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An Introduction Of Proof of Stake (PoS)

BitForex Editor
Nov 03, 2020

When you want to fully understand the term proof of stake in the world of Cryptocurrency, there is no way you will do that without mentioning Proof of work. Proof of Work and Proof of stake are the two primary methods to verify transactions making sure money is not spent twice. People often ask the question of which is better of the two. This article will expose you to all you need to know of these two methods of verifying transactions in the world of cryptocurrency, and you make to able to make your decision on which is better.

Proof Of Work (PoW)

Proof of work is a method of preventing malicious use of computing power using a lot of electricity. This system was applied to money in 2004 by a man named Hal Finney. It was not until 2009 that Hal Finney's idea was put into practice with Bitcoin's emergence. Anyone familiar with Bitcoin must have heard of "miners." For people who don't know, miners are people who get paid for verifying all Bitcoin transactions to ensure the system is free from the double-spending error. Miners verify these transactions by competing with each other to solve complex mathematical equations. These mathematical equations are what enable them to secure transactions on the network. Miners work around the clock to prevent people from spending the same money twice, using very complex and powerful processors to verify every single block present in the transaction chain.

The complex equations miners have to solve are of an advanced mathematical concept called cryptography. This is where Bitcoin, Ethereum, Litecoin, etc. get their general name, Cryptocurrency. These equations are so unique and challenging that only a supercomputer can provide the right solutions to them. The uniqueness of each of these equations makes the network know that the transaction is credible once it can be solved.

One of the significant problems of Proof of work is the amount of electricity needed to perform a single transaction. The amount of electricity needed to successfully execute a single transaction is equivalent to the amount of electricity used to power more than one household for a whole day in America. For this reason, transaction fees have soared from the minimal fees charged during the early years of Bitcoin to $40 for a single transaction during its peak period. Even though these transaction fees have been reduced, it is still not low enough to make it considered a suitable global payment system.

Proof Of Stake(PoS)

Humans are always looking to improve things around them to make their lives easier. The introduction of the Proof of stake is a testimony to that. We must have learned of the drawbacks of Proof of work. The Proof of stake was made to tackle or remove those drawbacks. In Proof of Work, miners have to compete among themselves to solve a mathematical problem. The miner who gets the equation attached to the transaction right will be awarded coins. On the other hand, in the Proof of Work, miners are not needed to verify transactions; instead, an entirely new method is used. One that does not require miners and does not operate by consuming a considerable amount of computational power will translate to high electricity usage for any transaction.

The Proof of stake gives miners mining power dependent on the amount of coin they have on the network. This means that the higher the stake a miner has, the higher percentage of blocks he can mine.

The Proof of stake has been identified as a solution to a problem that is not evident yet but is projected to come up in the future. This problem has been named the tragedy of commons in which everyone will ignore the interest of society to focus solely on their interest. What will trigger this problem in the future is when the monetary gains of mining diminish, leading to the acute shortage of miners. When there is a shortage of miners, the network becomes susceptible to something called the 51% attack, when one miner controls 51% of a network's computational power. This gives him the power to easily create fraudulent transactions for himself while invalidating legitimate transactions of others.

The PoS prevent this problem by making a miner perform a 51% attack if he singlehandedly owns 51% of the Cryptocurrency in the network, which is almost impossible. Even if he does own that amount of Cryptocurrency in the system, the PoS makes it very unwise for him to attack a network where he has majority shares because if the cryptocurrency value falls, so will his stake. Therefore the miner with the majority share will benefit more from a stable network so, he won't attack it.

Many networks have continued to use the PoW method. Ethereum proof of stake will kick off soon, and when it does, it will become the most significant Cryptocurrency using the PoS method.

Proof of Work V.S Proof of Stake

The Proof of Work vs. Proof of Stake battle is one that has raged on for a long time. While the bigger cryptocurrency systems still make you of the PoW system, the PoS is still better than it. Ethereum, the second-biggest Cryptocurrency, has announced that they will switch to the PoS method. This is Proof that companies are beginning to realize that it is better. Below are some reasons why the PoS method is better than the PoW method:

Electricity Consumption

While the PoW method needs a massive amount of electricity to keep the network working, the PoS does not need electricity to function.

51% Attack

We have already explained how the PoS method will help prevent the 51% attack that many see as a future problem in the crypto world.

The Problem of Centralized Organizations

The PoW method favors miners that solve cryptographic equations before others. This has led to centralized organizations buying ASIC’s. Which is the mining device which solves these equations. They buy these devices and combine their powers to ensure they always solve the sum first, making them control the network. This has made only four pools control half of the total Bitcoin mining power. Most of these pools are located in China, where they have cheap electricity. The PoW prevents pools from coming together to control the network as it is every man for himself.

In conclusion, even though the Proof of stake has its limitations, it certainly does not have many limitations when compared with the Proof of work. However, the primary cryptocurrency network still mines using the Proof of work. Still, with all the solutions the Proof of stake brings, it won't be surprising to see most of them switching to the PoS method in the nearest future as Ethereum is already in the process of doing that.

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