With the advent of Blockchain technology, things have drastically changed around us. During this course we have discussed a lot about implementation of this technology and how it works. But still very few know about Proof of Stake and Proof of Work techniques that are used to validate transactions.
Before we move further and go into any details, we need to understand mining a bit. So, let’s start with what is mining?
What is Mining?
Mining in terms of cryptocurrencies is a process of validating a transaction or block in a network, for this complex mathematical calculation is done. Once a transaction gets validated a new block is added to the chain. The person who is able to solve the computational puzzle quickly gets to place the next chain in the block and gets rewarded for this. Usually they get a newly released Bitcoin or any altcoin as rewards. Thus, help release new Bitcoin and other altcoins. Anyone who has the hardware required for mining can participate in it.
Mining process comprises of collecting all latest transactions into blocks and solving a difficult mathematical puzzle.
We assume that this information is enough and as you are reading this article, you have basic knowledge about cryptocurrency, Blockchain.
Now, let’s proceed further and understand what both the terms, Proof of Work (PoW) and Proof of Stake (PoS) mean and how are they different from one another.
Proof of Work (PoW)
Proof of Work is a protocol that was brought to light by Satoshi Nakamoto (father of Bitcoin) in 2009. He stated that the goal of this protocol is to help deal with cyber-attacks like distributed denial-of-service attack (DDOS).
Satoshi envisioned Bitcoin to a decentralized currency that would be based on trustless and distributed agreement. This eradicated the need of third parties to handle transactions. As traditional mediators will be replaced by miners, they will work on behalf of Bitcoin holders and check each transaction to make sure each one is legitimate and processed properly. To approve these transactions miners use their computing power to solve a puzzle and this is what Proof of Work is about.
What is trustless and distributed consensus?
A trustless or distributed consensus means there’s no requirement of traditional mediators. Individuals can now make transactions without them, and keep their personal ledgers, maintain history and balance of every account.
To explain let’s take an example, if Susan wants to transfer $ 200 to Bob she needs to trust third party service as they will debit from her account and will credit to Bob’s account. This means both the sender and receiver needs to trust third party.
But with Bitcoin and altcoins this is not the case, as each member on the chain has a copy of the ledger, thus eradicating the need of third parties and offers transparency of information.
Moving further we need to now understand proof of work and mining. PoW works on solving difficult mathematical calculation. To create new groups mining is done and trustless transactions are made on a distributed ledger.
Here, mining serves two purposes:
- Verifies transaction validity
- Creates new digital currency as miners are rewarded to solve the previous calculation.
What happens behind the scene when a transaction is set to be made?
- First, transactions are bundled on the block
- Secondly, miners verify legitimacy of each transaction made on the block.
- Next, they solve a mathematical puzzle known as proof-of-work problem.
- Then, the first miner who solves the puzzle is rewarded with an amount of transected currency know as block reward.
- Lastly, all the verified transactions are saved on the Blockchain.
The mathematical puzzle given to the miners is asymmetrical, and all miners compete with one another to solve the puzzle as quickly as possible. As soon as it is solved, an announcement is made on the network and that miner is been rewarded with a cryptocurrency. The difficulty level of a puzzle identifies competitiveness amongst miners and with this more computing power is added to the network for mining.
Higher the parameters more complex the puzzles this in return increases the cost. Proof of work is not constrained to Bitcoin; other cryptocurrencies to use this protocol for mining. But with the rise of Ethereum things are changing as Ethereum developers want to use a new consensus known as Proof of Stake.
PoW works on competition and computational problem-solving.
What is Proof of Stake (PoS)?
It is an entirely different method of validating transactions and achieving distributed consensus. Instead of allowing the first problem solver to create a block, in Proof of Stake the one who has maximum stake, share in currency becomes the originator.
The idea of Proof of Stake was suggested back in 2011 and since then many digital currencies have been using it.
In Proof of Stake all digital currencies are previously created and therefore their number doesn’t change. This means there is no reward for miners, so they take transaction fee. This is the reason why miners are called forgers in PoS.
In PoS forgers are selected to build blocks based on their share and age of that stake in the network.
Note: A stake is chosen, only if it is holding an address within the coin network.
With this we can conclude that both protocols have their own importance and use. You cannot think of one to be the winner and other the looser. Both have their positive and negatives, one is based on reward program whereas other isn’t. Where one asks miners to solve computation problem to make them the block originator the other doesn’t work on this concept. Proof of Stake, as the name suggests allows you to create blocks based on the share, stake on the network of a coin.