Different types of Consensus Mechanisms - Steemit Crypto Academy Season 4 - Homework Post for Task 3.
QUESTIONS
WHAT IS THE DIFFERENCE BETWEEN PoS & PoW?
ADVANTAGES & DISADVANTAGES?
WHICH ONE IS BETTER IN SCALING CAPACITY? EXAMPLES?
All blockchains need a ledger that stores information there, this is called a consensus system.
Consensus is a system that ensures which records are true and fair. The central head has the original copy of the ledger in a centralized system and notifies its employees about changes in the ledger, but is not trustworthy and prone to cyber-attacks.
Consensus system contain:-
1.Proof of Stake (PoS)
2.Proof of Work (PoW)
1.Pos(Proof of stake):-
It is a type of consensus mechanism in which miners compete against each other to solve a mathematical equation.
Proof of work can be described as a treasure box that is locked, Miners are the treasure hunters, the first person that cracks the lock will be rewarded with a specified amount of crytocurrency.
In 2009 bitcoin used mining to power its currency, then it required low processing speed and all Mine was allowed but now requires a higher process speed.
The winner has the right to group new transactions into new blocks and be awarded bitcoins. Typical examples of proof of work is Bitcoin and Ethereum.
Proof of Work is used to reach a consensus between many nodes in a blockchain. PoW rewards miners with more device/processor speed, the higher the hash rate of the miners, the higher the chances of winning.
So miners with similar goals come together to form a miner pool, which is a group of miners who mine together and later share the rewards equally among themselves.
Proof of Stake:-
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This is a another type of Consensus Mechanism that ask Validators to stake a specific amount of crytocurrency for rewards, it was first introduced in 2012.
For instance if there is a treasure chest, the validator that has the highest stake, will be rewarded with crytocurrency. Some examples of crytocurrency that uses PoS is Cardano and EOS.
The size of the stake determines the possibility of a validator to chosen.Validators will lose a significant amount of crytocurrency if they approve fraudulent transactions.
The stake should higher than the transaction fees. If one decides to stop being a validator, all his stake and transactions fees will be given back to him after a period of time.
PoS judges the validator based on amount of stake and the time he has held that particular crytocurrency.
Advantages & Disadvantages of Pow and PoS:-
Advantages of PoW (Proof of Work):-
• healthy competition :- Miners are rewarded based on solving mathematical codes, thus it can improve competition among miners about what they do.
• Security: As the value of cryptocurrencies increases, more miners are willing to join the system, thus providing a sense of security and increasing the power and effectiveness of the system.
• No Third Party Required: The PoW database is secure thus preventing any authoritative body from tampering with the information or records of the miners.
Disadvantages of PoW (Proof of Work):-
• Energy Consuming: minning activities are done on super computer, this take a toll on electricity consumption and increase the cost and consumption of power.
• Slow: Due to the fact that transactions are made from mining, a large amount of processing power is required to perform them. Any miner who does not have the processing power will have difficulty in mining and the slowness of the network.
• Miner pools make PoW a centralized system: A centralized system is one that is tied to a central authority, a miner pool is a group of miners in a blockchain that mines a particular cryptocurrency. This pool has a hierarchy of power and thus defeats the purpose of having a centralized system.
• Incompetent: A miner pool in PoW can approve fraudulent transactions and engage in fraudulent activities to gain profit.
• It is expensive to run: because it is not everyone who can afford high processing equipment.
Advantages of PoS (Proof of Stake):-
• It consumes less energy: POS chooses just one validator to approve transactions and create a new block. It does not require much energy for mining as compared to PoW.
• Less expensive to set up: PoW requires a higher processing speed system, but in PoS although the validator bets his money, PoS is less expensive to set up as high processing systems are not required.
• security: Only the validator approves the transaction and if any fraudulent activity is approved, he is penalized for losing some of his assets.
Disadvantages of PoS(Proof of Stake):-
• Less profitable: The reward obtained from mining is much higher than the amount of reward received as a validator in PoS.
The transition from PoW to PoS is difficult due to technical difficulties.
• More prone to attack: Because authorization in PoS is based on validators, a particular validator can be chosen as he controls all the funds in the blockchain. When each validator owns more than 50% of the blockchain, he basically controls the fate of that cryptocurrency, so any change in the price will depend on his transactions in his wallet
What is the difference between PoW & PoS?
PoS(Proof of stake):-
1.Crytocurrencys are staked and the highest stake run a new block.
2.The network is more decentralized because
Not many people are used to creating nodes.
3.Proof of work Doesn't required lot of energy.
4.it Doesn't allow everyone to mine.
Pow(Proof of Work):-
1.It Consumes heavy amount of energy from miners.
2.The network works with mining pools that makes the network feels like a centralized system.
3.Cryptocurrencies are mined and the miner who solves a mathematical equation is rewarded with a specific amount of cryptocurrency.
4.In Proof of work Everyone is allowed to mine.
Which one is better in scaling Capacity? Examples?
Scalability is the ability of a cryptocurrency to withstand or handle a large number of transactions at a particular time. For example, Btc is said to operate smoothly at 7 transactions per second.
PoS (Proof of Stake) is more scalable as it requires less energy than PoS. The validator is rewarded based on the stake he has held in the system and the transaction fee for the transaction.
No mining is required to make PoS fast and efficient. PoS confirms more transactions per minute than any miner can do in PoW (Proof of Work). examples :- dash, tezos.
Conclusion
The crypto currency world continues to advance and this assignment has helped me understand what a consensus mechanism means and the importance of PoS and PoW. I would like to pay special respect to Professor @sapwood for this wonderful assignment.