proof-of-work-and-proof-of-stake

Explaining the Concepts of Proof of Work and Proof of Stake

There has been news floating around in the world of cryptocurrency that Ethereum, one of the top three cryptocurrencies on the market cap at the time of writing, is planning for a transition from Proof of Work (PoW) system to Proof of Stake (PoS). Now, most of you would be wondering what PoW and PoS systems really are. In this post, we will explain to you what the basic difference between both the systems is.

The majority of the larger crypto-networks have been utilizing two main blockchain systems: PoW and PoS. These two blockchain systems govern how each block transaction is verified on the decentralized network. Before we further explain to you about PoW and PoS, let’s first understand the concept of ‘mining’ in cryptocoins and see how ‘miners’ work.

Mining

The term ‘mining’ is often heard in Bitcoin than Altcoins. Mining is a process in which miners create blocks of validated transactions so they can be included in the blockchain. To do this, they have to solve a complex mathematical problem to give proof of their work. Once the block is verified, it becomes a part of the distributed ledger called the blockchain.

Computers having a higher power processor are required to run with the complex mining process.

Once a transaction takes place in a cryptocoin’s network, let’s assume we are talking about Bitcoin’s network, it needs to be validated in order to avoid double spending. Since there is no third party involved, the miners are tasked with the responsibility of checking the validity of the transactions on the network. The process of validation is done through solving a complex mathematical puzzle. Only then the block gets added in the blockchain. More computing power and energy is required to solve the puzzle so the one who has a higher power processor computer will be able to solve the problem faster than the other miners in the network.

The miner who solves the problem first will earn a ‘reward’ in the form of a Bitcoin. Basically, the miner is giving proof of his work by becoming the first one to solve the problem. The other miners, who were not able to solve the problem, move on to the next block and start looking to solve the problem for that block. This is where the concept of PoW stems from.

Proof of Work (PoW)

PoW, as the name states, is the validation of the work being done and then proving it is correct. Bitcoin and many altcoins have been following this blockchain system to make sure each block of transactions is authentic to be added in the blockchain.

As explained under the heading of mining, PoW system requires its users – the miners in case of Bitcoin, to confirm the transactions within each block and to create new blocks to the blockchain. All the miners in the network compete with each other to be the first to find the solution for the mathematical puzzle, which itself, is an arduous task involving high computational speed and electricity cost.

When the miner finds the solution to the puzzle, he/she announces it to the entire network at the same time and becomes entitled to receive a reward from the protocol. The others, who fail at finding the solution, immediately stop working on that block and start trying to figure out the solution for the next one, thus repeating the same cycle.

Like every concept, even PoW has its own downside which has been explained below in few points:

  • PoW requires more consumption of electricity which may be costly for the miner.
  • A higher processor computer may be a bit expensive for some miners.
  • The miners may shift to mining another digital coin if they’re being offered a better reward there.

Proof of Stake (PoS)

The PoS system was created as an alternative to PoW with an aim to tackle the issues found in the latter. It’s another way of verifying and validating the transactions within a block. Though the purpose of PoS is similar to that of PoW but the process to reach the goal is entirely different.

Unlike PoW system where miners get rewards for solving the mathematical problem with a goal of validating transactions and creating new blocks, with PoS, the creator of a new block is picked in a deterministic way, depending on the stake or coins he owns in the network and how long they have been in possession of them. In the PoS, there are no miners but validators or forgers who do not get any reward but only the transaction fees for processing and forging a block to the chain.

A PoS validator can only mine a percentage of transactions that is reflective of his/her stake in the network. For instance, a validator who owns 5% of the digital coin can mine only 5% of the blocks in the network. This means a validator who owns a large stake in the network will be able to mine more transactions.

Here are a few reasons why some cryptocoins like Ethereum may want to switch from PoS to PoW:

  • The process of validations becomes faster.
  • An expensive computer hardware is not required to carry out the validation process.
  • PoS is cost-effective compared to PoW as the latter consumes high electric power.
  • A safer network because validators having a higher stake, let’s say 51%, won’t attack the network where they hold a majority share.

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