW or proof of work is a special protocol that aims to deter cyber-attacks such as DDoS (distributed denial-of-service attacks), which can use up the resources of a computer stem with the help of multiple fake requests. It uses a trustless and distributed consensus system.
PoW implements a decentralized system and works without needing a central authority. The PoW consensus mechanism can verify transactions without needing a third party. PoW makes double-spending difficult by proving that every user has done several computations. Many other blockchain projects that copied the original Bitcoin code also follow the Proof of Work model.
In this tutorial, you will learn:
- What is PoW?
- What is PoS?
- How Does PoS Work?
- How Does PoW Work?
- Advantages of PoW
- Advantages of PoS
- Disadvantages of PoW
- Disadvantages of PoS
- Proof of Work Examples
- Proof of Stake Examples
- How are transactions verified: PoW
- How are transactions verified: PoS
- Proof of Work vs. Proof of Stake
- Proof of Stake better than Proof of Work? Reasons Why
Proof of stake (PoS) is a type of consensus mechanism which is used to validate transactions on the blockchain. It works by allowing cryptocurrency owners to stake their coins. This gives them the right to verify new blocks of transactions on the blockchain and add them to the network.
The model of Proof of Stake exists as an alternative consensus mechanism. Few cryptocurrencies follow this protocol which replaces miners with stakes. The algorithm chooses any one of these stakers to publish the next block. Two developers named Scott Nadal and Sunny King created PoS noticing the flaws in PoW in the year 2012. Limited scalability and needing a lot of electricity are not a problem in the PoS model.
What is Staking?
Staked funds are set aside and stored in a smart contract by validators. This is known as the staking process. Whoever has a bigger stake might be chosen to verify transactions and create blocks. Blocks thus forged get added to the blockchain. All pos coins do not follow the same set of rules even though the concept of validation is the same. Every qualified validator market participant earns a reward based on ownership.
In theory, PoS is an “ideal” solution for scaling problems within the PoW mechanism. Ethereum 2.0 will be 100% proof-of-stake. Hence it will process its transactions, NFT transactions, and execute smart contract transactions. One must have a powerful computer system and a sufficiently sized wallet. It increases their chances of earning a proof-of-stake reward.
The PoS model handles maintaining integrity within a blockchain. It also guarantees that crypto users cannot mint coins without earning them.
PoS consensus mechanism concept is based on the following steps:
Step 1) Users who own native tokens of a blockchain store all or a part of it in staking pools safely.
Step 2) The algorithm pseudo-randomly chooses the next validator in line.
Step 3) The chosen validator has to propose a block and the number of transactions in it.
Step 4) Other participants get to approve and verify the proposed transaction.
Step 5) A new block is added to the blockchain.
Step 6) The selected validator earns a transaction fee.
Proof of work requires an expensive computer calculation or, in other words, the process of mining. Mining needs to be performed to create trustless transactions on the blockchain.
Step 1) Transactions are compiled and bundled up together in the form of a block.
Step 2) Miners then verify transactions within each block, checking to see if they are legitimate.
Step 3) Miners then solve a mathematical puzzle known as a proof of work problem to proceed. All miners have to compete.
Step 4) The first miner who solves each block problem is rewarded.
Step 5) The verified transactions are then stored on the blockchain.
Some Important benefits/pros of Proof of Work are:
- Proof-of-Work was invented to stop double-spending attempts.
- It is one of the most secure consensus mechanisms.
- Cryptos based on PoW has more mining power and are more secure.
- Mining earns rewards in a typical PoW model.
- Proof of work is random yet fair.
Some Important benefits/pros of Proof of Stake are:
- The PoS mechanism is safe from 51% of attacks.
- The Proof-of-stake does not need expensive hardware for processing.
- Transactions are faster and relatively inexpensive.
- Processing in the case of PoS does not use much energy.
- Stakes act as a financial motivator in the PoS model.
Some important risks/cons of Proof of Work are:
- Mining requires extremely powerful hardware.
- Not affordable for every market participant.
- Energy consumption due to extremely high mining participation is off-the-charts.
- The majority of mining pools are controlled by single entities.
- PoW model is prone to 51% attacks
Some Important risks/cons of Proof of Stake are:
- PoS models have not been implemented on an elaborate blockchain.
- Capturing control of the network is easy as it depends on capital.
- PoS misses out on many PoW benefits, such as mining rewards.
- Centralized threats like double-spending are executable.
- PoS has governance issues meaning users with more tokens can change the rules of the network.
Proof of work model has existed for a long time so let us go through some examples of PoW.
The first example we shall explore is emails attached with a lengthy piece of text. Ordinary computers can send millions of emails per day, but executing other tasks and receiving a lot of spam can affect its efficiency and reduce processing costs. PoW is used to lower processing cycles by providing complex computation problems which enhance security.
One of the most famously used examples of PoW is mining a cryptocurrency. The PoW model ensures that miners have direct authority within the network. It also prevents double-spending attacks from occurring. Miners have a fixed income because PoW includes enough headers in new blocks.
Another example of PoW is migrating DDoS attacks that cause inconvenience and disruptions. The PoW algorithm solves complex mathematical problems by getting a collective solution. PoW helps to solve problems in a distributed sort of way. This way, even a small number of participants can solve complex problems.
