What is Proof of Work and Proof of Stake? Explained in Detail
The debate regarding Proof of Work and Proof of Stake is heating up as one of the most popular cryptocurrencies Ethereum is reported to be ditching Proof of Work (PoW) for Proof of Stake (PoS). This begs the question, why were they using Proof of Work in the first place, and what has pushed them to move on to Proof of Stake. In order to understand their reasoning, however, you will first need to understand the basic idea behind these concepts.
The term ‘Proof of Work’ originated back in 1999, and the main goal of this protocol was to protect against cyber attacks like DDOS. When Satoshi Nakamoto came up with Bitcoin, the same concept was applied to this digital currency because he/she wanted bitcoin to be on a trust-less and distributed consensus system.
Trust-less and Distributed Consensus
Trust-less and distributed consensus system does not mean that there’s no trust, quite the opposite actually. The trust-less in this particular definition means that you don’t need to rely on trust-in third party services. Almost all of the traditional transactions involve a third-party these days. You either have to go through banks, use PayPal, or credit cards. Every transaction that you do is kept in a third party ledger.
Nakamoto didn’t want the same thing to happen with Bitcoin, so he/she took an entirely different approach. He/she removed the third party altogether and instead made an open source ledger called Blockchain. All of the transactions that happen through this system are open and anyone can directly verify them. These bundled transactions are called blocks and they are all available on blockchain. After a transaction successfully occurs, it needs to be verified for legitimacy purposes. However, instead of banks or PayPal verifying the transactions, this task is done by miners. And this is where Proof of Work and Proof of Stake systems come into play.
Proof of Work
Under Proof of Work, mining works like a competition. Miners from all over the globe try to verify the transactions inside a Candidate Block. A Candidate Block can be defined as “a temporary block using transactions from the memory pool.” And Memory Pool is a place where transactions are temporarily stored.
To complete the mining process and prove its legitimacy, they have to solve the encrypted mathematical puzzles. In this race, the first one to solve the puzzle receives the amount of transacted currency as a reward. After successfully verifying a transaction, the users send that information to the blockchain. This serves as an indication that a certain transaction has been solved. Other people see it as being done, and move on to verify other blocks.
It may seem like an easy way to make money, as you are just sitting at your home letting your computer do everything for you, but it really isn’t. You need the absolute best of computer with latest chipsets and graphics cards to solve the mathematical puzzles before anyone else. These computers plus the hardware required for the process are priced at an extremely high price and have a very short life-span because they are being pushed to their absolute limit with each transaction.
It also incurs a lot of electricity cost. Certain reports state that by 2020 the process of verifying a single transaction will consume as much electricity as the entirety of Denmark. A lot of people and currencies are worried about Proof of work for this very reason. The hardware price and electricity cost are increasing, while the profit margins are decreasing. This is putting off a lot of miners, and it might be one of the main reasons why Ethereum is making a shift towards Proof of Stake.
Proof of Stake
Proof of Stake is an entirely different system. Although the end objective is the same, the way it is achieved however, is entirely different. In Proof of Work, you don’t necessarily have to own a stake in any currency to do the mining. However, in Proof of Stake, the creator of block called Forger (PoS version of Miner) is selected in accordance to the number of stakes they have in a particular currency. The higher the number, the higher your chances are of generating a block. As an example, we can say that a person with 5000 Cordano (OmiseGo’s currency) will be more likely to create a candidate block, than a user with 3000 Cordano.
Forgers don’t get block rewards for their effort instead they just receive a certain fee for validating a transaction. Furthermore, a forger is not allowed to legitimize transactions that go beyond their investment in a particular currency. For example, if someone owns 1% of the total Cordano in rotation, then they will only be able to verify 1% of the transactions.
The Proof of Stake supporters argue that this is a better method as it keeps things from spiraling out of control. There’s no competition or race, so market pricing aren’t affected in any way. Moreover, it resolves the electricity issue, which is getting worse with each passing day. Another positive is that it keeps the network safe from attacks as forgers have direct stake in the currency. They wouldn’t plan to hack the network where their own stake is involved.
The top digital currencies were making use of Proof of Work system, which stopped people from paying attention to Proof of Stake. However, Ethereum’s alleged push to PoS has changed the dynamic altogether. It is still too early to say how things will go in the future, but Ethereum’s shift to PoS will certainly open doors for other coins.