Proof of Work v/s Proof of Stake : Mining 101

July 14, 2017 by

Proof of Work was one of the terms being tossed around in the cryptocurrency dictionary when Bitcoin was the sole player, until concept of PoS came along. And then, the world exploded with debates between “Proof of Stake” and “Proof of Work”.

Over time, many of you dropped queries on how PoW and PoS work and the differences between the two. So for benefit of all, we decided to come up with another Mining 101 guide, and this time it’s about Proof of Work (PoW) and Proof of Stake (PoS). 

Definitions, definitions

Proof of Work is a protocol that has the main goal of deterring cyber-attacks such as a distributed denial-of-service attack (DDoS) which has the purpose of exhausting the resources of a computer system by sending multiple fake requests. The Proof of Work algorithm is the one on which the security of the Bitcoin network relies. Each participating note wanting to indulge in mining is required to provide a solution to a computationally difficult mathematical problem, that is used to ensure the validity of the newly mined block. 

Additional Knowledge :
– The Proof of work idea was first published by Cyntia Dwork and Moni Naor in 1993
– The term Proof of Work was first used in 1999
– 2008 saw Satoshi Nakamoto apply this technique to his/her  digital currency revolutionizing the way traditional transactions are set.

Whenever one describes any modern-day decentralized cryptocurrency system, the term Trustless and Distributed Consensus is always used.

A trustless and distributed consensus system means that if you can send/trade currency without having to trust and third-party transferors. Here, every miner has a copy of the ledger (blockchain), and thus anyone can directly verify the information written.

A trustless and distributed ledger exists in a system based on the Proof Of Stake algorithm as well. In fact, the end result achieved by both Proof Of Work and Proof Of Stake is the same. It is only their working mechanisms that differ.

Unlike the Proof Of Work algorithm, the Proof of Stake algorithm chooses the creator of each new block in a deterministic manner which depends upon the wealth (defined as stake). Proof of Stake system doesn’t offer a block reward either.

The miners, which are referred to as forgers in a Proof Of Stake system, hence earn the transaction fees instead of the block reward.

Additional Knowledge:
– The Proof Of Stake concept was first suggested on the BitcoinForum in 2011
– In the following year i.e. 2012, Peercoin became the first digital currency to use the Proof Of Stake algorithm
– Other currencies that were started in the same year on the same platform included – NavCoin, Qora, ShadowCash, Nxt, BlackCoin et cetera.

Mining in PoW versus Mining in PoS

Mining, as we have mentioned previously validates the legitimacy of a transaction as well creates a flow of new crypto-currency as reward to the miner.

In the Proof Of Work system, the puzzle that the miner must solve has a key feature: asymmetry. This idea is also called as a CPU cost function, client puzzle, computational puzzle or CPU pricing function, commonly.

The network miners essentially compete to be the first to arrive at the solution to claim its records. Proof Of Work usually utilizes brute force by the miner and thusly, a huge number of attempts. As soon as the miner has solved the problem, he/she announces it on the ledger and immediately receives a fixed amount of cryptocurrency as the reward.

Proof of Stake, however, isn’t about mining, it’s about validating. In effect blocks still need to be created by someone, and who gets to create the next block depends on the specific Proof of Stake algorithm, but the selection process must have some kind of randomness, or at least distribute voting shares properly (otherwise we revert to a centralized system).

In PoS, each validator owns some stake in the network, for example ether in the case of Ethereum, that they bond. Bonding stake means you deposit some money into the network, and in some sense use it as a collateral to vouch for a block.

 

So, in a Proof Of Work system you know a chain is valid because lots of work is behind it, while in the Proof Of Stake you trust the chain with the highest collateral.

Another major difference that pipes in is the efficiency from a resource standpoint.

Enstine Muki, author of BlogExpose believes “Any system based on Proof of Work relies on energy use. According to a bitcoin mining-farm operator, energy consumption totaled 240kWh per bitcoin in 2014 (the equivalent of 16 gallons of gasoline). In a recent research, experts argued that bitcoin transactions may consume as much electricity as Denmark by 2020. Moreover, these energy costs are almost always paid in non-cryptocurrency (fiat currency), introducing constant downward pressure on the price.”

What this implies is that Proof of Work is extremely inefficient in terms of energy, and therefore also very expensive – which is obviously not desirable for a network whose goal is to minimize the need to trust third parties.

Most existing PoW blockchains, such as Bitcoin, pay for these costs with the pre-agreed creation of coins, also known as inflation.

In this category, Proof Of Stake stands out as well. It can be referred to as the greener alternative to a highly un-ecofriendly system upon which the basis of cryptocurrency lie.

Proof Of Stake works on an agreement within the blockchain measured not on the basis of how much computing power agrees with the current state, but instead on the basis of how much digital currency agrees with the current state. Hence, it requires negligible amounts of energy.

The Proof Of Stake algorithm thus provides us a pathway for implementing a decentralized ledger whose security is not based on expensive computation.

In Conclusion

A Proof Of Stake system makes the validators grateful for the fact that their computing power is not what influences their chances. It is instead influenced by the numbers of coins they own and the complexities of the existing network.

Besides this, energy conservation and a safer, more trustworthy network at hand are also the saline features of a Proof Of Stake cryptocurrency system.

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IBC achieved an unprecendented 88% signal accuracy. 
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