What Are Proof-of-Work and Proof-of-Stake Algorithms?

Last Modified:28 Feb 2021 13:35:07
What Are Proof-of-Work and Proof-of-Stake Algorithms?

Proof-of-work (POW) algorithm is the most widely used in Blockchain networks. For example, Bitcoin, Ethereum, and Counos Coin, three of the most well-known cryptocurrencies in the world, use proof-of-work.

However, recently, Ethereum has decided to move from proof-of-work to proof-of-stake (POS) as part of their development map.

The concept of proof-of-work was first introduced by Cynthia Dwork and Moni Naor in 1993. Bitcoin is the most well-known network that implements this algorithm, and thus, it will be used to explain this algorithm.

Before being registered in a block, Bitcoin transaction are grouped in a memory pool called “mempool” and a new block is created every ten minutes. Every transaction that is in the mempool requires verification, which is something that miners do. This process of verifying transactions is called mining. The miner verifies the transaction and then puts it in the next block.

In order to do so, the miner needs the hash value of the previous block. To do this, the miner uses great computation power to solve the complex mathematical puzzles.

After putting the effort, and mostly the computation power, the miner finds out the hash value of the previous block and announces it to the network. Then the transaction will be put in the new block, and the miner gets a reward for solving the mathematical puzzle, which inevitably led to the proper working of the Blockchain network. This is called the proof of work.

Proof-of-work makes it hard for a DDOS attack to happen. Since capturing 51 percent of the computation power in a network that uses the POW, the algorithm is too costly to be lucrative. Therefore, POW makes Blockchain networks very secure.

However, this security comes at a price. Solving the increasingly difficult mathematical puzzles requires more and more computation power and that requires more and more electricity and therefore, other forms of energy.

However, the proof-of-stake (POS) solves all these issues. In the proof-of-stake algorithm, all coins are already mined, so there is no need for mining.

In order to register a transaction in a block, nodes will volunteer to share their stake of the cryptocurrency in order to validate the transaction. Those who get to validate the transaction and register it in the next block are chosen based on various random selection mechanisms such as assets and coin age. This process of registering transactions in the next block is called merging, as opposed to mining.

Therefore, proof-of-stake eliminates the need for complex mathematical puzzles to be solved in order for a new block to be created, and thus, new coins being generated. Thus there will no longer be a need for large amounts of computation power and mass consumption of energy.

The proof-of-stake (POS) algorithm does not require energy as much as POW, and some projects are already using it, like the cryptocurrency DASH. However, it is not as secure as the POW algorithm.