What is Proof of Stake? Differences from Proof of Work

mining such as cryptocurrency Bitcoin It is an energy-intensive business. But it doesn’t have to be that way.

Bitcoin, other cryptocurrencies, etc. Dogecoin and LitecoinSecure your network using: proof of work (PoW) consensus mechanism.

Alternative consensus mechanisms used in cryptocurrencies such as: Ethereum It’s called Proof of Stake (PoS), and it radically reduces the carbon footprint of blockchains.

In this article, we will look at what a consensus mechanism is and how Proof of Stake differs from Proof of Work.

What is a consensus mechanism?

public blockchainAt its most basic level, it’s just a database.

Most databases set permissions to access and edit the database. This centralized control is convenient, but it is vulnerable to hacking. In contrast, blockchain makes everyone running the software responsible for updating it, from exchanges to traders in their basements.

This is a potentially messy process, so blockchains use a “consensus mechanism” or “consensus algorithm.” The consensus mechanism keeps the network running and ensures that only legitimate transactions are added to blocks. All nodes (or computers running blockchain software) check with each other and conclude, “Yes, this is true.”

This prevents ‘51% attacks’, where someone can amass and control more than half of the computing power in a distributed network.

What is Proof of Work?

To prevent attacks that could result in funds being spent twice, Bitcoin uses a proof-of-work consensus algorithm. The system asks people to use their hardware (and electricity) to help the network process transactions. In proof-of-work, miners (more accurately, their computers) try to solve incredibly difficult puzzles to be the first to complete a block of transactions. Their work helps ensure that transactions are legitimate. You will receive compensation in cryptocurrency such as Bitcoin.

Proof-of-work is built into the design of Bitcoin and has been replicated by other cryptocurrencies, including Ethereum. However, one of the by-products of this system is that it requires many machines that use a lot of electricity to solve complex problems. Aside from the energy consumed by the winning miner, most of the system is debatable.

What is Proof of Stake?

Proof-of-stake aims to achieve the same result as proof-of-work: securely confirming transactions on the blockchain.

While PoW miners use hardware resources (large, expensive computers) to secure the network, PoS “validators” use cryptocurrency. PoS requires validators to lock or stake unusable cryptocurrencies in order to have the opportunity to confirm transactions within a block and earn the associated fees. Blockchain uses locked cryptocurrencies to secure the network.

According to the Ethereum Foundation, proof-of-stake has several advantages over proof-of-work.

• 🖥️ Earning rewards is not based on top computing performance, so you don’t need top-of-the-line hardware.
• 🔌 Because of its lower hardware requirements, Proof of Stake uses much less energy than Proof of Work.
• 👨‍💻 More people can participate in operating PoS nodes, which will make them more decentralized and more resistant to 51% attacks.

After the “merger” in September 2022, Ethereum switched from a proof-of-work consensus mechanism to a proof-of-stake mechanism.

How do I choose a network?

Validators on a proof-of-stake network like Ethereum are randomly selected from the network to propose new blocks.

They are also randomly grouped into node committees that change daily. Whenever a new block of transactions is created and added to the blockchain database, the PoS consensus mechanism selects several committees to “prove” that the proposed block is correct.

Validators are rewarded for creating blocks and proving that other blocks have been created. If the validator is offline or does not provide the correct proof, they will be penalized. If you try to attack the network, you may lose your entire stake.

This algorithm is designed to make attacks on the network statistically impossible. According to ConsenSys (an editorially independent investment firm): decoding)“The odds that an attacker controlling one-third of the network’s validators would control two-thirds of the committee’s validators to successfully execute an attack are less than one in a trillion.”

The future of proof-of-stake

Ethereum is not the first cryptocurrency to use proof-of-stake.

Algorand, Cardano, Cosmos, EOS, polka dotand thesis All have implemented proof-of-stake versions.

Since Ethereum switched to proof-of-stake, the amount of staked ETH has steadily increased. As of January 2024, there are over 29 million, or nearly a quarter of the total supply, according to Dune Analytics.

Some have raised concerns that Proof-of-Stake could lead to the centralization of blockchain networks, and staking has become a regulatory flashpoint in the United States, with the Securities and Exchange Commission ruling that staking services offered by cryptocurrency exchanges can be used for unregistered securities products. It was claimed that this was the case.

Meanwhile, environmental campaign groups such as Greenpeace have been pushing for Bitcoin to switch to proof-of-stake. However, it is highly unlikely that the Bitcoin network will do so, given its ideological attachment to proof-of-work as a decentralization tool. To date, the Bitcoin miners and developer community have rejected proposed changes to the system designed by Satoshi Nakamoto.