Proof-of-Stake is the so-called better way of solving cryptographic problems. Following are a few cryptocurrencies that use the PoS model that is faster and more secure than PoW.
The decentralized network of Tezos includes an incentive mechanism that rewards validators. For maintaining and securing the network, validators receive newly-created tokens. Stakes increase as new participants enter the network and become active. The PoS system in Tezos also protects rewards and blockchain data from tampering.
The co-founder of Ethereum, Vitalik Buterin, proposed the Ethereum Improvement Proposal in 2016. It uses a modified version of the PoW algorithm called Sharding. The concept of Sharding can improve network performance by holding more hash power. Sharding would also increase the number of transactions in a block.
Cosmos is popular for deploying a PoS network for widespread use (more than Bitcoin). By securing millions of users, the project hopes to become the largest PoS-based coin. Its target audience includes people who do not have access to the banking system.
Understanding how transaction verifications work in PoW can be difficult without an example. Let’s look at Bitcoin’s model.
Step 1) Within every 10 minutes or so, a new block is created. It takes about the same amount of time to confirm Bitcoin transactions as valid.
Step 2) Every single block contains different transactions that require verification. Within a decentralized system, it becomes difficult and energy-consuming to verify every transaction.
Step 3) Proof-of-Work offers a huge amount of computational power to solve the cryptographic algorithm. It makes it impossible for network participants who have fewer resources to get better rewards.
Step 4) Once all transactions within a block are verified, they are added onto the public blockchain where other users can see them.
Let us suppose the mathematical sum 4+8 using Proof of Work. Now we know that the answer is 12. But in this model, whoever gets to the answer first wins the mining reward. Imagine miner 1 and miner 2 competing to solve this problem. The results would be as follows;
Attempt 1: 4+8 = 11 *Incorrect*
Attempt 2: 4+8 = 9 *Incorrect*
Attempt 3: 4+8 = 10 *Incorrect*
Attempt 1: 4+8 = 13 *Incorrect*
Attempt 2: 4+8 = 12 *Correct*
Attempt 3: 4+8 = 14 *Incorrect*
So you can see that miner 2 guessed the correct answer on 2nd attempt so that it will get the miner reward. But in reality, computers can execute millions of combinations each second.
At any particular moment, many hardware devices are trying to solve cryptographic equations. It is almost like a race to be the first to reach the finish line and get the mining reward.
The process is a little different in the case of any PoW coin other than Bitcoin, as expected from second and even third-generation cryptocurrency projects developed to fix the issues present in Bitcoin.
Compared to the Proof of Work model, the Proof of Stake model uses different processes for transaction confirmation and reaching consensus. While it also uses a cryptographic algorithm, the objective is quite different.
In the case of Proof of Stake, the creation of the next block is based on how much an individual stakes. The stake is based on the number of coins a user possesses for the specific blockchain they’re attempting to mine.
Technically speaking, the participants aren’t mining here but “forging”, as there isn’t a block reward to be attained. Unlike Bitcoin, cryptocurrencies which use PoS reward the participants by rewarding them with the transaction fee.
To begin the staking process, users must first deposit coins into a specific wallet, which freezes the coins, allowing them to be used to stake the network. Most PoS blockchains have a minimum coin requirement to start the staking process, which involves substantial upfront investment.
Example of PoS verification:
To better explain the PoS process, let’s take the example of Dash(DASH). The minimum requirement is 1000 DASH, which would, at one point(December 2017) would have been equivalent to $1.5 million.
Step 1) First, you have to decide the number of coins you want to stake to generate some rewards from PoS.
Step 2) Find out the total number of coins n circulation in the blockchain. In our example, it has 1000 coins in circulation.
Step 3) You then have to purchase and stake 100 coins, which is 10% of the coins in circulation.
Step 4) You are now ready to receive the staking rewards. According to this example, you have a ten percent chance of winning every reward on the blockchain.
|PoW or proof of work is a special protocol that aims to deter cyber-attacks such as DDoS (distributed denial-of-service attacks).||Proof of stake (PoS) is a type of consensus mechanism which is used to validate transactions on the blockchain.|
|Any hacker needs to gain more than 50% of total computational power to perform a 51% attack.||Hackers must own more than 50% of all cryptocurrencies on the same network, which is impossible.|
|The mining probability depends on the computational work done.||A new block’s validity depends on the size of the stake.|
|Miners receive rewards for complex solving cryptographic problems.||The validator does not receive a block reward. Instead, they only collect network fees as their reward.|
|Requires powerful and up-to-date mining hardware.||Requires server-grade unit for efficient processing.|
|PoW is the original cryptographic consensus mechanism originating long before PoS.||PoS was derived from PoW, but it comes with several improvements.|
|To achieve more scalability, all nodes within a transaction are involved.||The entire network is not involved in the verification of every transaction.|
The Proof-of-Work model has become an unfair system where common participants have no chance of getting the mining rewards. But the same is not true for proof-of-stake, where everyone gets an equal opportunity to become a forger and get rewards.
Due to the advantages mentioned above, Ethereum is preparing to convert into PoS in its 2.0 version. The release of ETH 2.0 is due next year.
Ethereum developers and communities have always supported a decentralized and transparent ecosystem. Seeing how potential hackers are taking advantage of the proof-of-work model, it is clear why Ethereum and other crypto projects are favoring the proof-of-stake mechanism.