Proof-of-work vs Proof-of-stake
By: Ricardo Bustos
Tags: Polis, Proof Of Stake, Cryptocurrency, Dash, Blockchain

To explain them, both of these systems are “consensus mechanisms,” and they are currently required to confirm transactions, without the need of a third party to validate the transaction. This will be explained in-depth further along.

When the first-ever cryptocurrency, Bitcoin, was built, they had to come up with a way for transactions to be verified without needing to entrust it to a third party. They achieved this by developing the Proof-of-work system.

Proof-of-work is used to determine how the blockchain reaches consensus, which is when a majority of the participants in the network agree on validating information, and as a result, it confirms it and adds it to the blockchain. Every single transaction needs to be verified for validity before it is recorded in the blockchain. Primarily, it is used to secure the network and stop someone from trying bad things, such as spend the same funds twice.

Proof-of-work uses an advanced form of mathematics called cryptography; that’s why coins are 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 resolved, the network knows that the transaction is authentic.

Although proof-of-work solved the double-spending problem and became a breakthrough for blockchain technology, it is far from perfect and has a lot of flaws. For instance, it requires a vast amount of electricity to validate a block because of the increased difficulty. It also allows a minimal number of transactions that can be processed at the same time. It is also easy to create a double-spending attack

Even though Proof-of-work is a system that is widely used by other cryptocurrencies, other consensus systems have been created to try and to find a system without the flaws of Proof-of-work. In this wave of developing a new consensus mechanism, a method first designed in 2012 by two developers called Scott Nadal, and Sunny King became very popular. Thus the Proof-of-stake consensus mechanism was born. The primary benefits included a fairer and more equal mining system, more scalable transactions, more decentralization, and less reliance on electricity.

Proof-of-work: How does it work?

Before we dig in, we need to clear some concepts that will be mentioned several times. The blockchain technology is intrinsically linked to cryptocurrencies and their respective consensus mechanism, but what is a blockchain?

Essentially, it is a database that records all the transactions that have occurred on the network and has been shared amongst the participating entities.

If we get technical and a bit redundant, the blockchain is literally a chain of blocks. These blocks contain information, that can be anything from a transfer of money, ownership, a transaction, or even an agreement between two parties. Every block includes a digital signature linked to the account that made the recording and a unique identification number, kind of like a fingerprint, which is called a hash, form both the current block and the previous block. Changing something inside the block will cause the hash to change; this is what makes it impossible for any information to be altered or for a block to be inserted between two existing blocks.

Instead of keeping information on a central point or entrusting it to central authority as it is traditionally done, multiple copies of the blockchain are sent to every member of the network. In proof-of-work, somebody must use their computational power to solve a cryptographic algorithm, effectively validating the transaction. Every single transaction needs to be verified for validity before it is recorded in the blockchain.

In the Proof-of-work system, thousands of individuals devices all compete to become the first to solve the cryptographic algorithm, but only the user that solved the equation first is rewarded for the services they provide to the network.

The way that cryptographic puzzles are created allows them only to be solved by trial or error. Computers can guess millions of different combinations per second, which requires such a large amount of electricity. So generally speaking, the individual or individuals that have the most powerful and expensive hardware devices will always have the edge on the rest of the network, and thus a higher chance of winning the reward. This proves why the Proof-of-work system is not fair.

Proof-of-stake: how does it work?

The Proof-of-stake system uses a different process to validate transactions and achieve consensus. The mechanism still relies on cryptographic algorithms, but the objective of the system is different.

While Proof-of-work rewards the miner who solved the complex equations first, in Proof-of-stake, the individual that creates the next block is selected randomly to validate the next block. The forgers have to deposit a certain amount of coin into the network as a stake, you could think of it as a security deposit, the size of stake increases the chance for the stake to be selected to validate the next block. The higher the stake, the higher the opportunity to get rewarded. But at the same time, the more you lose if you try to go against the system. If the individual that is staking wants to corrupt the blockchain, the stake he introduced would be lost, in this way, effectively securing the network.

In Proof-of-stake, users don’t mine blocks but rather mint them and are called “forgers” because there is no block reward that can be mined. Those who contribute to the Proof-of-stake system are rewarded by earning the transaction fee.

Thanks to Proof-of-Stake, system validators do not have to use their computing power because the only factors that influence their chances are the total number of their own coins and the current complexity of the network.

So this possible future switch from PoW to PoS may provide the following benefits:

- Energy savings.

- A safer network as attacks become more expensive: if a hacker would like to buy 51% of the total number of coins, the market reacts by the fast price appreciation.

- Increased decentralization, Proof-of-Stake enables anyone to be a part on the network validation process. You don’t need special equipment for this.

Proof-of-Stake and Polis Blockchain — My personal opinion

Polis Blockchain aims to be the most reliable payment system for day-to-day transactions. We have migrated from Proof-of-Work to Proof-Of-Stake over a year ago now. We firmly believe getting away from Proof-of-Work is the only way to make a viable day-to-day payment system.

There are also other concensus mechanisms that are arising, and Polis Blockchain will always look for the better way to be the decentralized payment system for day-to-day transactions. We are also investigating new ways to make transactions faster and secure, we are not marrie to Proof-of-Work

In my own personal opinion, I do not condemn Proof-of-Work. Polis Blockchain is not aiming to be the next bitcoin, as we believe bitcoin is a great store of value and this is due to their Proof-of-Work mechanism. However, due to the reasons stated in this post, I personally believe think any cryptocurrency with Proof-Of-Work, other than bitcoin, will not have a bright future.

Conclusion

Proof-of-work: This model requires a lot of energy consumption to validate blocks, while the individual or individuals that have the most powerful and expensive hardware devices will always have the edge on the rest of the network, and thus a greater chance of winning the reward.

Proof-of-stake: This model randomly selects the winner. The higher the stake, the higher the chance to get rewarded, more people can mint coins while on Proof-of-Stake, increasing decentralization, and more energy is saved overall.

There are also other concensus mechanisms that are arising, and Polis Blockchain will always look for the better way to be the decentralized payment system for day-to-day transactions.