While cryptocurrencies are crazing the world recently, many wonders about the mechanics behind the craze — the process of how to mine coins and blockchains that are using Proof of Work or Proof of Stake as their process model. Both models are the current requirement to confirm transactions that are made on the blockchain, without any need for a third party.
Proof of Work vs Proof of Stake
Proof of Work system started when the first cryptocurrency, Bitcoin, started and that it must find a way to transact without the need for a third party. Proof of Work is essentially used to decide how the blockchain reaches consensus, meaning if the network is sure that the transactions made are valid and not any duplicate payments are made. “Cryptocurrencies” is mainly derived from the word “cryptography” because Proof of Work is based on an advanced form of mathematics that is called “cryptography”.
Cryptography uses mathematical equations that are so difficult that only “super” computers with powerful software can solve the equations. All equations are not the same and that means that once it is solved, it will prove that the transaction is authentic.
Every block contains different transactions, and each must be independently verified by miners, using their “super” computers to solve a cryptographic algorithm which is called Proof of Work. Once solved, the transactions will be verified and will be publicly shown on the blockchain.
As cryptocurrencies becomes more popular after Bitcoin, Proof of Work begins to be the main model for other blockchains. Proof of Work seems to be an amazing discovery, but it needs a significant amount of electricity to solve the transactions and that limits the number of transactions it can be process at the same time. In other words, anyone that possesses powerful and expensive software and hardware device of a “super” computer will always have a greater chance of mining coins from the transactions.
With the above happening, another model was created by two developers — the Proof of Stake model. This model was created initially to provide fairer and more equal mining system that can benefit in more scalable transactions and less reliance on electricity. Ethereum is one of the more popular coins you will come across that is currently looking to switch over to the Proof of Stake model.
In the early stages, proof of Work would only cost a small fraction on the transactions which are useful for transferring small amounts, however, with growing popularity, the fees for each transaction to be approved increases over time. Thus, slowly beginning to make it too expensive and not suitable for a global payment system. The scalability issues that cause Proof of Work to limit their number of transactions done has caused other blockchains to explore Proof of Stake model.
Proof of Stake is similar to the Proof of Work model but blockchains apply a different process to it. It still uses a cryptographic algorithm, but the objective of the mechanism is different. In Proof of Stake, the individual that creates the next block is based on the number of coins they have staked in the particular blockchain that they are mining. But in this case, they are not really mining, instead they are forging, because there are no rewards, solely based on earning the transaction fee instead.
How it works, individuals will have to put their coins in the blockchain that requires a minimum amount into a specific wallet and from there, it freezes the coins staked, which in return are used to stake the network. So, to gain the reward, it is linked to the total percentage of coins you hold that is circulating in the blockchain. Therefore, the most interesting and important theory behind Proof of Stake will be that whoever that is staking will want to keep this network secure because the more your stake the more risk it might lost their entire stake if there is an attempt to hack the network or processing malicious transactions.
To summarize: –
- Proof of Work model requires ALL miners to solve a complex equation, with the ultimate solver determined by the person behind the most powerful and expensive software and hardware.
- Proof of Stake model rewards the winner based on the number of coins they have staked in the blockchain.
Being centralize, as we know how Proof of Work works, it resulted to organizations purchasing devices that generates the highest mining power, called the mining pool. It allows investors to pool their resources together to allow them a higher chance of solving the cryptographic equation first, whereas Proof of Stake prevents pooling to happen to dominate the network because those who contribute to the network by freezing their own coins are rewarded proportionately to the amount they have invested.
Electricity consumption, to be able to solve the complex equation from the Proof of Work model, the total amount of electricity required to keep the network functional is more than 159 individual countries consumption combined. It slows down the rate at which cryptocurrencies can increase their real-world adoption, because the electricity bills are paid using fiat currencies. Meanwhile, Proof of Stake uses lower electricity consumption as there are no complex equations to solve.
However, with the above, and understanding both models, Proof of Stake proves that only the rich get richer as the more coins you can afford to invest, the more reward you get, while making it difficult for most people that do not even have the ability to meet the minimum staking requirement.
In conclusion, the argument between both models will always be something that will divide each other’s opinions. But it will always be good to understand how each model works and the mechanics behind them so that each of us will have a better opinion to it.