The most remarkable thing about the 21st century is undoubtedly the evolution of technology. Numerous services have revolutionized the world that we live in today and brought people from all over the world closer with its enhancements.
These past few years have seen a lot of innovation and development in several areas, such as education and health care. Technological advancements also impacted the financial system, with the creation of cryptocurrencies in 2009 leading to a new era of financial innovation.
At first, many people were suspicious of cryptocurrencies, and nobody expected them to grow into such a complex ecosystem. Yet, from the creation of Bitcoin, more and more capabilities have been added to the blockchain world. And as time goes by, the financial industry’s centralized power adapts to this change and learns to cope with the evolution of technology.
Nowadays, although it might seem like the main competition in the cryptocurrency sector is between Bitcoin and Ethereum, there are numerous other currencies on the market striving to reach the top. And while altcoins may not have the same market capitalization and resilience as Bitcoin, they still have a promising future.
Yet, with the multitude of altcoins, blockchain technology and the whole concept of cryptocurrency have evolved. And nowadays, the supremacy of Proof-of-Work (PoW) is seriously challenged as even Ethereum is going all-in on Proof-of-Stake (PoS).
This is a big deal as many individuals have established various types of business endeavors based on mining cryptocurrency. And with Ethereum switching to PoS, they will have to drastically adapt or risk shutting down their operations.
Table of Contents
What is a consensus mechanism
At the heart of every blockchain lies a consensus mechanism. For example, in Bitcoin, we have a decentralized ledger that the miners update. Because the blockchain is stored on multiple devices, all these miners need to agree on the common true variant of the chain. They do that efficiently thanks to the consensus mechanism, which acts as a set of rules that describe how the mentioned process is supposed to work.
To put it another way, the consensus mechanism is a sophisticated method of stating rules that everyone agrees on so that there can be a unitary version of the ledger.
There are many different forms of consensus mechanisms and some of the most popular are:
- Proof-of-Work (PoW);
- Proof-of-Stake (PoS) ;
- Delegated Proof-of-Stake (DPoS);
- Proof-of-Capacity (PoC);
- Proof-of-Elapsed Time (PoET);
- Practical Byzantine Fault Tolerance (PBFT);
- Direct Acyclic Graph (DAG).
What does Proof-of-Work (PoW) do?
Proof-of-Work is the first consensus mechanism to be applied on a blockchain and is most known for securing Bitcoin. Bitcoin’s blockchain makes use of the SHA256 algorithm and digital signature to assure the immutability of the information stored on the blockchain. The digital signature helps to keep track of the transactions and prevent double-spending.
As Bitcoin users are sending coins one to another, these operations must be registered in blocks as transactions. To do that, the miners use computing power to solve the cryptographic puzzle associated with that transaction. The first miner to get the answer will also register the transaction and get the reward. DLT (distributed ledger technology) allows members to securely verify, execute, and record their transactions in a decentralized manner, to update and send data to all participants.
However, to execute a transaction in cryptocurrency, it must first be confirmed, which the network must accomplish quickly.
For example, a miner must offer a response, also known as proof, to a specific challenge to update the ledger. This proof is complex to create but simple to verify. In Bitcoin, the goal is to find a random number (nonce) representing a transaction’s hash value and add it into the block. It can only be discovered by trial and error.
Miners use powerful hardware to determine the correct combination of numbers as fast as possible, in a matter of seconds or minutes, and they do that all day long.
How does the Proof-of-Stake (PoS) work?
Proof-of-Work is often criticized for the extensive use of resources. In 2012, as BTC was making the first gains, the crypto community started seeing the faults mining comes with and began looking for alternatives. So, Peercoin came out with a different approach to confirming transactions, a method that is now known as Proof-of-Stake.
In PoS environments, users have the option of committing a part of their crypto funds to the network and become validators. That deposit is generally called a stake, and the action of validating transactions is called staking.
Although in essence staking and mining have the same goal, they work quite differently. Mining uses computing power to solve complicated cryptographic puzzles while staking uses the validator’s collateral to endorse new transactions.
Still, staking also requires a computer with internet access that can operate and eventually store the blockchain data. However, with the minimum system requirements, almost any computer can become a node once the software is set up and the stake is locked up in a staking contract.
Now, each currency has its own particularities for choosing validators, calculating, and distributing rewards. And that can be observed today in some of the most well-known cryptocurrencies that employ Proof-of-Stake, including Tezos, Cosmos, and Cardano.
PoS would be quicker and more efficient than PoW since anybody could theoretically become a miner. Because it is dependent on the Bitcoin quota possessed, it provides a linear scale compared to the percentage of blocks, which a miner might confirm.
The differences between PoW and PoS
To better understand the differences between these two systems, the table below will showcase some of the top characteristics of the two consensus mechanisms next to each other.
|Transaction validation probability||Is determined by the miner’s computing power.||Is determined by the validators stake size.|
|Rewards||Are paid to the first miner to solve each block’s cryptographic problem.||Are usually paid from network fees.|
|How does it work||Miners compete by solving cryptographic puzzles with their computer processing power to finish a block and add it to the chain.||The validator can be voted, or randomly picked. Once chosen he signs the transaction granting legitimacy through his stake.|
|51% attack||Hackers require at least 51% of computing power to attack the system and create a fork chain that grows faster than the true chain. The goal is to make all the other miners believe that the fork is the true chain.||To breach the system, hackers would require at least 51% of all coins on the network, and bypass security mechanisms preventing the same validators to create blocks in a row.|
|Energy consuming||Bitcoin network annual power demand is estimated around 116.49TWh.||PoS systems are more cost-effective and energy efficient than PoW systems, although they are less well-proven. This assumption comes from the fact that under no circumstances staking requires large computer facilities to confirm transactions.|
|Equipment||Mining on PoW requires CPU cards, GPU cards, and/or ASIC devices.||The standard server-grade device is more than enough for PoS. Furthermore, a medium performance computer with stable internet connection can work for most Proof-of-Stake environments.|
The effect of switching from PoW to PoS
Switching from PoW to PoS is believed it will have a favorable influence on the cryptocurrency world. Right now, Proof-of-Stake seems to be one of the most promising consensus mechanisms that can bring scalability back to crypto and bring it closer to the initial vision of being a true worldwide medium of exchange.
Currently, Proof-of-Work requires an enormous amount of power that will only grow as the hash rate and mining difficulty increase. This phenomenon is not particular only to Bitcoin but manifests in most PoW cryptocurrencies as well.
Therefore, Proof-of-Stake, as it requires significantly less energy to achieve consensus, it makes the whole validating process more efficient.
Yet, one disadvantage of PoS is that it may make crypto transactions more vulnerable. And in Ethereum’s case, it is true that the whole network will become more accessible to all parties involved, and increase the scalability, but we’re still to see how it is really going to play out.
Despite its benefits regarding energy and hardware efficiency, we must accept that PoS is still in its infancy and has to prove itself.
The transition from Proof-of-Work to Proof-of-stake will significantly impact the cryptocurrency and blockchain community. And if successful, it has the potential to create a safer, simpler, and more efficient distributed ledger technology that has less effect on the environment.
Furthermore, the interaction between users and projects will tighten under PoS, mainly through staking and other measures that boost user engagement and sustain the project’s long-term worth.