Starting out in the Crypto-verse, the number of complicated definitions can be overwhelming. This article is a comprehensive beginner’s guide to proof of work and proof of stake.
A functional blockchain is based on a network of computers located around the world. For a blockchain to function, the entire computer network has to agree on the contents of a blockchain, and this is something that the consensus mechanism does. The consensus mechanism verifies that the information added to the blockchain is valid, i.e., the network is in consensus.
There have been many blockchain consensus mechanisms, each of them having it pros and cons. However, the most popular ones are Proof of Work (PoW) and Proof of Stake (PoS). Let’s start with some basic definitions!
The term ‘proof of work’ was coined by Markus Jakobsson and Ari Juels in a document published in 1999, although the idea was first made known to the general public back in 1993.
As a protocol, Proof of Work was developed long before Bitcoin. Satoshi Nakamoto, the creator of Bitcoin, whose true identity remains unknown to this day, applied this protocol to the concept of digital currency.
Proof of Work is a definite prerequisite for mining, which is a complex mathematical calculation. This calculation needs to be performed to create a new block on a blockchain.
Proof of Work is used not only on the Bitcoin blockchain, but also on many other blockchains. Depending on the blockchain, the Proof of Work systems can be different, designed with specific technical data.
A number of transactions are bundled into a memory pool, or mempool. Users who perform mining, or miners, verify each of the transactions in the mempool to ensure that all of them are legitimate. This is done by solving a complex mathematical puzzle.
The first miner to solve this puzzle gets a block reward – a newly created coin and network transaction fees.
The completely verified mempool, called a block, is attached to the blockchain.
Ethereum developers (and others) want to move a new consensus mechanism forward, a system called Proof of Stake.
The idea of Proof of Stake first emerged in 2011. As we found out previously, Proof of Work is needed to validate transactions and create new blocks on a blockchain. This is also the case with PoS, but the process is quite different.
With Proof of Stake, there is no mathematical puzzle, instead, the creator of a new block is chosen in a deterministic way based on their stake. The stake is how many coins one has. The chance of becoming a block validator with PoS is proportional to one’s wealth. For example, if one person’s stake is 50 coins and the other one’s, 500, the latter is much more likely to be chosen as the validator of the next block in the chain.
One of the main differences between PoW/PoS is that with Proof of Stake, there is no new coin creation, or mining. All coins are created in the beginning, which means the miners must be fully rewarded through transaction fees.
Let’s compare the PoW and PoS systems in more detail…
As the PoS systems are newer, they have been designed to be more cost-efficient and more energy-saving than the PoW systems focussed on mining.
To think about it, a ridiculous amount of power is needed to operate a PoW system, which also becomes costly. As the PoS systems require no mining, they consume just a fraction of energy.
In principle, the question of security remains open. The PoW systems are older and have been tested continuously, which allows to make more certain conclusions, whereas the PoS systems still have a long way to go in terms of testing.
The problem here is that the PoW systems have the bigger risk of becoming centralized. As mentioned before, Proof of Work enables mining, which means that control is gradually moving from the community into the hands of certain individuals who are willing and capable of mining, contrary to the decentralized PoS, where one’s stake is the key.
To sum it up, a properly functioning consensus mechanism is necessary in order to maintain the efficient, secure, and decentralized nature of any blockchain network.
If you found this article useful, don’t miss other articles for beginners in our blog!
See you on Wednesday!
The CoinMetro Team