Proof of Work
Proof-of-work is the algorithm that uses to secure many cryptocurrencies, including Bitcoin and Ethereum. The concept was first proposed in 1993 as a way to combat spam emails, and it was named “proof-of-work” in 1997. Satoshi Nakamoto utilized it to secure the Bitcoin blockchain the technique was ignored because the process of mining new coins requires a lot of computing power. But he modified the approach to secure digital currency and launched Bitcoin in 2009 with the idea of reusable proof of work (PoW) using the SHA-256 hashing algorithm.
Bitcoin and other cryptocurrency transactions are processed peer-to-peer in a secure manner because of proof of work, which avoids the need for a trusted third party.
How PoW is Works
Proof of work (PoW) is a decentralized consensus technique and uses a “Mining” process. In cryptocurrency mining, proof of work is commonly used to validate transactions and mine new tokens which requires all participants (Nodes) to spend time-solving an unknown mathematical puzzle in order to keep the system safe from hackers. Miners are challenged with solving this puzzle and those who solve it first receive the miner rewards.
But the proof of work demands massive quantities of energy, which only grows as more miners join the network. As far now the total Bitcoin miners alone consume 204 TWh of electricity comparable to the power consumption of Thailand. People with better and more high-power equipment get larger rewards also PoW requires large amounts of energy from miners to encourage the usage of mining pools, making the blockchain more centralized rather than decentralized.
Proof of work requires a computer to perform hashing functions at random until it generates an output with the correct number of leading zeroes. That block will always contain 745 transactions as well as the prior block’s header. The generated hash would be unrecognizable if someone tried to modify a transaction amount by even 0.000001 bitcoin, and the network would refuse the fraudulent attempt.
Because modifying any part of the blockchain would require re-mining all subsequent blocks, proof-of-work makes double-spending extremely impossible. The reason the hardware and electricity required to perform hash functions are too expensive, users are unable to control the network’s processing capacity.
Proof of Stake
Proof of Stake (POS) was one of a wide range of innovative consensus mechanisms developed as an alternative for proof of work. In 2011 a Bitcointalk forum user proposed a technique named “proof-of-stake”. PoS utilizes a choosing process in which one node is chosen at random to validate the next block. The basic point is that allowing everyone to compete in mining is a waste of time.
How PoS is Works
Proof-of-stake does not use miners but rather “validators,” and it does not allow users to “mine” blocks instead “mint” or “forge” them. The validators will validate the transaction and add it to the block. The validators aren’t chosen at random and participants must invest a particular amount of coins in the network in order to become a validator. This will consider a security deposit. The stake size includes effective of a validator being selected to forge the next block.
PoS follows linear correlation, for example, if you add $100 to the network and another person deposits $1000. The other person has a 10% increased chance of being selected to forge the next block. This may not appear to be fair because it favors the wealthy, but it is actually fairer than proof-of-work. If a node is selected to validate the next block, the validators will verify that all of the transactions included within it are valid. The node signs off on the block and adds it to the blockchain if everything checks out.
The validator fees connected with each transaction are provided to the node as a reward. If validators allow fraudulent transactions, they will lose a fraction of their share as the stakes are bigger than the transaction fees, and they’ll end up losing more money than they make. It works as a financial motivator as long as the stakes are bigger than the total of all transaction fees. After a certain period of time, if a node stops being a validator, its stake and all transaction fees will be refunded but not too fast it takes time.
PoS is also isn’t perfect the greater the number of tokens in a wallet, the more mining power it receives. While PoS consumes considerably fewer resources, it has several flaws, including a higher risk of a 51% attack in smaller cryptocurrencies and incentives to hold tokens rather than spend them.
Pros and Cons of PoW
Proof of work is a competition in which miners compete to solve cryptographic challenges and validate transactions in order to win block rewards. To verify transactions, proof-of-work requires a massive amount of energy and expensive mining equipment.
Furthermore, the network is kept safe because scamming the chain would need a hostile operator to control 51% of the processing power on the network. In a proof-of-work system, if a blockchain is split, miners must choose whether to support the newer forked blockchain network or the original blockchain. In a reward PoW when a miner adds a block of data to the network, they are usually rewarded in cryptocurrency.
PoW has the potential to be highly costly and inefficient in terms of resource usage. Miners must pay for a range of costs, including the most up-to-date equipment, which quickly runs out. Mining generates a lot of heat and consume a lot of electricity. Furthermore, when the network is overwhelmed, the system’s transaction fees increase.
Pros and Cons Of PoS
Proof of stake uses a random selection of validators to ensure that the transaction is legitimate, with the validators being compensated with cryptocurrency in return. In PoS Node operators are rewarded for submitting or witnessing blocks that the blockchain has assigned to them.
The proof-of-stake method has various advantages over the proof-of-work including improved energy efficiency due to the low energy consumption of mining blocks. Furthermore, creating new blocks does not require high power technology equipment result of this PoS increases the number of nodes in the network.
Even though PoS isn’t perfect to become a validator the participant must have to deposit a certain amount of the cryptocurrency’s native token ( Ex. in Ethereum participants have to deposit 32 ETH) which is decided by the network’s size. In theory, people must be wealthy or earn enough money to purchase a network stake.
The presence of more nodes in a network supports the development of governance standards that give greater pushback to centralization. This is made possible in PoS systems by a larger level of equipment independence. As a result, proof-of-stake is often seen as the consensus technique that is least likely to result in network centralization.
Proof of Work Coins
The majority of cryptocurrencies use proof-of-work proof-of-work. The following are most popular cryptocurrencies that use PoW are Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Bitcoin Cash (BCH).
Bitcoin’s proof-of-work algorithm intends to add a new block every 10 minutes. To do so, it adjusts the difficulty of mining Bitcoin based on the rate at which miners add blocks. Hash computations become more difficult if mining happens too quickly. They become easier if the speed is too slow.
Ethereum is the second-largest cryptocurrency. Ethash is a proof-of-work technique, that requires miners to compete in a court hearing race to determine the nonce for a block. Only valid nonce blocks can be added to the chain. Ethereum recently began the long process of transitioning to Ethereum 2.0, an upgrade that will shift the cryptocurrency to the potentially greener proof-of-stake.
Litecoin was one of the first altcoins or Bitcoin alternatives. It was launched in 2011 and is based on Bitcoin technology it offers faster transaction speeds.
Bitcoin Cash is a peer-to-peer electronic cash system that intends to become a reliable worldwide currency with fast payments, low transaction costs, and huge transaction capacity (big blocks). Bitcoin Cash payments are delivered directly from one person to another, similar to how actual money, such as a dollar bill, is handed to the person being paid.
Proof of Stake Coins
“The Merge” (Ethereum 2.0), Cardano (ADA), Tezos (XTC), and other cryptocurrencies are following the PoS mechanism.
The Ethereum blockchain has been upgraded to Ethereum 2.0, often known as The Merge. The upgrade intends to improve the Ethereum network’s speed, efficiency, and scalability so that it can handle more transactions and reduce obstacles.
Cardano is a proof-of-stake blockchain platform that aims to encourage “changemakers, innovators, and dreamers” to create good global change.
Tezos intends to provide more advanced infrastructure, which means it may evolve and improve over time without the risk of a hard fork. Since their creation, both Bitcoin and Ethereum have suffered after their launch.