Steemit Crypto Academy Season 4 Beginners' course - Homework Post for Task 6: Different types of Consensus Mechanisms
What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?
What is PoW?
In proof-of-work systems miners compete to mine the next block by using one of many available hash functions. The proof-of-work system can be used in a number of different ways to secure a cryptocurrency, such as proof-of-stake or proof-of-burn.
The core concept of the proof-of-work is that it is easy to spend your effort and resources on something if you can easily verify that your efforts were successful. Unlike some other methods, such as proof-of-stake, which get around this issue by having an alternate difficulty adjustment mechanism like merge mining or POSV (Proof of Stake Velocity), proof-of-work requires the entire network to be working at the same time. This means that there must be a way to verify that you did work for a specific piece of data and had successfully solved a puzzle. The computational effort required to mine a given block represents an amount of electricity and computer hardware. Mining alone does not create new coins and is used to secure and verify the blockchain. PoW is not a perfect method but it's the most cost-effective one at present time.
Advantages of PoW
Advantages of proof of work are as follow:
- It is decentralized because the process of mining is done by various nodes, which are located all over the world.
- It is open to everyone who has the right hardware and free time; anyone can mine.
- Anyone can verify all submitted blocks, thus preventing double-spending or fraud.
- It is impossible to conduct round-trips (including change address attacks) with transactions that use proof-of-work as their proof of authenticity.
- Miners are rewarded for conducting work that helps secure the network, encouraging people to come up with better solutions over time .
- Work is required to be processed by the network before being accepted, ensuring the correct order in which transactions are processed.
- Proof of work is a deterrent against denial of service attacks because it obliges an attacker to have enough mining power to overtake the entire network.
- It is very robust compared to other solutions, because it doesn't rely on a single point of failure . It provides resilience due to the distribution of tasks among miners. When one miner fails or are banned because their mining was fake or have other malicious intentions, other miners ensure that work continues without interruption .
- It can be used as an anti-spam measure because of the computational power that it requires .
Disdvantages of PoW
- It is very costly and energy consuming, since solving these computationally complex mathematical problems can be done by running very powerful computers that consume a lot of energy .
- There will always be a need for miners, so if miners leave the network, bitcoin will not survive.
- A few miners can have an enormous amount of power over bitcoin forks.
- The solution to the problem of double spending is not very clear .
- Proof of work has confused many people due to its complexity and seeming un-understandability . This complexity makes it difficult to understand how it all works, but this does not stop people from tryin
What is PoS?
In PoS-based cryptocurrencies, blocks are produced in the same way as they are in PoW protocols, but with slight variations. The main difference being that it is the owner of a coin who is required to sign the block, not all of the miners or nodes on a network. In PoW mining, miners have an incentive to lie and manipulate information about new transactions to boost their rewards and increase their mining power. This possibility makes cryptocurrency investors wary of registering with exchanges for fear that the exchange might be hacked and your assets stolen.
Advantages of Proof-of-Stake
- The total number of coins that are mined is determined by the number of coins that are staked.
- No special equipment or hardware is needed to participate in proof-of-stake mining.
- The network is highly resilient against 51% attacks, which make up for the decentralized nature of Proof-of-stake systems, making them very secure networks.
- The total hash-rate of all mining pools combined is determined by the total amount of coins staked by all users.
Disadvantages of Proof-of-Stake
- The number of coins that are staked, determines the number of coins that are available for trading (this can be solved by creating a market-cap or price-per-stake model).
- The majority of block rewards end up in the hands of those who stake the most coins, which may lead to centralization.
- If a user loses their private key, they lose their investment and cannot trade or sell it until they regain access to their coins and spend them back into circulation.
Which one is better in scaling Capacity? Examples?
Ethereum currently uses PoW as well where miners can continue mining blocks and receive Ether as a reward. In Proof of Work, however, there is an issue regarding the scalability of transactions per second because once you have reached certain number of miners or nodes, it would take forever for them to reach consensus on any new transactions. This makes it difficult for transactions to happen on-chain because it will always be trying to reach consensus which can take up time and cause a backlog of transactions. The more transactions there are; the longer it takes for miners to agree on a new block and the longer it will take before any transaction is confirmed. This is why Bitcoin and Ethereum face scalability issues because of how long it takes for transactions to be confirmed.
Proof of Stake's algorithm does not require people to do calculations in order to prove that they have done work. Instead, they are required to have a stake or an amount of cryptocurrency. If you have more, you can mine more and use more of the system; if you have less, you can mine less and use less of the system. You get rewarded more if you add blocks or do transactions more frequently.