What is Proof-of-Work and Proof-of-Stake
In cryptocurrencies where mining is present, it is necessary that the miners confirm the payment is made. The confirmation of the payment by the miners is necessary to avoid double spending. The miner confirms the payment, only after that the payment is considered perfect and received by the buyer. Prior to the fact of confirmation in many cryptocurrencies, the payer can cancel the payment, so it is imperative that the recipient makes sure that the payment is confirmed.
There are various ways to confirm payments. The main ones are the Proof-of-Work (PoW) and Proof-of-stake (PoS) protocols.
Proof-of-Work (PoW) – proof of work. This protocol was created to protect systems from various abuses – hacker attacks, spam mailings.
The essence of the protocol is in two provisions:
- It is necessary to do a fairly complicated job
- Verification of progress should be simple
In order to receive money for processing the block and confirming payments, miners must perform certain work. Rather, the work itself is not performed by miners, but by their equipment. Equipment must carry out calculations of a certain complexity. Most cryptocurrencies have a hash complication algorithm. The more miners participate in mining, the more power they use, the more complicated the hashing algorithm. Complete the task becomes more difficult. This requires more energy costs and the purchase of large capacities.
So it takes 10 minutes to generate a Bitcoin block. 10 minutes is a constant. If more miners with more advanced and powerful equipment are connected to the system, then the block is processed faster accordingly. To prevent this from happening every 2 weeks or 2016 blocks, the hashing algorithm is complicated, so that it takes exactly 10 minutes to process one block.
Thus, the more miners mine cryptocurrencies, the more powerful they use equipment, the more difficult the hash algorithm is and the cryptocurrency becomes more difficult to mine.
All this has led to the fact that more and more energy and electricity are being spent on cryptocurrency mining.
As early as 2012, this approach led the crypto community to look for alternatives to the Proof-of-Work (PoW) protocol. Thus, the Proof-of-stake (PoS) protocol appeared. This protocol suggests that when mining blocks, those miners who have more of this cryptocurrency on their account will benefit. Thus, in order to mine cryptocurrency using the Proof-of-stake (PoS) protocol, the miner must itself be a cryptocurrency holder. And the more cryptocurrencies he has, the more chances he has to get a block. It does not require sophisticated equipment and large computing power.
According to the Proof-of-Work (PoW) protocol, the miner may not be the holder of the cryptocurrency that he miners at all. To carry out mining, he only needs to have the appropriate capacities. And the more power the minar has, the easier it is for him to get a block.
Principles of PoW / PoS Algorithms
The basic principle of the Proof-of-Work algorithm is the fact that the work is done. To confirm the payment, the miner must make certain calculations. There is competition among miners. The more the number of miners takes part in cryptocurrency mining, the more power they use, the more complicated the hashing algorithm and the harder it is to get a block.
At the same time, the miners themselves may not hold the cryptocurrencies that they mine. The main thing is to have powerful equipment. The more powerful the miners have, the more electricity and resources they spend on cryptocurrency mining, the more chances they have to get a block and get a reward for it.
When mining cryptocurrencies using the Proof-of-stake algorithm, the miner does not need to possess huge capacities and spend a large amount of electricity. He needs to be the holder of the cryptocurrencies that he produces. The more cryptocurrencies are stored on his wallets, the higher the miner’s chances to get a block and get a reward for its extraction.
Benefits of Proof-of-Work
Proof-of-Work proponents usually indicate not the virtues of the Proof-of-Work algorithm itself, but the weaknesses of the Proof-of-stake algorithm. The fact is that the Proof-of-stake algorithm assumes that the more cryptocurrencies are concentrated in the hands of one particular person, the more he has the ability to manage the entire mining process and choose those blocks that should be confirmed by rejecting other blocks.
The crypto community is against the idea of centralizing cryptocurrency mining in the same hands, so that one person or group of people controls the entire mining process.
On the other hand, the centralization of the mining process occurs not only when using the Proof-of-stake algorithm, but also when using the Proof-of-Work algorithm. In order to increase profit, miners buy more advanced and expensive equipment and use large capacities for cryptocurrency mining. The advantages are those miners who live in areas where cheaper electricity. So, 75% of Bitcoin miners are concentrated in China, where they have cheap mining equipment, cheap labor and cheap electricity.
