Blockchain Basics — PoW vs. Pos vs. PoI
Blockchain Technical Series (5 part series — PART 5)
Blockchain technology is disrupting almost every industry for the better. Making work easier, efficiency and security are just but a tip of the iceberg of the many benefits it brings. Besides admiring what Blockchain offers the world, it is important that you understand how it works.
If you have been in the Blockchain and cryptocurrency ecosystem for a while, perhaps you have come across some algorithmic terms such as POW (Proof-of-work), POS (Proof-of-stake) and POI (Proof-of-importance). These are the three primary algorithms through Blockchain operates and are among the decisive factors to consider when deciding whether to invest in a cryptocurrency project or not.
Unfortunately, very few people have taken the time to understand how these concepts work. Some of the critical aspects you should endeavor to understand in Blockchain include speed, applications as well as the consensus algorithms.
In this post, we shall explore everything you need to know about; PoW (Proof-of-work), POS (Proof-of-stake) and POI (Proof-of-importance). So, let’s delve in and explore:
Several coins use this kind of algorithm. Good examples here are Bitcoin, Ethereum, and Dash. Simply put, Proof-of-work is a mining process that requires you, as a user, to install a mining rig or powerful computer to solve complex mathematical problems to create new virtual coins.
So, how does it work?
As a miner, you have to solve complex mathematical problems in search of virtual coins. The complex mathematical problems make the work moderately tricky for you but easy for the network to check. Once you successfully solve several calculations for various transactions, the verified transactions are eventually put together and stored on a new block on a public distributed ledger. Mining verifies the legality of the transaction, and new currency units are created.
As the first miner to solve the problem, you get rewarded with the newly created cryptocurrency unit provided by the protocol. The reward incentive attracts more miners. Subsequently, it increases the computing power on the network, and this causes the average number of calculations required to create a coin to increase. Also, it increases the difficulty level of mining the coins, therefore, making the process harder and costly for an individual miner.
Pros of PoW
• POW provides a platform where decisions on vital changes to be implemented within the Blockchain are made jointly. Here the majority of the votes are from developers, miners and other important members of the community.
Cons of PoW
• There is wastage of both computing power and electricity in generating random assumptions.
• Flooding the market with currencies can lead to the value of the currencies to depreciate.
Following the fact that mining has become slow and costly over time, Pos method has come into play. Unlike PoW that uses the power of the computer, PoS capitalizes on the shortage of the currency. It focuses more on the property of the users, instead of a solution to a challenge,
In other words, Proof-of-Stake is a system that requires you, as a user, to show ownership of a certain number of cryptocurrencies in the Blockchain to create new blocks. Here, instead of miners getting cryptocurrency units as rewards after mining, they mostly get transaction fees as their rewards.
How does it work?
The theory behind this is like in a savings account in a bank. If you have some money saved up in a bank account with time, it will earn interest and the more money on your account, the more you earn on interest.
In PoS, the more coins you have on your wallet or more transactions performed in your wallet, the more you stand to gain. However, to avoid any one person getting control of the coin the process is shared across the network.
This process depends on the size of the network as well the number of people staking the coin. The more people stake the coin, the fewer rewards you get from this process and vice versa.
Pros of PoS
• There is no need for expensive advanced computer equipment
• The whole process is low cost because of low electric bills
• It is a relatively easy process because it requires no challenging equations that need to be solved
Cons of PoS
• PoS offer a platform that contradicts cryptocurrency principle of not having a central authority by allowing those who possess more coins to dictate the changes to be implemented on the platform.
• Also, those who have more are guaranteed a winning streak increasing the gap between the haves and the have not.
• PoS may make the coins lose their core function as a form of payment.
POS is fairly passive and with most coins only requires you to have a wallet and a synchronized Blockchain, and then once a new block is created you get to secure it and get coins awarded to your wallet.
Proof-of-importance is a Blockchain consensus algorithm that considers the overall productivity of users in the network. It was first used by NEM (New Economy Movement) which is a Blockchain technology company aiming to process transactions more efficiently and introduces reputation to the cryptosystem.
How does it work?
This algorithm depends on how much you active on the network. The more active you are as a user, the more rewards you receive. Each user is scored and the higher your score, the more the rewards. This algorithm is designed to reward the very loyal users of the Blockchain. Therefore, encouraging more use of the platform.
The number of coins may swing the votes naturally given that transactions of the large amount may qualify for more transactions. However, the algorithm primarily depends on the activities monitored by each user and not necessarily the amount they transact.
Advantage of PoI
• The rich may not unfairly keep getting richer on the platform because the amount of cash possessed by an individual is not the only factor to consider when measuring the reputation of an account.
Disadvantages of PoI
• One burning issue with this method is the use of dummy transactions which would have people rewarded for sending back and forth transactions to cheat the algorithm. Use of dummy transactions is an issue that NEM and other major players are yet to exhaust.
Currently, the search for an ideal consensus mechanism is still an ongoing process. Because factors such as efficiency, cost and scalability still have room for improvements, therefore, need to be exploited to the maximum.
Such possibilities have created the excitement of what more to expect from Blockchain in the coming months and years. And if you would like to be a part of the great future that Blockchain is expected to present then jumping into the bandwagon of the knowledgeable few in the Blockchain and cryptocurrency field is the next step to take.
Blockchain Technical Series(PART 1): A Simple Guide to the Mining Ecosystem — GPU, Pool, and Merge Mining
Blockchain Technical Series(PART 2): Blockchain Consensus — What You Should Know
Blockchain Technical Series(PART 3): Blockchain Basics — What is Mining (ASIC Mining)
Blockchain Technical Series(PART 4): Blockchain Basics — What is Masternode