Ethereum’s planned move to PoS has got most of us asking, “what is Proof of Stake?”. But very few resources seem to have the answer.
With more people becoming involved in the crypto industry each day, experts need to be giving clear, accurate, and reputable information that helps new users to better understand the assets that they’ll potentially be investing in.
Once you’ve gained a basic understanding of the most common types of cryptocurrency, such as Ethereum and Bitcoin, the next step is to begin to look at the technology behind these digital currencies.
There are a few different types of technology and validation mechanics that are used, each with its advantages and drawbacks – in today’s article, we’re going to take a look at each of these, explaining the subtle differences and what this means for the currencies that use them.
These approaches have been used to achieve consensus among database nodes, application servers, and other enterprise infrastructure components for decades. New consensus techniques have been developed in recent years to allow cryptoeconomic systems like Ethereum to agree on the state of the network.
In a cryptocurrency system, a consensus mechanism also aids in the prevention of certain types of economic attacks. By controlling 51 percent of the network, an attacker can theoretically compromise consensus. Consensus measures are in place to prevent this “51 percent attack.” Different approaches have been developed to address this security issue in various ways.
The two types of consensus mechanisms that you’ll commonly see referenced across the crypto industry as PoW and PoS, or Proof of Work and Proof of Stake.
The question that remains is, “what’s the difference?” – to help keep things clear, you can find a jargon-free definition of PoW and PoS below:
How does Proof of Work operate?
Bitcoin and Ethereum both currently use this method of consensus to validate transactions and add evidence to the blockchain, however, there are plans for currencies to stop utilising this method and instead adopt the PoS protocols.
Ethash, a proof-of-work technique, requires miners to compete in a trial-and-error race to determine the “number only used once” for a block. Only valid “number only used once” blocks can be added to the chain.
A miner will continually run a dataset, which can only be obtained by downloading and running the entire chain , through mathematical processing when racing to build a block. According to the block difficulty, the dataset is used to build a mixHash below a target “number only used once”. Trial and error is the most effective method for doing this.
The target hash is used to determine the difficulty. The smaller the target, the greater the difficulty which can be altered to create more efficiency. . Other miners and clients can easily verify this once it has been produced. Even if just one transaction changed, the hash would change significantly, indicating malpractice.
Hashing makes it simple to detect fraud. However, proof-of-work is a significant disincentive to assaulting the chain as a whole, which adds a heightened level of security for all parties involved in transactions.
What is Proof of Stake?
Proof-of-stake is a consensus method that blockchains employ to reach distributed consensus. Miners demonstrate that they have cash at stake by expending energy through proof-of-work.
PoW is far slower and much less scalable than PoS, which may present limitations on how PoW blockchains are utilised in the future following continued industry growth.
What difference will the switch to PoS make?
Proof of Stake consensus mechanics allow Validators to add transactions to the blockchain with far more efficiency, both in terms of the level of effort required and the time needed.
The environmental impact of PoS is much lower than that of PoW, which means you can stick to green initiatives and reduce the amount of damage caused during the mining process, which is one of PoW’s biggest drawbacks.
PoS provides an economic incentive to approve valid blocks, which encourages more Validators to become involved.
As with any new and upgraded technology, one of the major risks associated with PoS is that it has not been fully tested and proved to be a valid, reliable consensus mechanism.
PoS setups can lean more towards a centralised structure, which is not best suited to crypto’s DeFi protocols.
There are fears that PoS may not be as secure or tamper-resistant as Proof of Work, as it hasn’t been tested and challenged to the same extent that the previous system has.
The BCB Group team BCB Group is the fastest-growing crypto-native provider of business accounts, serving most of the major industry players with access to over 29 fiat currencies.
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Chris is an industry veteran, passionate about financial innovation, and was previously at Bitstamp, where he held the role of Head of Business Development and was responsible for helping financial institutions enter the crypto market and focused on identifying opportunities for integrating crypto with traditional finance. Prior to that, he…