Proof of Stake vs Proof of Work Advanced mining guide

Proof of Stake vs Proof of Work Advanced mining guide

Probably, you may have read countless articles and heard a lot of talk going on recently about the Proof of Stake introduction into cryptocurrency. But, clearly a majority of you haven’t grasp the fundamental meaning of it. 

A lot of you have been wondering what is really a Proof of Stake and a Proof of Work?  Surely it looks a complicated topic to tackle in. It really is until you step into a basic comprehensive explanation, understandable by everyone regardless his/her knowledge over cryptocurrency which is the ultimate goal of this article.

Here we’re going to cover important issues related to two blockchain consensus systems Proof of Work and Proof of and most importantly what are the benefits and challenges for switching from one consensus system to the other.

Before starting, note that commonly Proof of Stake and Proof of work are shortly referred as PoS and PoW so we’re going to stick with this terminology often. For the sake of those readers who may not have a good knowledge basis we will start from scratch. 

What is blockchain and mining?

Blockchain is a network of computers connected via internet that track and record transactions between its participants based on certain cryptographic principles. The process of permanently storing these information requires highly developed hardware systems to run necessary computer algorithms. This process is called mining. On the other hand, those whose computers belong to are called miners or nodes. 

For example, let say I want to make a coin transaction in blockchain. Once I start processing my transaction all miners get notified of this and they scan my request through computer algorithms. At the moment they validate my transaction becomes a block attached to previous blocks hence the name blockchain. 

In order for the blockchain to work out there is a need for a set of rules or a consensus-based protocol agreed by everyone in the network. This is made so fraudulent activities are avoided and everyone in the block is aware of what is going on without the need of an intermediary third-party which is the case in traditional banking system. 

Lets jump straight into it. 

The idea of consensus-based protocol originates back in 1993 when Cynthia Dwork and Moni Naor was presented. Several years later this new form of consensus was given the name Proof of Work. At the time very few understood the fundamental importance of this genius idea. It was until the mysterious Satoshi Nakamoto gave life to this idea using it for running their his Bitcoin digital currency in a blockchain. 

Until recently everything seemed to work just well. But with more and more people, companies and relevant parties stepping into cryptocurrency, issues related to safety are increasing. In addition to this the total cost of maintaining a “mining farm” makes it not affordable for most people giving advantage to the rich. 

To wrap up this section, two most accentuated issues related to Proof of Work are 

Cyber-attacks – Denial of Service (DDoS) attacks are an example of this. What these attack do is they sent fake request to miners and cause their processor-based hardware systems to exhaust.

Cost – Establishing highly developed computers to run all activities in the blockchain needs money and a lot of electricity. It is estimated that during 2017, Bitcoin miners around the world spend electricity equally to New Zealand electricity spending. 

This brings us to the main topic of this article: The Proof of Stake

To most of people keen on cryptocurrency, particularly miners, the best approach toward these issues is Proof of Stake. But, what is Proof of Stake.

Same as Proof of Work, PoS is a consensus-based protocol necessary for a blockchain to function by regulating terms and condition of how “mining” it will be done and who is going to take the reward. In other words Proof of Stake its an algorithm to validate transactions within a blockchain in a different way to Proof of Work. Its introduction dates in 2011 when Proof of Stake was discussed in a Bitcoin talk whereas the first cryptocurrency blockchain to use it was Peercoin in 2012. 

The validator in a Proof of Stake system is determined according to how much a participant allocates in the  blockchain. This is very important because it gives a uniform probability to all participants to be selected as a validator of the network, in contrast to PoW where rich miners had higher chances to become the validator.

To easy understand this you can think of it as a deposit in the traditional trading system. So, basically a validator (or forger as it’s regarded in the PoS system) desposits a large amount of its digital wealth in the blockchain, hence the name Proof of Stake. Such deposit acts as an assurance that in case he initiates fraud activities he’s going to be punished. Furthermore, in a PoS system the validator cannot win more than it deposits in blockchain therefore it’s unlikely he will do it. This solves the first issue related to PoW: safety

The transition between PoW and PoS would revolutionize the cryptocurrency world, especially because it ensures a uniform probability for all participants to be selected as the validator and consequently take the reward. This is not the case with PoW because rich people have much powerful processor-based supercomputers to run cryptographic algorithms and therefore higher chance to become the validator. 

Also, everyone who has a computer has a chance to join in a PoS consensus-based blockchain. This solves the second issue related to PoW: centralization.

Proof of Work vs Proof of Stake

Now with all these said the question is: which one is better PoW or Pos? Clearly, PoS has lot more advantages and once minor issues related to it are solved it will soon be widely accepted. Currently cryptocurrency blockchains that are working based on this are Ethereum, Peercoin, BlackCoin, Lisk, NxT and few others. 

There are still skeptics who argue that PoS cannot tackle problems attached to the current PoW. Some fear that PoW is not a good approach for solving decentralization issue. They emphasize that similar to Pow, the Proof of Stake gives a bit of advantage to the rich in the sense that those who actually own more digital wealth can deposit more become the validator and consequently take the reward and get richer. 

There’s already an idea to solve this problem by adding another selection criteria for the forger or validator as you will: the age of miner and its stake. Basically, the amount of coins he holds as stakes in the blockchain and the number of days those coins have been there. A miner can compete to become a validator 30 days (at minimum) after he deposits his coins.

Finally, the section below aims to describe the advantages and disadvantages of PoW and PoW 

 

Proof of Work

      Advantages:

  • No-third trust party needed to validate transactions
  • Block formation  minutes
  • A strong defensive approach against DoS attacks
  • New cryptocurrency unit granted as a reward

     Disadvantages:

  • High electricity required
  • Rich miners are likely to become validator (decentralization)
  • Miners can join hashing powers to control the blockchain known as 51% attack 
 

Proof of Stake 

Advantages:

  • No-third trust party needed to validate transactions
  • Cost-effective
  • Loyal forgers
  • The validator is only rewarded transaction fee
  • Safer because miners risk to lose more than they gain when trying to fraud
  • No need of huge processor-based computers to mine
  • Uniform probability to be selected as a forger

Disadvantages:

  1. Those who own the majority of stakes can take control of the blockchain and fraud transactions
  2. Risk of monopoles as rich participants have higher chances to become validators
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