Unlike conventional networks, the blockchain allows users to contact directly, without the involvement of intermediaries and third parties, and all transaction data is entered into a publicly distributed registry. This is very convenient, but for such a scheme to work, the so-called consensus is needed. In other words, you need to specify a single transaction confirmation mechanism. For this purpose, special computer algorithms are used, the most popular among other are Proof of Work (PoW) and Proof of Stake (PoS). We will discuss them in this article!
What is the algorithm Proof of Work (PoW) and how did it appear?
Researchers Moni Naor and Cynthia Dvor presented the idea in 1993 that access to a network resource became possible only when performing a certain, rather complex task.
Satoshi Nakamoto introduced Hashcash technology in Bitcoin in 2004. Thus, Bitcoin became not only the first cryptocurrency in general, but also the first PoW cryptocurrency.
Proof of Work: how it works
The solution of the problem is the confirmation of the proof that some kind of work has been done. And this is exactly what Naor and Dvor talked about – access to the system only when performing certain actions.
It is important that the problem to be solved is mathematically asymmetric to perform it should be difficult, and easy to check. That is, the miner must make an effort to solve the Proof of Work Problem, but the system will check its calculations instantly.
This effect is achieved through cryptography. The miner needs to find the only right solution among the many possible ones to solve the problem (find the hash). Of course, he does this not manually, but with the help of a mining program and special equipment (ASIC, mining farm, and so on).
For example, the reward for disclosing a block is 10 BTC. It was revealed by 3 miners – with a hashrate of 100, 200 and 300 H / s. Their reward will be 2, 3 and 5 BTC, respectively.
Thus, PoW is an algorithm for reaching a consensus, in which the probability of a new unit opening and the value of the miner’s remuneration depends on the size of its useful (for the system) work.
However, despite all the advantages of PoW (in particular, a high level of protection against spam attacks), you cannot call it an ideal option for reaching a consensus.
Proof of Work: disadvantages
The complexity of mining is growing, and the tasks that miners need to solve to open blocks become more complicated. So, they need to either spend more time on calculations (which is meaningless in terms of earnings) or use more powerful equipment that consumes much more electricity.
Experts say that with a sufficiently high level of complexity of PoW mining, the potential profit from hacking the network will be less than the amount that a hacker will have to spend on the purchase and maintenance of equipment. Therefore, it is believed that cryptocurrency PoWs are well protected from DDoS attacks – throwing spam transactions with them is too expensive for an attacker.
As already mentioned, the higher is the hashrate, the greater is the reward for opening the block. If the user concentrates more than 50% of the hashrate (even 51%), there is a high probability that the system will automatically “charge” new calculations to it, and the rest of the miners will simply remain out of work.
The attacker sells coins that are mined on the main blockchain, and at the same time he mines coins on the side chain. For example, secretly creates a fork and gets coins on it, but does not spend them.
If he manages to create a branch longer than the main one, the other nodes of the main blockchain will assume that he still has coins that he has already sold. He uses his assets twice.
The attack becomes possible because of the mathematical “gaps” in the technology of PoW. And if such a scenario is unlikely in the Bitcoin network (so much capacity is involved in mining that it is almost impossible to capture 51% of the hashrate), then other cryptocurrencies remain vulnerable.
What is the algorithm Proof of Stake (PoS) and how did it appear?
The idea of a new consensus adoption algorithm was announced in 2011 on the bitcointalk.org forum. The main idea is that the validators are not miners with more powerful equipment, but users who own a larger share of the internal coins of the network.
With PoW mining, the participant who first solved the problem receives a reward, and the opened transaction block is added to the blockchain. In PoS mining, the user owning a larger share becomes the “creator” of the new unit. That is, confirms the transaction.
In general, in the technology of PoS the concept of coin mining is inappropriate. They are already mined, and validators only confirm transactions. Therefore, PoS mining is also called forging (from the English. “Forging” – “forging”).
However, not a clearly defined amount for disclosing a block, which changes with increasing complexity, as in PoW mining, but a sum of coins equivalent to its share in the network.
Proof of Stake: principle of operation
The main condition is that money in the account can not be moved. They simply are and literally take part in the confirmation of transactions. And then you get a profit for it.
For example, you put 100 coins into the account, and only 1000 coins in the system. So your share is 10%. During 30 days, the developers have released another 300 coins. Of these, 10%, that is, 30 coins, will be credited to you automatically. You now have 130 coins, and the total issue is 1300 coins.
However, in many networks, the profit also depends on the duration of the forging (the longer you keep funds on the account, the greater is the profit) and the volume of the issue (the more coins you have, the greater is the reward).
The forging program can be installed on any computer. The main thing is to keep in touch with the network constantly. However, the costs of a 24-hour PC are not comparable with the consumption of electricity by powerful mining farms.
The algorithm is liked by many developers. He was first accepted by Peercoin, Nxt and ShadowCash. And now the number of PoS cryptocurrencies is in the tens. However, not everything is smooth.
Proof of Stake: disadvantages
With the first condition of the difficulties, as a rule, does not arise. You can simply have a separate forging wallet and a separate one for your own transactions. But with round-the-clock communication, problems often arise.
This problem can be solved with the help of cloud PoS mining. You need to register on the site that offers this service, make a payment and replenish your balance. So you get a forging wallet that will be constantly online. True, it is more expensive than just paying electricity bills.
If you put 10 coins into the account, and another user – 1000, his income will be 100 times greater. However, in the course of forging, expenses often arise that are in no way dependent on the state of balance.
For example, a fee for interest accrual or sending messages within the system (sometimes it is necessary for the validation of blocks). It turns out that the profits of richer investors will gradually increase, and less well-off investors will decrease. In the future, this may lead to centralization of the network and even violation of its original rules.
The fact is that in many PoS cryptocurrencies, user voting is carried out to make changes to the blockchain. And the greater is the share of ownership, the more powerful is the voice of the user.
This item is directly related to the previous one. According to experts, the situation is not excluded, when a group of influential nodes (nodes responsible for transaction validation) conspire to change the original rules. Hypothetically, they can even take possession of all the coins, simply by creating and confirming such a transaction.
Recently, there are more and more cryptocurrency that refuse PoW in favor of PoS. In some reviews, the presence of PoS is even noted as an advantage of cryptocurrency. Vitaly Buterin also added fuel to the popularity of the algorithm, who announced that Ethereum would soon be transferred to PoS.
Many experts are confident that, over time, PoS cryptocurrencies will force out coins with the PoW algorithm (except Bitcoin). And they even advise investors to bet on the first ones.
Moreover, the new algorithm provides new opportunities for earnings on cryptocurrencies. Previously, there were miners who threw their computing power on the extraction of coins, and traders who played on the courses cryptocurrency.
According to experienced users, with the right choice of cryptocurrency and a good start-up capital (which will be on the forwarding wallet), such earnings become safer and sometimes more effective than trading earnings.
PoS mining is a good option for long-term investments. And it is great for beginners who have not yet learned how to catch the best moments for buying and selling coins on the exchange, are not ready to spend money on expensive equipment and are not sure about investing in ICO.