Cryptocurrencies owe their successes to the financial incentives which underlie their various consensus mechanisms. Most of these fall under the categories Proof of Work (PoW) or Proof of Stake (PoS). There has been a lot of debate about the efficiency, security and sustainability of those two mechanisms. Both of these mechanisms has their own advantages and drawbacks. In this article we will take a look at both of these mechanisms so at the end you can chose your own view on these two mechanisms.
Consensus
Before we jump into both of these mechanisms we should define the word “consensus”. Consensus in crypto is not that different form consensus in the real world. Lets illustrate this with a simple example: You and your nine other friends want to decide whether to watch a football game (FG) or go out and drink some beers (DB). In this case you have to ask the question: How do we reach consensus on what to do?
There are different approaches to do this. For example, you can use a simple majority rule where 6 out of 10 have to vote for one thing for the whole group to do this thing. Alternatively, there is the possibility where 9/10 people have to vote for one activity so it is certain that most of the people will have a good time. To be absolutely sure, we can add a security step where the people have to vote 30 minutes later to ensure that they still want to do this activity.
In cryptocurrency it is the same thing. But instead of the group of friends, computers have to come to a consensus whether a transaction is valid or not. The primary difference is that crypto consensus mechanisms have built in financial incentives to make sure valid transactions are confirmed. Why is this so important? Lets assume our friend group came to a consensus that they want to watch the football game. But this one friend just does not like football that much. Realizing that he is going to lose the majority vote, they come up with a clever idea: They invite a certain amount of people who also don’t like to watch football to this friend group. With these three people the vote would wing towards going to drink beer.
This same manipulation is present on the cryptocurrency blockchain. The difference is that the participants on the blockchain are deciding whether to approve millions of dollars of transactions. This creates a huge incentive to connect additional computers to a cryptocurrency blockchain to manipulate these transactions to their benefit. While in the friend group this issue could be easily solved by disallowing the addition of further participants, on the crypto blockchains you want to connect as many computer as possible because the more computers are connected to a network the more secure it is. With this being outlined: PoW and PoS are achieving the goal of having a secure network and bringing everybody together.
Proof of Work
Starting with PoW: It has its roots in a mechanism that was invented in 1993 to combat email spam. In 2008 Satochi Nagamoto this mechanism was used to ensure the security of a distributed digital payments network. So here is how it works: Any computer that process a transaction on a PoW blockchain like BTC needs to make a correct guess of an extremely random number to earn the right to do so. This costs time and energy to do.
In the example of the friend group this would be as follows. Every member gets a quiz to solve and whoever solves it first gets to vote on the activity that everybody has to do. The probability of a computer solving this quiz is depending on his hashing power which can be seen as the intelligence quotient of the people in the friend group. The smarter you are the higher the chance of solving this quiz. To incentivize people to join such a PoW blockchain, they earn fees from transactions in each block plus a block reward in that native coin. Every single time a block/ quiz is solved a new block/ quiz comes around to get solved. To ensure that some supercomputer does not guess the random number before everyone else, Bitcoin adjusts its network difficulty based on how much computing power is connected to it. This is similar to increasing the hardness of the quiz to ensure that not always the same friend gets the vote. Since not everyone is able to afford this amount of computers or not everyone in the friend group is super smart, they can work together and make a pool. Therefore the rewards would be split between the contributing parties solving the block.
This makes the PoW blockchain very safe, because it would mean that somebody if manipulative intentions would have to buy a lot of supercomputers to even have a chance to manipulate something. Not only would they have to buy a lot of computing power but they also have to continue to produce faulty blocks. This is because as soon as someone produces conflicting blocks on a PoW blockchain the blockchain temporary forks and all the other computers continue building on the longest chain. This longest chain is hard to maintain for an entity that is manipulating the network. This would be very hard to maintain and therefore makes the network very secure.
Proof of Stake
PoS seeks to do the same with much less hassle. Instead of using large amount of computing power to guess a random number and process transactions a cryptocurrency coin is staked/ locked on the blockchain to earn the right to do so. Logically, the more amount you stake the more likely you are to process transactions and create a block. This would be similar to saying: The friend who puts the most cash into a jar has the highest chance to get a vote. This alone would not be very safe, which is why this mechanism adds a random variable in which gives each participant the chance of getting the block. This would mean that each participant has to throw a pair of dice and the highest number would be eligible to process the block. The more coins you are stacking the more tries to throw the dies you have.
Another nice feature in this mechanism is called slashing. This basically meant that if one friend/ computer is trying to something manipulative or shady he is getting slashed. This means that a certain amount of his staked coins would be deleted or burnt and therefore would be a punishment. Several blockchains have different slashing percentages. Some are only slashing 5% while others are very drastic and are slashing 100% of the staked coins.
Conclusion and Comparison
This bring us to the comparison between those two mechanisms. In theory, everyone can connect their computer to a PoW network and earn cryptocurrency as a reward. Although this is possible, to be able to mine a Bitcoin successfully is very difficult and very cost intensive since the hardware and energy consumption is very expensive and you are not guaranteed to process the block. This led to some mining pools where several individuals put their computing power together. This led to a centralization of the network because there are only a certain amount of pools on the world. Furthermore, the PoW network can not implement any improvements for the blockchain if even at all, because this needs the consensus of every miner around the world. What is even worse is that if newer and more performable computers come on the market, the previous generation is being thrown away causing a significant amount of electro trash. Here the long term success depends on the computers resistance and environmental friendliness of the energy consumption.
On the other hand PoS networks are not perfect either. Since a lot of the coins are pre mined in these kind of networks, it makes them also pretty centralized. This means that if somebody would own the majority of these coins he would have effectively control over the whole network. The main advantages are that they do not require as much computing power and are generally way faster than PoW networks. Here the long term success depends on an equitable distribution of supply and the ability to store their massive transaction histories in a decentralized way.
Published by ga38jem on
Publish0x|LeoFinance|Steemit|read.cash
On 11th November 2021
Sources:
https://academy.binance.com/en/articles/proof-of-work-explained
https://academy.binance.com/en/articles/proof-of-stake-explained
https://www.danheld.com/blog/2019/1/5/pow-is-efficent
https://vitalik.ca/general/2020/11/06/pos2020.html
