An Introduction to Proof of Work and Proof of Stake

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Proof of Work and Proof of Stake

In the cryptocurrency world, network validation often comes in one of two forms: proof-of-work or proof-of-stake; both of which aim to solve the issue of verifying transactions and solving them using unique methods. However, both offer different solutions to the ongoing debate over scaling. Does one have a true advantage over the other, or are they just different philosophies? We’ll take a look at both.

Proof of Work

Most people have probably heard of Bitcoin (BTC) “miners”. Miners work competitively to solve complex math problems in order to secure transactions on the network.

Miners use powerful processors in order to validate each block on the chain with elaborate cryptographic functions, ensuring that invalid transactions, such as double-spends where someone spends the same money twice, are removed. Using the distributed consensus, other miners and nodes on the network “agree” to the validity of transactions made. This process is known as proof-of-work or PoW. Proof of Work is based on an advanced form of mathematics called ‘cryptography’, which is why digital coins like Bitcoin and Ethereum and called ‘cryptocurrencies’. Cryptography uses mathematical equations that are so difficult that only powerful computers can solve them. No equation is ever the same, meaning that once it is solved, the network knows that the transaction is authentic.

Lots of other blockchains copied the original Bitcoin code and as such, also use the Proof of Work model. Although Proof of Work is an amazing invention, it is anything but perfect. Not only does it need significant amounts of electricity, but it is also very limited in the number of transactions it can process at the same time.

This has led to transaction fees increasing significantly from when the project first started in 2009. Although these fees have since been reduced, they are still too high to make it suitable as a global payment system. Most of these issues are mainly due to the limits of Proof of Work.

Proof of Stake

As a result of the limitations arising from the Proof of Work model, other consensus mechanisms have been created, with one of the most popular being the Proof of Stake model. Proof of Stake was first created in 2012 by two developers called Scott Nadal and Sunny King.

Proof-of-stake, or PoS, gets rid of miners altogether and instead has “validators.” Validators don’t use processing power to secure blocks, instead they literally “stake” their funds on the blocks that they believe are valid. A validator can generally be anyone willing to stake coins on the network, and an algorithm determines which validators will be chosen for each block. As such, the benefits of the Proof of Stake model include a fairer and more equal mining system, allowing more scalable transactions and less reliance on electricity.

PoW Adoption vs. PoS Adoption

The most obvious starting point is to discuss the original adopter of Proof of Work, which is the Bitcoin blockchain. Every time a transaction is sent, it takes about 10 minutes for the network to confirm it. Furthermore, the Bitcoin blockchain can only handle about 7 transactions per second.

This has led to transaction fees increasing significantly from when the project first started in 2009. For example, Bitcoin fees initially cost a very small fraction of a cent, which made the network useful for transferring small amounts. However, as you will see from the chart below, this increased to as much as $40 per transaction during its busiest period in December 2017.

The second most popular cryptocurrency in the world, Ethereum also uses Proof of Work. Interestingly, the developers made a few changes to the original code, which allowed the network to process transactions in just 16 seconds. Although this isn’t the fastest in the industry, it is significantly quicker than the 10 minutes it takes Bitcoin.

Nevertheless, the scalability issues that Proof of Work has caused Bitcoin is also a problem for Ethereum. The maximum amount of transactions that the Ethereum blockchain can process is 15, which again, is substantially lower than the network needs. However, although the Ethereum Proof of Stake date isn’t yet official, it is hoped that it will increase this number to thousands per second.

Just like Ethereum, other blockchains sometimes use a variation of Proof of Work by changing the type of algorithm which supports the transaction validation process. Other popular blockchains that have installed Proof of Work include Bitcoin Cash and Litecoin.

On the other hand, some really popular cryptocurrencies now use Proof of Stake. One of these is Dash, which allows users to send and receive funds in just a couple of seconds.

Still a lot of work to do

The reality could be that there isn’t just one correct solution for scaling. Each project may need to look at how it is being used and ask what path or paths are best for it. Not to mention new strategies and technologies are constantly emerging that could shake up the whole game at any time. While all of the ideas here show immense promise, the book is still not yet written on how to scale blockchains. Likely a combination of many of these ideas and more will ultimately shape how cryptocurrency reaches a mass audience, but the problem needs to be solved before it does. Otherwise, it is possible that a centralized, permissioned chain will be the only kind that is accessible to a global population.

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