Thus, mining is centralized when using the Proof-of-Work algorithm.
Benefits of Proof-of-Stake
The Proof-of-stake algorithm came about in response to the shortcomings of the Proof-of-Work algorithm. The fact is that using the Proof-of-Work algorithm has led to the fact that cryptocurrency mining required more and more electricity and production capacities of mining farms. A large amount of electricity consumed negatively affected the ecology and the environment. Experts began to talk about the harm caused to nature by cryptocurrency mining.
Therefore, an algorithm was invented that made it possible to mine cryptocurrency without wasting huge production capacities and electricity. The advantages of mining with the Proof-of-stake algorithm exist for those miners who have large cryptocurrency reserves. The more miners have cryptocurrencies, the more they are interested in maintaining the functioning and operability of that cryptocurrency, the reserves of which they possess.
Disadvantages of PoW / PoS Algorithms
There are no ideal cryptocurrency mining algorithms. Each of these algorithms has its own drawbacks.
The main disadvantage of the Proof-of-Work algorithm is that large resources, production capacities, and electricity are spent on cryptocurrency mining. Miners must constantly buy new, more advanced and productive equipment. At the same time, this equipment is used for only one purpose – hash decryption. It carries no other payload.
Over time, even more power and electricity will be spent on cryptocurrency mining using the Proof-of-Work algorithm, which will only worsen the environmental situation. Many governments are already concerned about the amount of energy miners spend and increase the cost of electricity for miners.
The main disadvantage of the Proof-of-stake algorithm is that in order to have advantages when cryptocurrency mining, miners must constantly keep the cryptocurrencies they mine, increasing the number of coins in their wallets. All this can lead to the fact that mining will be in the hands of a small number of people and miners will conspire to have great opportunities for cryptocurrency mining.
Differences between Proof-of-Stake and Proof-of-Work
Proof-of-stake suggests that the miner must have large cryptocurrency reserves in order to have advantages in their extraction. At the same time, the miner does not need to have large production capacities, mining farms and spend a large amount of electricity for cryptocurrency mining.
In the case of the Proof-of-Work algorithm, the miner may not be the holder of the cryptocurrency that he miners at all. For a miner, the main thing is to have powerful and modern equipment, mining farms and live in areas with cheap electricity or have access to cheap electricity. The cheaper the electricity in a certain area, the greater the advantages of miners over competitors from other areas. Therefore, cryptocurrency mining is concentrated in areas with cheap electricity. So 75% of Bitcoin mining and 70% of all cryptocurrency mining are concentrated in China, where electricity is cheap, also cheap mining equipment and labor.
What tasks does Proof-of-Work solve
The main objective of the Proof-of-Work algorithm is to ensure the smooth operation of the blockchain and protect it from DDoS attacks, spam and other abuses and fraud. In order to confirm the fact of the payment, the miner must do some work. Rather, the work should be done not by the miner himself, but by his equipment. And the more powerful the miner’s equipment and the more resources it has, the more likely it is to successfully complete the job.
Thus, all fraudsters and various abuses are cut off from the blockchain. After all, in order to carry out fraudulent actions, you also need to do the work. At the same time, the meaning of spam, DDoS attacks and other fraud is reduced to zero. Hackers are not profitable to commit any abuse with the blockchain. It will take too much resources, capacities and money.
Thus, the Proof-of-Work algorithm is built on the principle of energy and resource costs. Mining cryptocurrencies requires such resources that abuses are simply cut off due to the high energy intensity and their material disadvantage.
Thus, it turned out that the huge computing power and expensive equipment are not used for scientific work and computing, but only for one purpose – mining the unit and confirming payments. The reward for the block is sufficient so that the miners increase their capacities. Higher energy consumption and the purchase of more powerful, sophisticated and expensive capacities leads to the fact that the cost of mining, carried out using the Proof-of-Work algorithm, is only growing.
This, in turn, provokes an increase in the rates of the cryptocurrencies themselves, mined in this way. After all, miners will not sell cryptocurrency below its cost. And the more miners connect to the mining process, the higher the cost of cryptocurrency mining will be, the higher its rate.
Thus, the Proof-of-Work algorithm protects the cryptocurrency from a sharp depreciation. It cannot cost too little cryptocurrency, which is mined in such a complex way with such an amount of costs.