Crypto Academy Season 4 Beginners' course - Task 6: Different types of Consensus Mechanisms
QUESTIONS
What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?
WHAT IS THE DIFFERENCE BETWEEN PoW & PoS?
Proof of work
The concept proof of work was first introduced by Cynthia Dwork and Moni Naor in the 1993, and it aim is to prevent fraudulent acts and misuse of computer services like spamming.
Proof of work is a consensus algorithm that describes how decentralized networks are in accordance on transactions so as to avoid multiple spending of tokens.
Proof of work find it's application mostly in mining.
How does it work?
Proof of work provides a puzzle, more like computational puzzles, for miners to solve, these puzzles are difficult to solve but much more simpler to verify. If a miner do solve this puzzle other miners will therefore verify the solution to see if it's correct and if it is, they get to place a block on the blockchain. It is therefore impossible to add a new block to the Blockchain without first validating the result of the puzzle.
A miner is a computer network in form of a decentralized node who is responsible to add more block to the Blockchain.
Bitcoin is the first crypto currency to adopt use of proof of work as a method of verification of it's transactions in the Blockchain.
Apparently, decentralized nodes also known as miners try to guess a number also known as “Nonce” and this nonce is put through a hash function, for example; bitcoin uses “SHA-256” then other miners(decentralized nodes) tests the validity of this number and if proven correct, new cryptocurrencies are created as reward for the miner.
Examples of coins making use of proof of work consensus algorithm:
- Bitcoin
- Ethereum
- Litecoin
- Bitcoin cash
- Ethereum classic
Proof of stake
Proof of stake was first introduced by Sunny King and Scott Nadal in the year 2012 to solve the problems of proof of stake. It's aim was to provide a solution to Bitcoin mining energy consumption which was very high.
Proof of stake is quite more straight forward than proof of work.
Proof of stake is a consensus algorithm that favors miners with the most coin held. Therefore blocks are added to the block chain by miners with more coins in their wallets. In proof of stake, blocks are forged instead of mined like the proof of work.
How it works
The proof of stake makes use of a pseudorandom selection process to choose miners who gets add a new block to the blockchain. Though there are factors that are out into consideration before choosing
- Amount of coin held
- Randomization
- Age of stake
Amount of coin held:
Miners who have more coins held in their wallets are chosen selected. The higher the coin the more chances are that the miner is selected.
Randomization:
Randomization involves looking for miners that posses a combination of a lower hash and a higher stake.
Age of stake:
It is possible for a miner to buy a lot of coin and stake them just so he could get the reward. Therefore so as not to favor just a miner with the highest coin held, age of stake is required and the amount of time a coin has been held.
Examples of coins using the proof of stake consensus algorithm:
- Tron
- Cardano
- Solana
- Algorand
- Tezos
Difference between Proof of work and Proof of stake
| Proof of work | Proof of stake |
|---|---|
| Blocks in proof of work are mined | In proof of stake blocks are forged |
| Consumes high mining energy | Proof of stake does not make use of mining energy |
| Makes use of a pseudorandom number which is then guessed by miners | makes use of a pseudorandom selection process to select miners |
| Creates cryptocurrencies for rewards to miners | uses transaction fee as reward for miners |
| Proof of work systems have lower energy efficiency | proof of stake systems have higher energy efficiency |
ADVANTAGES AND DISADVANTAGES OF PoS AND PoW
Advantages of Proof of work:
Proof of work helps protects against numerous attacks due to the increased computational power and time.
Proof of work results in decentralized network(distributed network) where each miner has a copy of the exact same data and there is no need for a third party.
Proof of work prevents double spending which basically is, spending a token twice.
Disadvantages:
Proof of work requires expensive computer hardware for its processes.
Proof of work consumes a very high mining energy.
Proof of work only provide for security, only when there is a large network of miners working on the Blockchain. Therefore, there is lack in security when there is small network of miners competing for a block in the Blockchain.
Advantages of Proof of Stake
It provides better security against fraudulent transactions
Proof of stake has a better energy efficiency
Helps with the stability of a coin price; since there is no need for the minting of new tokens to be used as reward for a miner.
Disadvantages:
Staking rewards are much smaller compared to mining rewards
With proof of stake, a coin cannot be sold until the staking period elapses.
In proof of stake, miners/forgers with the highest cryptocurrency held stand more chance of being selected to add block to the Blockchain.
SCALING CAPACITY
To understand scaling capacity, one must first understand the term “scalability”.
Scalability in general terms describes a models ability to function properly under increased workload. When a system is said to be scalable, it means that despite the increased workload/transactions, it's performing efficiency will not dwindle.
In cryptocurrency, scaling capacity can be refers to, as the level of capability for a system or model to perform millions of transactions per second.
Back to the question, “which has more scaling capacity PoS or PoW”?
Well, due to its better efficiency and better processing, PoS had a better scaling capacity than proof of work. Why?
PoS uses a low amount of electricity compared to PoW for it's processes and uses little to no mining energy compared to PoW which in turn improves it's scalability.
A clear example, proof of stake is uses a selection method to select miners (forgers) who has more cryptocurrency accumulated and staked in his wallet and then uses transaction fee as a reward for said forger. By doing so, proof of stake performs millions of transactions whilst still undergoing its selection process this having a higher transaction throughput unlike PoW.
CONCLUSION
Cryptocurrency is a technological advancement that has only recently just started, that said, new ways/methods to better navigate its processes are still in progress. But for now, proof of stake and proof of work are the two consensus algorithsm in place for it's processes with both having it's perks and downsides as well. Hopefully in the future a better algorithm will emerge and solve the lapses both algorithms have.
Thank you for reading
Professor @sapwood