CryptoCurrency — “Proof of Work” Vs “Proof of Stake”

Hi All,

Welcome to my first ever blog and this is to explain the “Proof of Work” Vs “Proof of Stake” in the cryptocurrency world. This blog assumes that you have some basic knowledge on bitcoin, blockchain and cryptocurrencies.

Before we go on to “Proof of Work”(will be referred as PoW) and “Proof of Stake”(will be referred as PoS), let us quickly talk about “mining” in Cryptocoins.

What is Mining?

Without going into too many details, we need consensus because anyone can create a block; while we only want an unique chain, so we want a way to decide which block we should trust.

Mining is a process of validating a transaction or block in a network by the process of complex algorithms to prove and validate the correctness of the transaction and thereby add the new block to the chain. You would have heard this term “mining” and “miners” more in bitcoin than altcoins. What does it take to be a miner and do mining?

You need to have high power processor based computers running continuously with the complex mining algorithms.

When a transaction happens in the respective coin’s network(let us say in bitcoin network here for easy understanding), more the computing power and more the computers you have, you may get to validate the transaction faster than other miners in the network and hence may earn a fraction of a bitcoin as a reward.

Anybody who can have the above mentioned hardware and setup, can be miner

There are some alt coins which follow a different consensus process and/or algorithms that is not through the process of “mining” and hence they will be referred as “Not Mineable” coins

Proof of Work(PoW):

Proof of Work (PoW) as the name states is the validation of the work that happened and proving it is correct. Bitcoin and many alt coins follow this way of consensus to make sure the authenticity of the chain is good.

To understand how it works in simple terms, assume that you are in a math exam along with other students in a classroom. The student who can, not only come up with the correct answer but also can come up with the complete proof (steps in math terms) of arriving at the correct answer first gets the reward. As we know this needs the student with lot of brain power which naturally consumes a lot of energy from the body.

Now mapping it to the cryptocurrency world, “math exam” refers to the “transaction”, the “classroom” refers to the “world”, “Student” refers to the “computing hardware/computer” that runs the complex algorithms, “brain power” refers to the “computing power” and the “lot of energy” refers to the “lot of electric power”. I hope it is easier now to understand.

As every concept or approach may have its own benefits and downside, PoW has its own downside as below

· Requires more electric power which in turn costs the miner
· High computing power hardware which is expensive(not if you are a millionaire :) )
· Possibility of miners moving their hardware to mine a different coin if the reward is better there(loyalty)
· With more and more coins(like more count of bitcoins) getting released, miner’s reward would come down as the coin becomes scarce to mine

Proof of Stake(PoS):

Proof of Stake (PoS) is an alternate way of verifying and validating the transaction or block. This will pick the Validator (Equivalent of “miner” in the PoW) by the amount of stake(coins) a validator has and the respective age of the stake. If you have 100,000 alt coins (let us say Nxt coin which use PoS) in a wallet, it will have an age attached to it on how long you have it. Here the 100,000 Nxt coins is the stake. If you move your coins from one address (or wallet) to another the aging gets reset. This amount is like the security deposit which means the Validator holds a significant stake in Nxt coin with good aging is more committed and combined with many other factors, will get a higher chance to validate a block. This allows building a trusted and distributed network with loyal Validators (high stake of coins). The Validators earns the part or whole of the transaction fee. In PoS, it is not “mining” but “forging” which is done by the Validator who will process and forge a block to the chain.

This eliminates the below challenges from PoW and believed to have an advantage

· No need of expensive hardware(a normal laptop or computer running the respective coin’s Validator client will do as long as your laptop or computer is online)
· Energy efficient as it won’t consume high electricity as PoW does
· More loyal Validators …As higher the stake the Validators have for a long time, more chances for the Validator to be picked up for “forging” and earn the transaction fee
· Faster validations

In PoS, each validator owns some stake in the network, Ether in the case of Ethereum, that they bond. Bonding stake means you deposit some money into the network, and in some sense use it as a collateral to vouch for a block. In PoW you know a chain is valid because lots of work is behind it, while in PoS you trust the chain with the highest collateral.

There are much more differences between the various Proof of Stake algorithms that are being developed but I am limiting to what I said so far just to provide a higher level of differnces.

There are currently issues with PoS as well, such as a small group of people owning a majority of tokens/coins will be the Validators but it is still evolving and eventually more solid and robust will be out there at some point in time.

Ethereum is also moving towards PoS with its new “Casper” protocol and you can read more about it in the below link
https://blog.ethereum.org/2015/12/28/understanding-serenity-part-2-casper/

Hope you enjoyed my first blog and find it useful. Please do provide your comments if any.