Hey Everyone! 👋 In this article, we are going to discuss the most critical topic in blockchain technology. But, before that, we have to understand what is a crypto consensus mechanism because cryptocurrencies fall into the categories of Proof of Work or Proof of stake, and to understand both of these terms you have to be familiar with the concept of consensus. We will also understand which is better in efficiency, sustainability, and security.
👨🏫Cryptocurrency Consensus👨🏫
Consensus in cryptocurrency follows the same idea as a consensus between people. The difference is its computers coming to a consensus AKA an agreement about whether a transaction is valid or not. Usually, the consensus threshold in cryptocurrency is more than half, or 51%.
In simple words, A consensus mechanism is a way that a group of people makes a decision. For example, Bitcoin users need to constantly update their history of transactions to reflect new transactions and wallet balances.
⛏What is Proof of Work?⛏
Any computer that wants to process transactions on a proof of work cryptocurrency blockchain like Bitcoin needs to solve a complex equation to earn the right to do so. This costs time and energy to do. If this sounds tedious and arbitrary, it’s because it is. This idea of work exists exclusively as a means of protecting a cryptocurrency from manipulation by the computers connected to its blockchain.
Proof of Work can be confusing, but it's just a way for a bunch of people to compete in a blockchain. The winner gets a mining reward and adds the next block. Proof of Work is the first and most commonly used consensus model - it's used by Bitcoin!💰What is Proof of Stake?💰
Proof of Stake is a consensus model used by many cryptocurrencies (including Ethereum 2.0) that switches the way it picks the miners or validators that confirm blocks. Instead of letting luck pick those with the largest or fastest computers, proof of stake switches to a random selection process of those that put up a stake to validate future transactions.
Instead of using large amounts of computing power and energy to solve an equation to process transactions, a cryptocurrency coin is staked i.e. locked on the blockchain to earning the right to do so.
The length of time a cryptocurrency must be staked to process transactions can vary, as can the minimum amount of coins or tokens a computer must lock up as a stake.
Logically, the more cryptocurrency you stake, the more likely you are to process transactions and create a block.
⛓PoW: Advantages and Disadvantages⛓
In theory, anyone can connect their computer to a proof of work cryptocurrency to process transactions and earn cryptocurrency as a reward for doing so.
However, over the years companies have developed specialized computers called application-specific integrated circuit machines, or ASICs for short. This is gradually centralizing PoW cryptocurrencies.
What’s worse is that when a new and improved ASIC is released, the older model usually ends up in a landfill, and this is one of the many environmental concerns about proof of work cryptocurrency mining.
💱PoS: Advantages and Disadvantages💱
In theory, anyone can connect their computer to a proof of work cryptocurrency to process transactions and earn cryptocurrency as a reward for doing so. This is facilitated by the minimal hardware and energy requirements to participate in most proof of stake cryptocurrency blockchains. However, most proof of stake cryptocurrency blockchains have high thresholds when it comes to the minimum stake you need to put down to connect to it as an independent computer.
Moreover, most proof of stake cryptocurrencies had something called a premine which is where a bunch of coins or tokens are minted in advance and distributed to the team and large investors.
Consequently, most proof of stake cryptocurrencies is more centralized than Bitcoin and Ethereum since the average user is stuck delegating to a validator or staking pool belonging to the team and VCs.
Proof of Stake - Casper✅
CASPER will be a security deposit protocol that relies on an economic consensus system. Nodes (or the validators) must pay a security deposit in order to be part of the consensus thanks to the creation of the new block. Casper protocol will determine the specific amount of rewards received by the validators thanks to its control over security deposits.
If one validator creates an “invalid” block, his security deposit will be deleted, as well as his privilege to be part of the network consensus.
In other words, the Casper security system is based on something like bets. In a PoS-based system, bets are the transactions that, according to the consensus rules, will reward their validator with a money prize together with each chain that the validator has bet on.
So, Casper is based on the idea that validators will bet according to the others’ bets and leave positive feedbacks that are able to accelerate consensus.
👋Proof of Work vs Proof of Stake: Conclusion👋
Thanks to a PoS system validators do not have to use their computing power because the only factors that influence their chances are the total number of their own coins and the current complexity of the network.
So this possible future switch from PoW to PoS may provide the following benefits:
Energy savings
Provides fast and inexpensive transaction processing.
Doesn't require special equipment to participate.
I would also recommend watching this video as it gives in-depth analysis and to the point explanation. 👇
That's it for this blog post and in the next articles, we will be covering more complex blockchain topics in a simple way. Till then, you can follow our official channels and use our products on your next big web3 project! 👋