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Proof of Work vs. Proof of Stake

by Marko Stokic

If you’ve been diligent in reading our weekly newsletter you will definitely have heard of Proof of Work (PoW) and maybe even of Proof of Stake (PoS).

Proof of What?

The three best keywords to describe blockchain are: distributed, cryptographic and immutable. All three are tied together through Proof of Work/Stake and result in a distributed consensus.

Let us start with PoW because it is the most prevalent one in the blockchain space and the mechanism that Bitcoin uses. So, computers or rather miners compete with each other to solve the needed mathematical puzzle to attach a new block to the existing chain. The reason they compete with each other is because of the most basic and effective incentive ever: money or in our sphere bitcoin. Every time someone adds another block, he is rewarded with a pre-determined number of new bitcoin as well as fees for each transaction. In each block is a summary of the transactions and the identity of the previous block, and this identity connection from one block to another is what makes the blockchain immutable. Changing a registry in the ledger from a year ago would require you to also change all the blocks following, catch up to the current length of the legit blockchain and then convince others that your version of the chain is the correct one and to work on it. Impossible!

Still, why is it called Proof of Work? You adding another block to the current chain and everyone else verifying that your puzzle solution is correct is proof of the work you did to be the first to solve it. The work you did is actually just letting your computer run to try to figure out the right combination. Everyone is doing the same and the more power you use, the higher your chance to be the one.

And this is where one frequent criticism of blockchain comes from: This process “wastes” so much energy and is bad for the environment. Another problem with PoW is that decentralization gets diminished through mining pools, where miners combine their computing power to increase their chances.

Luckily, just as we humans, blockchain also keeps on evolving and considering everything it is still a really new technology. Blockchain’s evolution could very well be towards Proof of Stake. In PoW or bitcoin for example we need the majority of miners to be working on the correct chain so that it is safe and working. Miners only incentive is the reward from solving the block and there is no punishment for doing something wrong and that is why we need these huge numbers.

In Proof of Stake on the other hand there IS punishment. There are no more miners, only validators. Every user that wants to participate in the decision-making process and benefit from transaction fees will have to deposit a certain number of coins in a vault. Then one user is “randomly” chosen to be the validator for the next block. This is not completely random and there are different ways to do it but generally the higher your stake/deposit, the higher is your chance of being chosen as a validator. But why would the whole network put his trust in one validator? This is where punishment comes in handy. If the validator approves faulty transactions, a significant part of their stake gets taken away. The idea is that this is deterrent enough and will keep the system safe. The second biggest cryptoasset Ethereumis undergoing this evolution right now, so keep an eye out in mid-2019 for Ethereum 2.0.

TL;DR: Everyone wants money and Proof of Work and Stake are just different ways of incentivizing someone to do the right thing. Work a lot to have a chance at some reward vs get punished if you do the wrong thing.

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