Nothing lasts forever, and in the world of a continually growing technology, this saying achieved an entirely new meaning.
Without a doubt, cryptocurrency is the most rebellious offspring of the technological revolution. Shaping the new landscape of the financial industry.
Yet, most digital currencies have been practising the same traditional way of validating transactions (otherwise known as a proof-of-work), without significant changes.
With time, proof-of-work became unaffordable due to high electricity costs. Hence there was a requirement for a new system – proof-of-stake. It not only lessens the costs but also increases the network’s security level.
In the battle between proof-of-work vs. proof-of-stake, none has become a winner yet. The two most important crypto coins – Bitcoin and Ethereum – are using different algorithms and no consensus has been reached yet.
So it possible to choose which one is better and more efficient? If yes, then why haven’t all networks moved to only of them yet?
What is Proof of Work?
The Proof of work idea was first published by Cyntia Dwork and Moni Naor in 1993. In 2008 Satoshi Nakamoto applies this technique to his digital currency revolutionizing the way traditional transactions are set.
[Tweet “The Proof of work idea was first published by Cyntia Dwork and Moni Naor in 1993.”]
In order to validate the transaction and insert a block into a blockchain, a miner has to give an answer, or a proof, to a particular challenge – otherwise known as a proof-of-work.
The puzzle is a complex mathematical algorithm which difficulty rises or decreases depending on the solving time. The transaction should be resolved in a few minutes and miners should never exceed that time frame.
In the realm of cryptocurrencies, PoW is the most popular protocol.
Miners use PoW to validate transactions and mining new coins, but its main goal is to block potential cyber-attacks or suspicious actions within the network.
PoW has one significant disadvantage though – it’s an expensive and intensive process. Using PoW, protocol raises the mining difficulty with time. It results in financial implications as miners have to spend in more robust hardware to complete transactions.
Faster and stronger computers need a significant amount of energy to generate coins. Those powerful gaming machines – ASICs – also cost a large sum of money. Therefore, mining with the use of PoW became reserved for those who can afford heavy equipment in a large quantity.
Disregarding the cost, PoW has one significant advantage – it allows trustless and distributed consensus.
What Is Trustless and Distributed Consensus?
The trustless and distributed consensus goes back to one of the cryptocurrencies’ characteristics – decentralization. The consensus allows sending and receiving money without having to trust in third-party services.
Instead of using traditional bank transfers, Visa, Mastercard, etc., individuals can send funds directly between each other. The ledger is automatically updated with the transactions’ history and the account balances. Everyone has a copy of the ledger (blockchain), hence the risk of fraud or theft is minuscule.
What Is Proof-of-Stake (PoS)?
PoS is still an algorithm, but it’s another method to authenticate transactions – the goal is the same, but the process of reaching there is different. The Proof Of Stake concept was first suggested in the BitcoinForum in 2011.
Unlike the PoW, were solving an algorithm rewards miners with new crypto coins, PoS picks a new block creator in a pseudo-random way – depending on its wealth (stake). Because there are no block rewards, miners only get the transaction fees.
This is why, PoS system miners are called forgers, rather of miners. Same way, mining is called minting.
Once a user has a balance in their wallet, they require to keep the wallet open and attached to the internet to gain stake rewards. People who own a significant amount of the total coin supply will earn more stakes. So the more you invest, the more you earn.
Proof Of Work Vs Proof Of Stake: Which one is Better?
Infographic Source: https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/
It is the first question every cryptocurrency enthusiasts appears to be asking. Using a PoW cuts out potential attacks, thanks to technological advancements and financial obstacles. Programming an attack can be very costly, and most of the time it takes more than one would be able to steal.
PoS, however, is cheaper to attack but whoever would try to do it, would be sabotaging itself.
One of the solutions can be the Casper protocol, designed by Vitalik Buterin.
Without getting into too many details – Casper is here to collect deposits from the network’s participants. If someone violates the rules, Casper will take the deposit, and the person will be removed from the network.
Could this be a perfect solution then? Perhaps, but it would eliminate mining from the equation.
There shouldn’t be a decision between proof-of-work vs. proof-of-stake. Fusing the best from two worlds might be just what the cryptocurrency universe needs.
We previously know that none of those two methods is perfect on their own. Connecting them will provide an incentive for miners to hold their mined coin and will reduce the risks from both ends.
What are your opinions on both protocols? Let us know in the comment section below if you have anything to add or come across any interesting ideas!
Recommended Read: The 8 Essential Factors for Choosing a Software Development Company