What Is Proof Of Work ?
The Idea Was First Introduced In 1993 To Combat Spam Emails And Was Formally Called “Proof-Of-Work”.
However, The Technique Went Largely Unused Until Satoshi Nakamoto Created Bitcoin In 2009.
He Realized That This Mechanism Could Be Used To Reach Consensus Between Many Nodes To Secure The Bitcoin Blockchain.
The Proof-Of-Work Is A Consensus Algorithm Used In Bitcoin To Confirm The Transactions And To Add A New Block To The Blockchain.
How Does Proof Of Work Works ?
Proof Of Work Algorithm Works By Having All Nodes to Solve A Cryptographic Puzzle.
Whenever The New Transactions Are Done In The Network, The Miners Have To Solve A Cryptographic Puzzle To Validate The Transactions And A New Block Is Created Which Includes The Recently Concluded Transactions And Then Added To The Blockchain.
It’s A Race Between The Miners Because The First One To Find The Solution Gets The Miner Reward.
Problems With Proof Of Work ?
- This Has Led To a situation where People Are Building Larger And Larger Mining Farms. Because The More They Have The Computational Power The Higher The Chances To solve The Cryptographic Puzzle.
In A Report Published By Galaxy Digital And Confirmed By the International Energy Agency ( IEA ), The Annual Electricity Consumption Of the Bitcoin Network Stood At 113.89 TWH/Year. This Is Very Huge And This Is Not At Good For Our Environment.
- But It Doesn’t Stop There Proof-Of-Work Gives More Rewards To People With Better Mining Equipment.
- The Higher The Hash Rate, The Higher The Chance That You Will Get To Create The Next Block. As A Result Receiving The Mining Reward.
- To Increase The Chances Even further, Miners Have Come Together And This Is Called Mining Pools.
- They Combine Their Hashing Power And Distribute The Reward Evenly Across Everyone In The Pool.
- Proof-Of-Work Is Causing Miners To Use Massive Amounts Of Energy And It Encourages The Use Of Mining Pools Which Makes The Blockchain More Centralized As Opposed To Decentralization.
These Pools Now Control Large Portions Of The Bitcoin Blockchain, Moreover, They Are Centralizing The Mining Process And That’s Dangerous.
If The Four Biggest Mining Pools Would Merge, They would Have The Major Stake ( If Anyone Have More Then 50% Stake In A Network They Can Control The Blockchain. This Is Called 51% Attack ) In The Network And Could Start Approving Fraudulent Transactions.
What Is Proof Of Stake ?
In 2011 A Bitcoin Talk Forum User Called Quantum Mechanic Proposed A Technique That He Called Proof-Of-Stake.
The Basic Idea Is That Letting everyone Compete Against Each Other With Mining Is Wasteful, So Instead Proof Of Stake Uses An Election Process In which One Node Is Randomly Chosen To Validate The Next Block.
Proof Of Stake Has No Miners But Instead Has “Validators” And It Doesn’t Let People “Mine” Blocks. But Instead “Mint” Or “Forge” Blocks.
Validators aren’t Chosen Completely Randomly.
To Become A Validator, A Node Has To Deposit A Certain Amount Of Coins Into The Network As A Stake. In Other Words, You Can Think Of This As A Security Deposit.
The Size Of The Stake and Some Other Features Like How Long The Coins Have Been Staked For And Randomization Determines The Chances Of A Validator To Be chosen To Forge The Next Block.
Some Coins That Presently Uses Proof Of Stake Are TEZOS, COSMOS, TRON, CARDANO. However, Each Coin Has Different Rules As To How It Calculate And Distributes Rewards.
How Does Proof Of Stake Works ?
In Proof Of Stake, If A Node Is Chosen To Validate The Next Block, Firstly The Node Will Check If All The Transactions Within It Are Valid Or Not.
If Everything Checks Out, The Node Adds The Block To the Blockchain. As A Result, The Node Receives The Fees That Are Associated With Each Transaction.
You Might Have A Question How Can We Trust Other Validators On The Network?
Well, That’s where The Stake Comes In, Validators Will Lose A Part Of Their Stake If They Approve Fraudulent Transactions.
If A Node Stops Being A Validator, His Stake Plus All The Transaction Fees That He Got Will Be Released After A Certain period, Not Straight Away. Because The Network Still Needs To Be able To Punish The Validator, If The Network Discovers That Some Of The Blocks Were Fraudulent.
Proof Of Work vs Proof Of Stake : What’s the Difference ?
Proof Of Work :
- The Nodes Are Called Miners.
- Moreover Mining Capacity Depends On Computational Power Or Mining Equipment.
- Mining Produces New Coins As A Result.
- Miners Receive Block Rewards.
- Massive Energy Consumption
- Significantly Prone To 51% attack.
Proof Of Stake:
- Nodes Are Called Validators Or Forgers.
- Validating Capacity Depends On The Stake In The Network.
- No New coins Are Formed.
- Validators Receive Transaction Fees.
- Low energy Consumption.
- 51% Attacks Are Virtually Impossible.
One Big Advantage With Proof Of Stake
- If Anyone Buys A Majority Stake In The Network, Therefore They Can Effectively Control It And Approve Fake Transactions. This Is Called 51% Attack And Was First Discussed As Weak Point Of Proof Of work.
- If A Single Miner Or Group Of Miners Can Obtain 51% Of The Hashing Power, They Can Effectively Control The Blockchain.
- Proof Of Stake On the Other Hand Makes This Attack Very Impractical, Depending On the Value Of Cryptocurrency.
- If Bitcoin Would Be converted to Proof Of Stake, Acquiring 51% Of All the Coins Would Set You Back A Whopping 500 Billion Dollars So The 51% Attack Is Actually Less Likely To Happen With Proof Of Stake.