Proof of Work and Proof of Stake are two of the most well-known consensus algorithms in the area of cryptocurrencies. The blockchain allows users to contact directly, without involving intermediaries and third parties, and all transaction data is entered in a public distributed registry. In other words, there is a need to create a single transaction confirmation mechanism, so special computer algorithms (PoW and PoS) are used for this purpose.
Proof of Work
Proof of Work is an algorithm used to protect systems from abuse (DoS attacks, spam mailings, etc.). The main essence is to perform complex and lengthy tasks, as well as the ability to quickly and easily check the result of work. PoW tasks are not intended for humans and are always solved by computers with high computing power. The concept of Proof of Work was first mentioned in 1993 in the work “Pricing via Processing, Or, Combatting Junk Mail, Advances in Cryptology” (authors – Cynthia Dwork and Moni Naor). It should be noted that the term was not used in the article, but the concept described it: “To get access to a shared resource, the user must calculate some function: quite complex, but feasible; this way you can protect the resource from abuse.” In 1999, the term “Proof of Work” appeared – it was used in the article “Proof of work and bread pudding protocols” (authors-Markus Jakobsson and Ari Juels) in the “Communications and Multimedia Security” magazine.
In the Bitcoin blockchain, the PoW mechanism was used as a means of reaching a consensus on which version of the blockchain is considered as the correct one. The PoW mechanism provides the ability of a network node (node) to verify that the miner (which is the node that adds a new block to the blockchain) performed the calculations. Proof of Work in Bitcoin gave rise to the large crypto mining industry and became the engine for the development of particularly powerful equipment since the computing resources are huge and far exceed the capacity of the largest supercomputers.
Advantages of PoW:
- Provides good protection against DDoS attacks.
- There is a mining of cryptocurrencies that are several years old. This means reliability and gives confidence in the safety of the cryptocurrency price.
Disadvantages of PoW:
- Huge investments are inevitable. One needs to buy expensive equipment and arrange the premises for it.
- The complexity of the production of a crypto coins amount grows every day, so the current capacity of purchased equipment over time becomes irrelevant.
- 51% of the network capacity is a vulnerability in PoW blockchains that allows an attacker to take control of transaction confirmation and block generation.
Proof of Stake
Proof of Stake is an alternative to Proof of Work. This is a method of protecting blockchain by asking users to show ownership of a certain amount of cryptocurrency. Let’s analyze this process in simpler words. Using the PoS algorithm, the network nodes, as in Proof of Work, perform some hashing operations. The complexity of calculations is distributed for each node in proportion to the share of virtual coins on the node’s account. In other words, the more cryptocurrency a user holding a node has, the higher their chance of creating a new block.
In mid-2011, two developers, Scott Nadal and Sunny King published a paper online detailing the method of operation of a new algorithm called Proof of Stake. The main goal of this method was to solve the problem of excessive power consumption during mining. The idea of the algorithm is that the concept of mining becomes irrelevant. The cryptocurrency has already been mined, and users confirm transactions. Sunny King called this concept “forging”- getting a certain amount of coins, equivalent to a share in the network.
In August 2012, King introduced the first Peercoin cryptocurrency, which used both PoW and PoS algorithms. The principle of operation is as follows:
- The user buys coins and transfers them to the wallet.
- Then he/she needs to download the software for fogging and register.
- The software confirms the transaction and after a while coins are credited.
In simple words, PoS is a prime example of how money can make money.
Advantages of PoS:
- There is no need for expensive mining equipment. You only need a computer with a wallet and a required amount of the selected cryptocurrency on the balance.
- There is an environmental aspect too – it saves electricity.
Disadvantages of PoS:
- There is a tendency to centralize. The algorithm encourages stakeholders to accumulate and hold funds on the balance.
Proof of Work helps the network make sure that the participant (or rather, the node that adds blocks to the blockchain) completed the task. The first cryptocurrency working on Proof of Work was Bitcoin. It uses PoW as a consensus algorithm (decides which version of the blockchain is considered to be correct). It uses the SHA-256 hashing algorithm. The most promising cryptocurrencies on the Proof of Work algorithm are currently Bitcoin, Litecoin, Ethereum, Ethereum Classic, Monero, Quark, Bitcoin Cash.
Let’s look at what is interesting about PoS. Here, the pioneer was the Peercoin cryptocurrency, which was also called PPCoin. In its pure form, Proof of Stake is rare. Its most commonly used modifications are Leased Proof of Stake (LPoS) and Delegated Proof of Stake (DPoS). Dash was one of the first cryptocurrencies to use the PoS Protocol. Also, the PoS protocol is actively used by Nxt, FargoCoin, Novacoin, ShadowCash, etc.
The hybrid scheme that combines PoW and PoS is implemented in many cryptocurrencies, including Peercoin. This scheme is called Proof of Activity. PoW blocks are searched along with PoS blocks, which means the blockchain consists of both types of blocks. PoW blocks can serve as some kind of checkpoints if you take into account the total complexity of the work in the entire chain, and PoS is considered as “annual income from the Deposit”. Currently, there are several notable cryptocurrencies based on approval by confirming the share. For example, Peercoin, BlackCoin, Namecoin.
The Proof of Work mining algorithm was widely used for mining of the first cryptocurrencies that appeared on the crypto market. The growing popularity of “digital gold” has led to an increase in the complexity of mining, and gradually the production of popular types of coins has become unprofitable. Today, the Proof of Stake algorithm is used in different variations by dozens of cryptocurrencies. However, there is an opinion that the PoW mining algorithm will soon lose its relevance. The PoA mechanism is a rather interesting solution for combining two popular algorithms and minimizing disadvantages.