Proof-of-Work and Proof-of-Stake algorithms

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Proof-of-Work and Proof-of-Stake (PoW and PoS) are the main algorithms used in cryptocurrency blockchains. They are used to add new records/transactions safely.

Bitcoin technology

What is Proof-of-Work (PoW)?

Proof-of-Work literally means “proof of work”. Initially, this algorithm was developed to protect against DDoS and similar spam attacks, that is from those cases when the network is deliberately trying to disable a huge number of requests.

For such protection, each participant in the network must solve a complex mathematical/cryptography problem, and the correctness of the answer can be easily checked.

For example, you have a combination lock with a 3-digit code. To find the right combination will take some time, but we will quickly identify the right code and open the lock. Problems for the PoW algorithm are also solved by selection, but they are much more complicated and require large computing power.

History of the Proof-of-Work

The idea of the Proof-of-Work algorithm was formulated in the early 90s as a model of protection against spam e-mail. Cynthia Dwork and Moni Naor, who worked in the IBM Research Department at the time, shared the idea.

A working system based on this idea was created by Adam Beck in 1997 in his project HashCash. The project was also aimed at combating spam, but already then used cryptography methods that are now used in the Bitcoin blockchain. Beck is the creator of PoW, as Satoshi Nakamoto in his whitepaper refers to his work.

Application of Proof-of-Work in cryptocurrencies. Mining

Mining is the process of creating new transaction blocks and adding them to the blockchain. The set of rules that check the correctness of the mining process is the PoW consensus algorithm. The mining process itself includes the search for a new block solution satisfying the conditions (Proof-of-Work of the bitcoin network is based on the SHA-256 hashing algorithm). Finding such a solution (hash) requires a lot of computing power, and the complexity of the network is not constant – it changes and adapts. The miner who first finds the correct solution receives a reward in the form of new, newly created coins, as well as commissions for transactions. In such a system, those who have large computer capacities are more likely to find the right solution, so miners are constantly increasing them, working together in mining pools, and the complexity of the network is constantly growing.

Disadvantages of the PoW algorithm

The PoW algorithm has a number of disadvantages:

  • mining with Proof-of-Work algorithm requires huge and ever-increasing costs as energy costs for network operation and purchase of new equipment. Mining in the largest blockchains is comparable in energy costs with the consumption of some countries.
  • the calculations in the Bitcoin network that must be performed to determine the correct hash do not carry any other payload. Some cryptocurrencies use mining in their network to solve certain mathematical problems, but such solutions are not yet used on a large scale.

51% Attack

In the early stages of the existence of any cryptocurrency with the PoW algorithm, the network becomes vulnerable to the so-called “51% attack.” If more than half of all computing power in the network (>51%) is in the same hands, then such a miner has the opportunity to confirm only his blocks, without allowing anyone else`s.  He will receive 100% of all new Bitcoins produced as well as block any transactions. In addition, the attacker can rewrite the entire history of generating blocks, starting from a certain point in the past, taking all coins by himself. At the moment, a 51% attack on the Bitcoin network is very expensive, and also does not make sense, since it will bring down the entire crypto market. However, some younger blockchains have already experienced such attacks.

Proof-of-Stake. Who made it and how does it differ from Proof-of-Work?

bitcoin technology

The second most popular consensus algorithm used in cryptocurrency blockchains is Proof -of-Stake (PoS). A very similar idea of monetary policy was declared by Wei Dai in his b-money currency in the late 90s. Some of Dai’s other developments were then used by Satoshi Nakamoto when developing Bitcoin. Description of the PoS algorithm in the form, in which it is known now, was published by the QuantumMechanic user on the infamous bitcointalk forum in 2011. A year later, in 2012, the Peercoin cryptocurrency network was launched and worked on this algorithm.

The key difference from PoW is the principle of creating a new block in the blockchain. If the owner of larger computing power has an advantage in PoW, whereas in PoS, the probability of mining a crypto asset depends on the share of coins (stake) that belongs to the network participant. For example, someone who owns 5% of all coins will create about 5% of new blocks. The method of mining cryptocurrency assets using the Proof-of-Stake algorithm is called forging or minting.

Pros and cons of PoS

The PoS algorithm solves some PoW problems.

For example, network maintenance requires much fewer resources because PoS does not use huge computing power. There is absolutely no problem of 51% Attack because to fulfill such an attack you need to possess more than half of all coins. That makes the attacker the largest participant in the network and the most uninterested in the inevitable fall of the exchange rate in the case of aggressive manipulation.

On the other hand, such mechanics provoke the desire of the network to centralize – the rich members are getting richer. That can result in centralized control of the network by one or more participants.

Future of Proof-of-Work and Proof-of-Stake

At the moment, the vast majority of blockchains use the PoW algorithm, but there are also more and more PoS supporters. And given the rapid dynamics of the development of the crypto market, the situation can change dramatically in a relatively short period of time. Some cryptocurrencies (such as DASH) already use a hybrid consensus algorithm-Proof-of-Activity. At the moment, there is a transition from the PoW algorithm to PoS in the Ethereum network, which can become a significant event in the world of cryptocurrencies.

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