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Proof-of-Stake (PoS) vs Proof-of-Work (PoW)

Basics

What is Proof-of-Work?

Initially, the proof-of-work (PoW) algorithm was designed in order to address the increasing amount of distributed denial of service (DDoS) attacks on most blockchain networks. DDoS attacks were launched by sending several fraudulent requests to the server which in turn exhausts the server and sometimes results in causing a network-wide downtime.

The PoW algorithm was already available before the birth of bitcoin and its underlying blockchain technology. However, the algorithm rose to prominence when the bitcoin founder, Satoshi Nakamoto, incorporated it into the bitcoin network as a means to verify digital transactions.

The PoW algorithm was established as early as 1993 by Moni Naor and Cynthia Dwork. However, the term, PoW, was only coined much later in 1999 by Ari Juels and Markus Jakobsson.

Returning to the current century, the algorithm took an important place in bitcoin’s whitepaper that was published in 2008, as it enabled the network to conduct distributed consensus which was also trustless.

What is a trustless and distributed consensus?

Simply put, a trustless, distributed consensus system allows two parties to send and receive money from one another directly without having to involve a third-party.

In most traditional payment methods, such as electronic fund transfers (EFTs) or simply swiping your card at a payment point, you automatically place your trust in a third-party (such as VISA or MasterCard) to conduct your transaction on your behalf. For a nominal transaction fee, they complete your transaction and keep a record of all previous transactions.

However, cryptocurrencies have been created in order to eliminate the need for a third-party. Bitcoin and all other altcoins were designed to have their own digital ledgers where users in the community can directly verify all the stored information.

Proof-of-Work and Mining

To get a little more technical, the PoW algorithm also has some downsides, most notably in that it requires expensive equipment and a comprehensive technical knowledge to mine a cryptocurrency that uses PoW-based algorithms. After solving a series of complex computational calculations, miners are able to verify transactions and generate new blocks on the network.

Miners are essential to cryptocurrencies as they perform two functions:

  • They verify transactions
  • They mine new cryptocurrency coins and get rewarded for their efforts in the same cryptocurrency.

What happens once you conduct a transaction?

Any blockchain network is a complex ecosystem made up of transactions, among other things. The moment you set a transaction, this is what takes place on the network:

  • Transactions are grouped together into blocks.
  • Miners verify every single transaction and confirm their legitimacy.
  • In order to confirm transactions, miners are required to solve a series of mathematical problems using complex devices.
  • Miners are rewarded for each transaction approved.
  • All verified transactions are then stored on the digital ledger.

The mathematical problems are all characterized by asymmetry. For example, while the mathematical problems will be difficult for the requester, it will be easy to check. The mathematical problems are also referred to as the CPU pricing function, CPU cost function, computational puzzle, or client puzzle.

Hundreds of miners compete to solve a provided block first, as only the first successful miner is rewarded for their efforts. Once a miner is successful they announce it to the rest of the community and then collect their reward.

This aspect, as well as the specifics of the hashing process, has created a highly competitive mining environment. In addition, the mining process has become unsustainable as the constantly growing number of blocks, makes for higher and more complex problems that need to be solved, which in turn contribute significantly to transaction times and costs.

What is a Proof-of-Stake?

A proof-of-stake also seeks to reach a distributed consensus but does so differently than PoW.

While still seeming new, the algorithm was suggested in a popular bitcoin forum in 2011. However, the algorithm was first implemented in 2012 by the cryptocurrency, Peercoin. Shortly after the initial successful implementation, several other altcoins jumped on the PoS bandwagon, including nav coin, shadowcash, qora, nxt, nushares/nubits, and blackcoin.

Whereas PoW operates by using miners to solve complex mathematical solutions to verify transactions, PoS differs in that creators of new blocks or ledgers are chosen in a very different way than the PoW system.

In addition to the electoral system, the PoS does not offer rewards, but the users who verify transactions, take a cut from every transaction fee in their particular block. Because of this PoS users are called forgers.

Why does Ethereum want to use PoS?

The PoS became popular after the Ethereum network and its creator, Vitalik Buterin, announced that the network will be undergoing a hard fork to change from a PoW to PoS algorithm.

A big driving force behind this decision is the sheer amount of electrical power resources that PoW miners require in order to validate transactions, let alone mine new coins.

Electrical bills are obviously still settled using fiat currency, which also, in turn, exercises a negative effect on the value of cryptocurrencies.

Recent research has also confirmed that by 2020, bitcoin transactions might require as many electrical resources as the country of Denmark.

This has worried crypto developers for a variety of reasons. The ethereum community, in particular, has expressed a wish to explore alternatives that are more environmentally sound and cheaper.

Also, considering the reward system, PoS forgers always own an amount of the cryptocurrency which they are verifying, which means that they have more interest in ensuring a transparent and honest network environment.

The PoS system is likely to become more popular in the cryptocurrency industry especially considering the current context of a world desperately seeking to become more environmentally friendly. The new algorithm promises to be more sustainable, environmentally and financially, while also suggesting that the unique algorithm will be conducive to a more honest and transparent network that is safer and less likely to become targeted by damaging hacking campaigns.

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