The proof of work (POW) consensus algorithm is the most widely utilized in blockchain technology. It is used by both Bitcoin and Ether, the two most well-known cryptocurrencies. However, the Proof of Stake (PoS) consensus algorithm is gradually stealing the show and is fast becoming the go-to for most new protocols such as Polkadot.
Ethereum, popularly referred to as the “King of DeFi,” also plans to transition from PoW to PoS in its much-anticipated Ethereum 2.0 upgrade. If successful, this move will have a significant impact on the PoW Vs. PoS debate among crypto enthusiasts.
Significance of blockchain consensus:
Decentralization and immutability are the two most important promises of blockchain. It’s a shared database that nodes (computers on the network) manage in a shared manner. All nodes are complete ledgers, which means they have access to the blockchain’s whole transaction history. As a result, blockchain technology is often referred to as a “distributed ledger network” (DLT). The network cannot be destroyed by simply taking out any central server.
A protocol program links block records, referred to as ‘blocks,’ and no existing block can be erased or modified. The only way to update the blockchain is to add a new block, which can be done by any node without a central authority.
If a node builds a block without adhering to the predefined standards, the other nodes will ignore it. If the non-compliant node continues to generate blocks in violation of the standards and a few other nodes begin to create blocks on top of the non-compliant blocks, a dispute will ensue in the community.
The community can pick a hard fork to restore the network’s previous state before the conflict began; however, repeated hard forks have an influence on the network’s stability. To avoid frequent hard forks caused by non-compliant nodes, a consensus method is required.
Malicious nodes can also use the ‘distributed denial of service’ (DDoS) attack to overwhelm the network’s other nodes. False transactions, such as ‘double-spend’ or spending the same cryptocurrency twice, can be triggered by such nodes. To prevent this, a consensus process is required.
What is the POW algorithm?
POW was conceived by Cynthia Dwork and Moni Naor in 1993, but the name was given by Markus Jakobsson in 1999. The most well-known implementation of POW is Bitcoin, which we will use to demonstrate the concept.
The Bitcoin blockchain groups transactions into a memory pool called “mempool,” and a new block is created every 10 minutes. Every transaction in the mempool requires verification, which is carried out by “miners.” The process of verifying transactions is known as “mining.”
The transaction data is provided by the Bitcoin user. The miner then verifies the transaction and adds it to the next available block. However, to include the transaction in the next block, the miner must know the cryptographic hash value of the previous block, which is kept secret. When constructing a new block, this hash value must be referenced.
The miner must try one number after another in a show of brute computational strength to obtain the hash of the last block, and no skills are required. Miners are compensated with a fraction of Bitcoin, making it a competitive process. The successful miner is the one who beats everyone else in the game and uses huge processing power to solve this massive mathematical challenge. The miner announces the hash of the previously recorded block to the network for other nodes to check and then generates a new block containing the transactions in the mempool after verification.
The miner solves an asymmetric cryptographic puzzle. The miner finds it relatively difficult, but the other nodes in the network can observe the results of the vast number crunching. The miners get better at solving the puzzle over time, and the block creation time drops from 10 minutes to less than a minute. As a result, the puzzle is updated every 14 days to make it more difficult. As a result, more computational power will be required in the future.
How is the PoS algorithm different?
When using the PoS algorithm, a group of nodes opts to stake their coins to validate transactions. They’re known as “stakers.” The staker’s chances of receiving transaction validation responsibility improve as the staked amount and duration increase.
There is no mining in this network because all cryptocurrencies have already been minted. It is no longer necessary to solve a difficult cryptographic puzzle. Continuous hardware upgrades and rising energy expenditures are also eliminated. The process of validating transactions is known as “forging.”
Additionally, the transaction validation procedure does not require the involvement of the entire network, which improves scalability. Another technology option, known as “sharding,” can be implemented via PoS. Originally derived from database administration, sharding in blockchain refers to the storage of horizontal sections of the network in separate groups of nodes for increased efficiency. Because no node can observe the complete network, sharding cannot be used with the POW algorithm; instead, PoS is required, with separate stakers for each shard.
POW vs. PoS: which is better?
POW has been thoroughly tested and is utilized in a variety of cryptocurrency applications. With today’s processing capability, DDoS assaults on a blockchain using this technique are impossible. However, the high energy costs, increased environmental stress, negative media attention, rising centralization of mining operations, and limited transaction throughput will almost certainly render it unviable in the long term. The hefty energy costs of Bitcoin mining are causing rising worry among communities, and China has formally banned all such activities.
The PoS algorithm allows for a more scalable blockchain with increased transaction throughput, and it has already been used by a few projects, such as the Moonbeam. These PoS blockchains provide a new opportunity for crypto traders and investors to make more profits from their holdings. Take Moonbeam, for instance, and you can get a minimum APY of 10% when you stake GLMR. Other blockchains like Cardano, Matic, and BSC also provide this opportunity.
However, PoS is less secure when compared to the POW algorithm, which is entirely decentralized.
Suppose the planned implementation of PoS in a well-known protocol like Ethereum goes well. In that case, the crypto community will be reasonably confident in the PoS algorithm’s ability to keep the network safe. That could tip the scales in favor of PoS, and only time will tell which one will emerge as the future blockchain consensus algorithm.