PoW vs PoS: Key Comparison Between Proof of Work & Stake
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.
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.
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.
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.
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.
Advantages of PoW
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.
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| Types of attacks |
Proof of Work Examples
Proof of work model has existed for a long time so let us go through some examples of PoW.
Emails
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.
Cryptocurrencies
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.
DDoS
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 Examples
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.
Tezos:
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.
Ethereum 2.0:
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:
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.
How are transactions verified: PoW
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;
Miner 1
Attempt 1: 4+8 = 11 *Incorrect*
Attempt 2: 4+8 = 9 *Incorrect*
Attempt 3: 4+8 = 10 *Incorrect*
Miner 2
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.
How are transactions verified: PoS
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.
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.
Proof of Work vs. Proof of Stake
Proof-of-Work
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
Proof of stake (PoS) is a type of consensus mechanism which is used to validate transactions on the blockchain.
Proof-of-Work
Any hacker needs to gain more than 50% of total computational power to perform a 51% attack.
Proof-of-Stake
Hackers must own more than 50% of all cryptocurrencies on the same network, which is impossible.
Proof-of-Work
The mining probability depends on the computational work done.
Proof-of-Stake
A new block’s validity depends on the size of the stake.
Proof-of-Work
Miners receive rewards for complex solving cryptographic problems.
Proof-of-Stake
The validator does not receive a block reward. Instead, they only collect network fees as their reward.
Proof-of-Work
Requires powerful and up-to-date mining hardware.
Proof-of-Stake
Requires server-grade unit for efficient processing.
Proof-of-Work
PoW is the original cryptographic consensus mechanism originating long before PoS.
Proof-of-Stake
PoS was derived from PoW, but it comes with several improvements.
Proof-of-Work
To achieve more scalability, all nodes within a transaction are involved.
Proof-of-Stake
The entire network is not involved in the verification of every transaction.
Proof of Stake better than Proof of Work? Reasons Why
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.
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