If you are into cryptocurrencies, then you must have heard about “proof of work” and “proof of stake” algorithms. Today in this article we will inform you about these two models that are driving the cryptocurrencies. We will also acquaint you with the various differences between the two models, their advantages and disadvantages, and why cryptocurrencies have slowly started switching to “proof of stake” model from “proof of Work” model.
What Is Proof of Work (PoW)
Proof of work, in simpler terms, is a proof that a user has done some amount of work in acquiring a cryptocurrency. This work is done actually through computing machines (computers), so proof of work is also called CPU Cost Function.
The proof of work model has been introduced to ensure that the cryptocurrencies are not counterfeited or hacked. It is a safety mechanism to prove that the cryptos possessed by a person have not been acquired by means of counterfeiting or hacking, but by means of legitimate efforts.
Proof of work is used by the Blockchain in validating the crypto currency possessions (Account Balances) and transactions. Since block chain is a decentralised ledger, therefore Proof of work acts as a decentralised consensus mechanism.
How “Proof of Work” Protocol Works ?
To understand the working of “proof of work”, we have to understand what “mining of cryptocurrency” means. The cryptocurrency mining means the process of creation of cryptocurrency by way of solving computational puzzles. During mining of cryptocurrency,especially Bitcoin, lakhs of computers called Rigs, are at work and in competition with each other, to mint it.
The puzzles are solved by way of guessing and the computer that solves the puzzle is said to have created a Block for the block chain. So, the successful computer has created a block and has proof of work. Therefore, the users on the blockchain will have no problem in validating and adding the Block to the Blockchain. As an incentive for creation of a legitimate block, It is awarded a certain amount of Bitcoin (called Mining Reward). In this way it acquires cryptos by putting a lot of computational effort.
Advantages of Proof of Work.
Proof of work is a fragmented consensus mechanism aimed at deterring the adversaries from fiddling with the Blockchain and fudging with cryptocurrencies. The other advantages are discussed below in detail:
- Security: The “proof of work” model has rendered the cryptocurrencies almost hack proof. In order to fiddle with, alter or reverse any transaction, the consensus of majority of the users is required. This almost-impossible “majority approval mechanism” ensures the security and transparency in the crypto world.
- Neutrality: In “Proof of Work” model, a user on a decentralised network does not need to have any possession of cryptocurrencies, in order to be able to make decisions about the validity of transaction occuring across the network.
- Democractic Nature: The “Proof of work” model infuses democractic character in the cryptocurrency. A user with little or no cryptocurrency has an equal say as that of a person with a large amounts of it.
- Reliability: The “Proof of Work” model is a tried and tested algorithm and has secured Blockchains from adversaries for years now.
The advantages discussed above might compell you to think that all is “wow” about the “Proof of Work” model, but it is not so. Lets discuss its disadvantages now.
Disadvantages of Proof of Work.
The main disadvantages of “proof of Work” algorithm are as under:
- Energy In-effeciency: The “Proof of Work” model uses a lot of energy and is therefore detrimental for environment. Bitcoin (based on proof of work model) mining uses as much energy as would be required by the country of Portugal for more than a year.
- Non Eco-friendly: This decentralised consensus mechanism is disastrous for environment. For instance, Bitcoin mining leads to the emission of 27.96 Million metric tonnes of Carbon dioxide into the air. Apart from this, tonnes of electronic waste is generated each year from the computing machines employed for crypto-mining.
- Costly Venture: The mining based on proof of work model, needs high end special computing machines. Therefore, it is a very costly affair.
- 51% Attack: There is every likelihood that at the fag end of the “proof of Work” based crypto mining, some mining cartel may manage to control 51% of the users and then start fiddling with the block chain. It may manipulate the blockchain the way it wants, and create new blocks in its name and invalidate the blocks in the name of others.
So, these were some disadvantages associated with the “proof of Work” model and owing to these, some cryptocurrency companies, especially Ethereum, are planning to make a shift to “Proof of Stake” model
What Is Proof Of Stake
This is also a decentralised consensus mechanism aimed at reducing the in-effeciencies of “proof of work’ model, especially the amount of energy and computational resources employed in crypto mining. This protocol was introduced in 2011 and it is based on the concept of “verifiable Stake” of a user. It eliminates the competition for the right to add a new block among the miners as prevalent in “proof of Work” model.
In this decentralised model, the users who have more cryptocurrency have the more power to mine and validate transactions than the others, and vice versa. In other words, the users who have more stake in cryptocurrency have more adminstrative control over the Blockchain than the others.
In Proof of stake model, whenever any transaction occurs, it must be validated by the users having at least some stake in the cryptocurrency as against the proof of work model, where validation by 51% users (irrespective of their holdings) is necessary.
How Proof of Stake Works
Whenever any transaction occurs, its data is stored in a block. This transaction has no meaning at all unless it is validated. For its validation, the block must be linked to the Blockchain.
To judge which blocks should be added, a network of users is created. This network consists of only such users, who have some cryptocurrency and have put that at stake in lieu of the control over the Blockchain. Such a group of users are called Validator Nodes. Their cryptos are at stake, because if the users validate wrong transaction, they will lose their ownership as a penalty. It is a sort of “stake money”.
Now the user, who has put more cryptocurrency at stake has more powers on the Blockchain and vice-versa. Whenever any transaction is to be verified, a validator node will be selected randomly, based on the following criteria:
- The stake: the nodes having more stake are likely to have more chances of being called to validate a transaction. It is so, because the nodes that have more stake will act more responsibly as they will not like to lose their stake.
- Idle age: the nodes that have been idle for a long time are more likely to be called to validate a transaction. After validation, their age will be reset to zero.
If the validator node attests to a transaction, it is added to the blockchain. Whenever a validator node validates any legitimate transaction, it will recieve a transaction fee, and in the opposite case, a penalty.
Advantages Of Proof of Stake
The “proof of stake” model was born at “bitcoin talk forums” in 2011 as an alternative consensus mechanism to overcome the disadvantages of “proof of work” model. Now let’s look at the advantages of “proof of stake” model;
- Eco-friendly: The cryptocurrencies running on “Proof of Stake” model do not involve competitive mining and large number of computing machines. Hence, very little amount of energy is consumed and less amounts of e-wastes are produced.
- No Requirement of high end computing machines: Since proof of stake algorithm does not involve competitive mining, therefore there is no need of high end computing machines and setting up of mining pools.
- Cheap and fast: Proof of stake algorithm allows the cryptocurrency transactions to be fast and inexpensive, as it does not involve competitive mining. This cheapness and fastness favours scalibility.
- No centralisation: Proof of stake eliminates centralisation by favouring large number of nodes to join the network ( due to freedom form buying high-end-machines and spending huge amounts on energy consumption). In cryptocurrencies involving “proof of work”, the miners start grouping themselves into mining farms, which inturn kills the very concept of decentralisation.
Disadvantages of Proof of Stake
The disadvantages of “proof of stake’ model are discussed below:
- Favours Rich: Since “Proof of stake” algorith works on the principle that more stake a person has, the more control he has over the blockchain. Since Rich people can afford staking more amount than the others, therefore “proof of stake’ can become “rich man’s paradise’.
- Security Concerns: The blockchains running on “proof of stake” algorithm are not as secure as the ones operating on “proof of work” algorithm.
A question might have popped up in your mind. What if a person accrues 51% stake and fiddles with the blockchain? This has been taken care of as the transaction fee is always kept below the stake a user holds. In addition, why would a person having 51% stake in a venture fiddle with it. It would be like ” a dog biting his own tail”.