Crypto Academy Season 3 Beginners' course - Task 4: Different types of Consensus Mechanisms
What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?
Proof of work
Proof of work concept existed much before its use ny Hai Finney for securing financial transitions in 2004 and the first cryptocurrency to adopt it was Bitcoin in 2009. PoW is a autonomous or decentralized consensus algorithm in which computational power of nodes has to do work of solving complex cryptographic puzzles to find a transaction hash so as to verify and valodate the transaction. Let's me try to explain it in more simpler terms.
When we perform a bitcoin transaction, it needs to be verified before recording on blockchain. So a transaction is added to unverified pool of transactions. To verify a transaction, nodes need to find a correct hash with the help of computational power. The node that first finds the correct hash verifiy the transaction and distribute the transaction across all the nodes involved in the blockchain. After independent verification by all the nodes, the transaction is recorded and distributed across this public ledger. In this way, blockchain represents the highly secure and transparent record Keeping system of Bitcoin. The miners are rewarded for doing this task from newly generated cryptos produced as a result of mining.
So we can say that proof of work is a consensus mechanism based on computational power of nodes to secure cryp5os like BTC, ETH, BCH, LTC, DOGE, DASH etc from online malicious attacks like double spending etc.
Proof of Stake
Proof of work was first conensus mechanism adopted by first known cryptocurrency to mankind, that is, Bitcoin. Soon we begin to experience some shortcomings of PoW. To address those issues, new consensus algorithms were created like PoS, DPoS, PoB, PoC etc. Let's understand PoS.
PoS was first adopted by Peercoin and was later followed by ADA, BNB, DOT, AVAX etc. in PoS as the name implies, miners are not randomly choosen but they are choosen on the basis of coins staked. Miners are able to mine blocks proportionate to percentage of coins staked. A miner who stakes 10% of coins will get opportunity to mine 10% ot blocks.
Unlike PoW no new coins are generated instead miners are rewarded from the transaction fee paid by the users of network.
Advantages of Proof of Work
Anyone can participate in mining process by just having hardware access. No permission is required from anyone. It is a completely decentralized consensus mechanism.
Miners are rewarded from tokens newly generated during mining. Mining rewards are comparatively better.
PoW has highest level of security conferred upon it by complex cryptographic puzzle based hash function unique to each transaction.
- PoW consensus algorithms makes networks immune to attacks like DDoS, double spending etc
Disadvantages of PoW
The powerful devices used in proof of work consensus algorithm are costly and they consume huge amount of energy. Therefore Pow is costly and energy inefficient mechanism.
PoW is not Eco friendly becuase hardware devices used for mining generate a lot of noise and therefore establishments where mining rigs are set are not worth living. Moreover, some speculation about environmental degradtion can be found too.
PoW networks have lesser scalability due to mamy reasons like small block size etc.
PoW is susceptible to 51% attacks because of consolidation of 51% of computational by some frivolous financial institutions.
Mining rewards keep on decreasing. In case of Bitcoin, rewards keep om halvings once every 210 000 blocks until the maximum forecasted supply of 21 million bitcoins has been released by the bitcoin network. So it is an apprehensive factor for miners before setting a mining rig.
Advantages of PoS
PoS is stake weighted consensus mechanism primarily created to address the issue of energy inefficiency of the proof of work mechanism. So it isnenergy efficient mechanism.
PoS is cost effective as well.
PoS is lees susceptible to 51% attacks because it is not advantageous to stake 51% tokens.
PoW is eco friendly. No issues like pollution or energy drainage are seen.
Miners are paid rewards from the transaction fee charged from the users of the network. With the passage of time, network fee is likely to increase and miners are likely to get good rewards contrary to proof of work mechanism where rewards keep on decreasing with time .
Scalability is better than PoW.
Disadvantages of PoS.
PoS is a centralised mechanism as mining rights proportionate to tokens staked. So more the tokens staked, more will be your mining block capacity.
Rewards given to miners when compared with BTac are lesser.
Although not susceptible to 51% attacks but security is not as complex as PoW.
Staked tokens can't be used for any purpose as long as mining is pursued.
Scalability of PoW and PoS.
PoS networks in addition to other benefits mentioned above has better scalability than PoW following networks. Example are given below
| PoW coin (TPS) | PoS coin(TPS) |
|---|---|
| BTC - 7 | XRP -1500 |
| ETH -30 | ADA - 257 |
| Eogecoin -70 | DOT -1000 |
TPS : Transaction processing speed ( Per second)
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