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Proof Of Work VS. Proof Of Stake

Proof of Work and Proof of Stake are both requirement models called consensus mechanisms that confirm every transaction that takes place on a blockchain without any intermediaries needed. Well-known blockchains have adopted either of them that allows people to earn extra cryptocurrency by becoming miners. We just have to understand each to understand which model is better for you.

It was always in Mr. Satoshi Nakamoto’s mind that no intermediary or third-party should intervene in the transaction of his Bitcoin between parties. He then achieved a feat by creating the Proof of Work System to determine how to reach consensus in the Blockchain. All transactions need to be verified through consensus to make sure there are no shady deals such as double spending. Proof of Work relies on advanced mathematics known as cryptography, the reason why Bitcoin and other digital coins are called cryptocurrencies. Cryptography is the art of using very difficult mathematical equations that only very powerful computers are able to solve. Only one equation will ever exist and if that equation is solved, the network will verify the authenticity of the transaction.

Subsequent blockchains replicated the original Bitcoin code along with using the Proof of Work model. But amazing as it is, Proof of Work is far from the ideal of perfection. Apart from consuming large amounts of electricity, it can only process a limited number of transactions at one time.

Because of this, other forms of consensus mechanisms were created by developers, of which, came the popular Proof of Stake model created by Scott Nadal and Sunny King in 2012. During this time, the Proof of Work System was argued to consume the equivalent daily electricity costs of $150,000. The figure since then is said to have increased to millions of dollars. Peercoin was the first-ever blockchain project to utilize the Proof of Stake model that produced multiple benefits such as better equality in the mining system, transactions are more scalable, and there was less reliance in power consumption.

With this discovery, the Ethereum team made a move to shift from Proof of Work to Proof of Stake as soon as possible.

The Bitcoin Blockchain was the first to use Proof of Work in 2009. Each time a transaction is sent, 10 minutes of waiting is needed before the network confirms it, and it can only handle an average of 7 transactions per second. Because of this, transaction fees began to increase significantly. From a very small fraction of a cent that made the network effective for small amounts transfer, Bitcoin fees ballooned to as high as $40 per transaction back in the busiest period of December 2017. Though scaled down to this day, transaction fees were still exorbitant to make Bitcoin a suitable global payment system due to the limitations that Proof of Work pose.

Second to Bitcoin in popularity, Ethereum also implements Proof of Work but with deviations from the original code that it is possible for the network to process transactions within 16 seconds. It was a far cry from that of Bitcoin’s 10 minutes. But then, the maximum amount of transactions that Ethereum can process is only 15, a problem it shares with Bitcoin on scalability issues. As hard as the Ethereum team is working on its Proof of Stake shift, once official, the number can increase to thousands per second.

Other blockchains that introduce variations to their Proof of Work include Bitcoin Cash and Litecoin.

Dash is one blockchain that uses Proof of Stake that allows its users to send and receive funds in only a matter of seconds.

Using an example, Bitcoin transactions need 10 minutes to be verified. At each 10-minute interval, a new block is created. Different transactions make up a block that requires independent verifications. To achieve this without intermediaries, miners race with their computational power to be able to solve a cryptographic algorithm as Proof of Work. Once a transaction is verified, it will be posted on the public blockchain which can be viewed by anybody. The first to solve and confirm will be rewarded bitcoins, as with any other cryptocurrency blockchain Proof of Work with their own native coins. With thousands of devices competing, only the fastest gets the reward. Proof of Work, therefore, is not a fair system due to the fact that only those with powerful and expensive hardware will always be at an advantage of winning rewards.

While Proof of Stake still uses a cryptographic algorithm, its process is different in confirming transactions and reaching a consensus. When Proof of Work is rewarding miners in solving complex mathematical equations, Proof of Stake rewards the miner based on how much they have staked, basing it on the number of coins the miner has on the blockchain they are mining. Technically, they are not miners, but forgers, or foragers, that every time a new block is verified, they simple earn transaction fees.

In order to validate transactions, you need to put your coins in a specific crypto wallet that freezes the coins for use to stake the network. Proof of Stake blockchains have a minimum staking amount to start, which is usually a significant amount of upfront investment. Whenever you win the reward, the amount of transaction fee you will receive is based on the percentage of coins you are holding.

Proof of Work makes all of its miners race to solve a very difficult mathematical complex, and the one with the most powerful computer hardware will likely solve the problem first and gets to win the reward. This is the current consensus mechanism employed by Bitcoin, Ethereum, and other cryptocurrencies. Many issues, however, surround Proof of Work including the vast amount of power consumption it requires, the centralized power mining pools are creating, and the daily threats of a 51% attack.

The Proof of Stake consensus mechanism simply chooses the winner at random based on the amount they staked. Meeting the minimum staking requirement will guarantee you a good return on your investment. One concern we can have on Proof of Stake is that transactions can be verified on multiple chains, something that Proof of Work does not allow. It could make a hacker work on a double-spend attack.

Even then, as the blockchain technology progresses with different advancements, so will be consensus algorithms with their own upsides and downsides.

eQapital is more relevant than ever in catering to the present needs of the digital investor. Financial services from Trust, Custody, Exchange, Transfer, to Asset Management needs are strategized on blockchain to empower you to control your funds, whether fiat or crypto. Security is in place with AML/KYC/CFT procedures. Our friendly eQapital Team will be ready to assist you 24/7. Give us a call now.

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