Proof of Work (PoW) VS Proof of Stake (PoS)

from Token Party

In this article we try to explain the difference there is between these two protocols Proof of Stake (PoS) and Proof of Work (PoW), the latest born with the Ethereum 2.0 network. Recently you might have heard about the idea of moving from an Ethereum consensus based Proof of Work (PoW) system to one based on the so-called Proof of Stake.

Proof of Work

Proof of Work is a protocol whose main objective is to deter cyber attacks such as a Distributed Denial-of-Service (DDoS) attack. It aims to exhaust the resources of a computer system by sending multiple false requests. PoW is perhaps the biggest idea behind Satoshi Nakamoto's Bitcoinwhite paper (published in 2008) because it supports trustless, distributed consensus. Nakamoto has applied this technique to his digital currency (Bitcoin) revolutionizing the way traditional transactions are set up. A trusted, distributed consent system means that if you want to send and/or receive money from someone else, you don't have to trust the services offered by third parties. When using traditional payment methods, you must rely on a third party to set up your transaction (e.g. Visa, Mastercard, PayPal, banks, etc.). These institutions maintain their own private ledgers that store the transaction history and balances of each account. Let's take an example Mario sends 100 Euros to Carlo. The third party service (bank) debits Mario's account and credits Carlo's account. Both users need to trust this third part to do the transaction correctly which will then be marked in the bank register. With bitcoin and other digital currencies instead, all users who participate in the network have a copy of the register and can update it and verify that it is correct. Anyone can therefore see all transactions made and view the balances of each account. Privacy is however guaranteed, as the names of the account owners are not directly provided, but alphanumeric codes that cannot be directly traced back to the identity of the owner. PoW is a requirement to define a complex computer calculation, also called mining, that must be performed to create a new set of trustless transactions (the so-called block) on a distributed ledger called Blockchain. The so-called mining in this case has two purposes:

  • Verify the legitimacy of a transaction
  • Create new digital currencies by rewarding miners for performing the previous activity

When you want to set up a transaction, here's what happens behind the scenes:

  • Transactions are grouped into what we call a block
  • Miners verify that the transactions within each block are legitimate

To do this, miners must solve a complex mathematical calculation called the PoW problem. A reward is then given to the first miner to solve this math problem. The verified transactions are then stored in the public Blockchain. All miners compete to be the first to find the solution to the mathematical problem involving the Blockchain, a problem that cannot be solved in any other way, but with powerful computers. When a miner finally finds the right solution, he or she announces it to the entire network and simultaneously receives a cryptocurrency prize provided by the protocol. The more computing power you add to the network, the more the average number of calculations required to create a new block also increases. This method also raises the cost of block creation, prompting miners to improve the efficiency of their mining systems to maintain a positive economic balance. However, all of this comes at a price, as in order to perform these calculations, the computers used by miners need a lot of energy with a consequent negative impact on the planet. To solve this problem, the developers of Ethereum, have invented a new protocol for a form of distributed consensus greener and cheaper, the so-called Proof of Stake.

Proof of Stake

This protocol will make the consensus mechanism completely virtual. While the overall consensus process remains the same at the (POW), the method of achieving the end goal is completely different. In POW, miners solve cryptographically difficult puzzles using their computational resources. In PoS, instead of miners, there are validators. The latter freeze part of their cryptocurrencies to allow validations for transactions . The greater the amount of virtual currency owned, the greater the number of blocks that can be validated. The frozen capital remains as a guarantee that the transaction will be successful. This guarantee deposit is called "collateral". Validators will receive the equivalent of the value of the commission for lending their monetary base in order to validate blocks.