Proof-of-Work vs Proof-of-Stake: What does this have to do with the blockchain?

If you’re interested in cryptocurrency, there’s a concept you’ve probably heard before. It is Proof-of-Work. Does it speak to you, but you don’t see what it’s for or know how to explain it? This article clarifies the basics of the Proof-of-Work process used on the Bitcoin blockchain. Moreover, you will also discover the counterpart to Proof-of-Work, the Proof-of-Stake. This latest protocol is likely to be more and more talked about. Don’t move, we explain the differences between the two processes.

Before going into the details of the protocols, it is important to know when they come into play in the blockchain. To put it simply, the blockchain is made up of blocks that contain transactions. To be integrated into the blockchain, each block must be validated or checked.

In the case of a transaction in traditional money, your bank checks that you have the necessary funds when you make a purchase with a card. Once the check is done, the purchase order is placed, and the transaction is complete.

It is exactly the same for blockchains. The only difference (and it is a major one) is that the members of the network of a crypto (Bitcoin, Ethereum, etc.) are the ones who perform this control. For this reason, most crypto currencies are referred to as decentralized currencies, with no third-party organization.

The stage of control or validation of the operation is commonly called “mining”. The people who perform this operation are called “miners”. This step is crucial. The miners are the guarantors of the integrity of the system. Moreover, they ensure the functioning of the blockchain. Indeed, without new blocks mined and integrated, it is the end of the blockchain! That’s all there is to it!

The Proof-of-Work (POW) and Proof-of-Stake (POS) protocols are used during the mining phase of the cryptos. Concretely, they correspond to the consensus algorithm that allows to manage the control of the blocks. To be precise, it is more correct to speak of mining in the case of a POW and of minting or staking for a POS. In fact, the abuse of language is often made and accepted.

Finally, although these are the two most known, it is important to know that there are other consensus algorithms in crypto such as Proof-of-Authority (PoA), proof-of-Capacity, etc.

Proof-of-Work: How does it work?

Principle of Proof-of-Work

The first traces of Proof-of-Work date back to 1993. At that time, a semblance of Proof-of-Work was studied in connection with the management of spam on the Internet. In fact, the real Proof-of-Work as we know it now appeared in 2008 with Satoshi Nakamoto, the creator of Bitcoin. Since then, other cryptos use POW such as Litecoin, Bitcoin Cash, Ethereum 1.0, etc.

In a Proof-of-Work type protocol, a competition takes place between miners when it is necessary to validate a block. To win, a miner must find the “proof” first, i.e., the right hash of the block. In return for the work done, the winner receives a reward directly in crypto (in bitcoins for bitcoin mining for example). This reward allows the creation and circulation of new tokens.

Benefits of Proof-of-Work

Used since the creation of Bitcoin, the POW benefits from a favorable feedback. Over time, it has proven to be effective and meets expectations. The POW has made Bitcoin the most widely used and well-known cryptocurrency in the world today.

With its reward principle, the Proof-of-Work is particularly interesting financially. Many people and companies have quickly understood this and have entered the mining industry. With its high incentive, mining has a bright future ahead of it and with it the cryptos concerned.

Disadvantages of Proof-of-Work

A major disadvantage of POW is that it is an extremely energy intensive process. To do mining, you actually need specific equipment. Also, don’t think that you can do it alone in your room. The increase of miners in the world has led to an increase in the difficulty of mining. In other words, the more time passes, the more powerful equipment is needed to do mining. For this reason, it is not uncommon to see companies with large structures dedicated to mining. Others choose to join forces with other miners to create “pools” to pool their computing power and have a better chance of winning the jackpot. This race for hardware has significant repercussions.

First of all, it gradually transforms the mining industry into an elitist activity, reserved for a few heavyweights. The mining players are becoming more and more powerful but less and less numerous. With “pool mining”, it is easy to imagine that there is a risk that one day a handful of people will take control of the entire network. This is commonly referred to as a “51% attack”. Such a situation would jeopardize the cryptocurrency in question, which would then no longer be decentralized but under the control of a few players.

Finally, another major drawback concerns the environmental cost associated with mining activities. Mining requires significant computing capacity almost continuously. The energy consumed by mining is enormous and represents the energy produced by several nuclear power plants. Of course, the benchmarking done every year by the University of Cambridge shows that 35% of the energy used for mining is of renewable origin. However, in reality, this figure is to be put into perspective and is not an average. At a time when environmental issues can no longer be ignored, the carbon footprint of mining is a real issue for the future.

Proof-of-Stake: What is it?

Principle of Proof-of-Stake

Proof-of-Stake was created in response to the limitations of POW. It is a much newer protocol. The first cryptocurrency to use POW was Peercoin, created in 2012. Since then, SOP has been used by Dash, Stellar, Tezos and soon Ethereum 2.0, among others.

The fundamental difference with the POW concerns who controls the block. As we have seen, in a POW protocol, the “validator” is the miner who wins the competition. In POW, there is a deterministic choice of validator. How does this work? In fact, when there is a block to be validated, each person who wants to validate it puts a certain amount of money at stake. This is money that the chosen minor puts on deposit, so to speak. This money will be given back to him/her when he/she has completed his/her task correctly.

The way of rewarding miners is different for SOP. It does not involve a fixed reward that creates currency. Instead, miners are paid through the transaction fees that are associated.

Advantages of Proof-of-Stake

The big advantage of POS is that it is more resistant to 51% attacks. This is because SOP does not involve competition between miners. The risk of giant pools being created and taking control is therefore lower.

In the absence of competition, the race for hardware is not as prevalent as with POW. In terms of environmental considerations, this makes SOP a much more sustainable and virtuous model than POW.

Finally, another important advantage is that SOP has better scalability, i.e., better speed to handle transactions. Indeed, as explained above, the POW puts miners in competition. Only the work of the winner allows the block to be validated and to move on to the next block. In other words, the work of the other “losing” miners involved in the competition is useless. The POW blockchain therefore moves at the pace of the fastest miner. In the SOP, it is different. Since validators are chosen, this means that there can be several validators working in parallel for different validations. The transaction processing capacity is therefore decoupled.

Disadvantages of Proof-of-Stake

SOP is not without its drawbacks. For example, it can easily generate an elitist system by always choosing the validators who put the most money on the line. The result would be that the same validators would always be chosen and would become richer and richer. Thoughts are in place to avoid this tendency.

In addition, by betting on a validator, the SOP becomes dependent on the success of the validator. But what happens if the validator does not do his job properly? Here again, solutions are being considered, such as establishing a pool of back-up validators.

But the biggest handicap of the SOP at the moment is its poor feedback compared to the POW. This is why the launch of Ethereum 2.0 is highly anticipated by specialists. If Ethereum 2.0 is a success, then the SOP would have a real crypto standard, just like the POW with Bitcoin.

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