Proof Of Work VS. Proof Of Stake

The argument never ends


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.

Early Adopters

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.

Verifying Proof of Work Transactions

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.

Verifying Proof of Stake Transactions

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.

To Conclude

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.



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eQapital Banq

Your fiat and digital asset custodian. Bridging the gap between Banking and Blockchain.