Blockchain 101: Proof of Work vs Proof of Stake
Getting a bunch of strangers to play custodian to certain financial values is difficult enough. Getting them to constantly maintain the status quo over these values without the human factor porting some into a parallel dimension is often a tall order. This is all the more disconcerting when every human action, or otherwise, is inextricably tied to a price and this price may run the whole gamut from greenbacks to matryoshka dolls.
Yet, true ownership and transfer of financial values need at least a witness to establish the truth of the event. The more the witnesses, the more certain the truth presented is. The further removed one witness is from the other, the more unquestionable the truth presented becomes. And if the independence of each witness can be established during every attestation, the immutability of this truth is established.
Utopia? No, it is. This is simply the crux of blockchain technology.
Welcome Humans
To consider any event as true, its consistency and constituent must remain the same to its observer. However, if an entity — or group of entity — controls the event and observation, the truth may wound up giving the fickleness of the wind a run for its money.
So, how does the blockchain establish immutable truth? The first solution is to not leave humans at the helm of affairs, while still leaving them to helm the affair.
Confusing? Let’s start by simplifying what a blockchain is.
Blockchain is an open and transparent ledger where every value exchange and ownership can be publicly audited. This ledger is not owned by anybody, rather, a copy is kept in the device of every user utilizing the network (also known as nodes). The technology also ensures that:
- All actors on the network are treated equally and independently
- All actors are incentivized to maintain the network’s integrity.
- All actors have something at stake to prevent them from gaming the system
- The cost of gaming the system is prohibitively high enough to deter any single entity from seizing control and checks must be in place to prevent collusion.
An inbuilt consensus system ensures that all records are in sync. If there are conflicting accounts, it queries all the nodes and applies the data agreed upon by at least 51% of the nodes.
With no human at the helm of affairs, while leaving humans to helm the affair by running nodes based on clearly defined algorithms, blockchain is redefining how we trust without needing to know the other party from Adam.
But just how does this system achieve consensus without a powdered wig insight?
Sir, You’re Making a Scene
Underpinning every blockchain is a consensus system ensuring that every transaction is verified and the network is in agreement with itself. This is all the more vital when dealing with nodes whose fingers are literally equal and a system that makes every account holder their own bank.
To break it down into a simple analogy, the consensus ensures that Bob’s account not only contains the amount he wants to send to Alice, but also debiting the amount from his account, crediting Alice’s account, and the broadcast of the new account balances. This prevents Bob from coming back to spend the amount he has already spent. Even if he runs an older database containing his previous balance (contending against the current value on the network), all the system has to do is have the nodes declare the values in their ledger and in a truly democratic fashion, not only tell the erring node its laces were untied, but also lace it up.
The Proof is in the Pudding
Currently, the two most predominant consensus systems are Proof-of-Work (PoW) and Proof-of-Stake (PoS). With PoW, the system generates complex math puzzles for the verification of transactions that have been locked into “blocks”. Solving these puzzles unlocks the content of the block, allowing it to be written and stored on the blockchain while rewarding the node that solved the puzzle in the blockchain’s native asset. However, only the first node to solve this puzzle is rewarded. By rewarding only the first to solve, nodes have no choice but to compete against each other, while their owners will do whatever possible to optimize the performance of their hardware.
Gaming a PoW network is prohibitively expensive. An attacker will have to find a way to control 51% of the working nodes on the network at any given time. Given the demanding computation that goes into unlocking blocks and the specific hardware requirement, the overhead for maintaining one, let alone whatever makes up 51% of the network, is enough to put off any attackers. However, this protection has now become the biggest problem facing PoW blockchains.
Allocating the computational resources of hundreds of systems to solve a single puzzle and only rewarding a single system is an excessive waste of resources. Given their specific hardware cost, inordinate energy generation and cooling requirement, it’s not unusual to find most crypto enthusiasts priced out of participating in the network consensus.
If PoW is Speedy Gonzales for nodes, PoS is Slowpoke Rodriguez — no puzzle to solve, no nodes outrunning themselves to punch the ticket, no pricey hardware, no energy waste. Node operators are simply required to put their money where their mouth is by locking up the asset they own on the network in order to be randomly chosen to validate transactions. Some PoS blockchain will also require the coins to be in the operator’s wallet for an amount of time before they start yielding reward.
To attack this network, an attacker will need to control 51% of the total coin supply. Depending on the maturity of the network and market cap of the asset, this attack could just be as expensive as a PoW. Let assume that an attacker manages to accumulate 51% of the total supply. The attacker will have to stake this supply to attack the network, which is the same as shooting yourself in the foot because with 51% ownership, they own the network.
By giving operators skin in the game without the energy waste and costly hardware, PoS blockchain is ushering new levels of accessibility into one of the core pillars of the 4th industrial revolution.
The more the witnesses, the more certain the truth presented is. And this where Concordium finds its roots, its inspiration, and its vision!
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