Proof of work vs Proof of stake- Whats the differences?

/Proof of work vs Proof of stake- Whats the differences?

Proof of work vs Proof of stake- Whats the differences? 2018-02-21T17:14:17+00:00

PoW vs PoW

Proof of work and proof of stake both are fundamentally two different ways of mining various cryptocurrencies. So in this article, I will explain in detail the difference between proof of stake and proof of work for beginners or for anyone trying to figure out the difference.

What is proof of stake?

The key thing for proof of stake is wealth. In proof of stake, miners are called validators, there is a block which needs to be generated and there are four validators. Each validator deposits their money in the blockchain so that he or she can validate or sign a block. The first validator has the most money or wealth as he takes up 38% of the block, the second validator has 25%, the third has 21% and the fourth has 16%. In proof of stake the bigger the stake the more chances you have of solving the block. So basically the rich get richer as the ones with the most stake get rewarded not in coinage but in transaction fees. Proof of stake is a lot more environmentally friendly compared to proof of work so no real world energy is really wasted in this process. One key thing to keep in mind is that no new coins can be generated or mined.

Proof of stake coins

NEO >> This coin is formerly known as Antshares and it exists on NEO’s blockchain. Despite being classified under the category of proof of stake the coin is somehow is different from other PoS coins as there is no need to keep the stake wallets open constantly and it can be staked in an NEO wallet for a good return.

NXT >> This cryptocurrency was introduced in 2013 and is the first one that brought up Proof of Stake blockchain. Since then it operates as an alternative to Bitcoin. The idea behind NXT is to develop a blockchain that would be easy to use and adapt for various business applications. However, some people claim that the returns on NXT are not great anymore.

Lisk >> This cryptocurrency and its blockchain technology try to be as accessible as possible. The blockchain network’s coin known as LSK was first issued in 2016. Currently, they work on Software Development Kit, which will deploy the blockchain network to the Lisk network. In 2017 Lisk had a rather big growth.

Bitshares >> This is a user of somehow different PoS technology. Bitshares is based on Delegated Proof of Stake technology. The DPOS is rather new and aims to solve the problems that are faced both by PoW and by PoS. The technology aims to maximize the returns and quality of performance. Many experts have predicted that Bitshares are going to dominate the market during 2018.

Stratis >> This PoS cryptocurrency is a blockchain platform that tries to make the C# applications more reliable and developed on the dot NET framework. The STRAT token runs the platform and can be stored on the official Stratis Wallet. Currently, Stratis staking is not very profitable as the annual return is estimated to be maximum 1%.

Stellar >> The Stellar Lumens Consensus Protocol aka SCP, is a system that reaches consensus and does not rely on closed systems that record Lumens transactions. Stellar secures its blockchain by relying on a Byzantine agreement system. Stellar has an increasing rate that is fixed to 1% per year.

Proof of Stake mining:

Now let’s see what the process of Proof of Stake mining looks like. Proof of Stake systems requires users to indicate that they own a certain sum of cryptocurrency. Before moving on here are some of the terms that you need to know about:

  • The “stake” is the user’s wealth and according to the size of the stake, the creators of a new block are decided with a random pseudo method.
  • As a potential miner, you should be aware that PoS mining is often referred to as “minted” or “forged” rather than mined.
  • The people who validate transactions and are behind the creation of new blocks are called “forgers”.

Usually, the cryptocurrencies are created at the launch of the currency, however, the number of these digital currencies is fixed. For this reason, forgers receive transaction fees as rewards instead of using the cryptocurrency units as rewards. Forgers are rewarded with new cryptocurrencies usually when the new currency units are created by inflating the supply for the given coins.

In order to get started with PoS mining here is what you need.

  1. Computer
  2. Internet
  3. Coins (many)
  4. Patience

To start the PoS mining (staking) you need to:

  1. Set up a wallet.
  2. Let the program be downloaded and then download the blockchain (make sure you get those from reliable sources).
  3. After installing run the blockchain by typing in “%app data%”.
  4. Dump the blockchain into the app data of your wallet.
  5. Encrypt the wallet by clicking in encrypt.
  6. Type in your password. Make sure you remember the password because if you lose it you’ll lose your coins.
  7. After the previous step, the wallet may close down so you should reopen it again.
  8. If you see a lock sign it means that the encryption was successful.
  9. Send some coins to this wallet.
  10. Unlock the wallet and it will start sticky syncing.
  11. Your coins have to mature, in other words, sit in the wallet for a while. It may take from 4-48 hours to do so and the time varies depending on what type of wallet you use.
  12. Start staking.

Ethereum Proof of Stake

Ethereum team decided to choose PoS vs. PoW because PoW requires hard labor such as mining hardware, electricity, network and more for securing the actual transaction, they are developing a new method to move ether from PoW to PoS. PoS takes the “hard labor” out of the system and separates, spreads the work on the network. This transaction results in fewer miners and more stake owners but still manages to rich the same objectives. The protocol that Ethereum PoS has chosen to go with is known as Casper. Learn more about Casper protocol.

What is proof of work?

If you are not new to the world of cryptocurrencies then you may have heard the phrase “proof of work.” Proof of work is all about trust or the absence of trust because of blockchain technology you do not have to trust anyone.

In the case of normal bank transactions, you trust the bank because they have all your transactions which is a centralized ledger. So the verification process is done by the bank’s centralized server however with blockchain everything is decentralized which means you do not have to trust anyone and everyone can access the decentralized ledger where all the transactions are stored. In this case, the verification process is done by the system which is also called distributed consensus. All the transactions live in something called a block and all these transactions on this block need to be verified through mining. A transaction cannot be verified easily so it needs to be solved and this solving is done by mining machines owned by people all around the globe.

The reason so many people mine is that the more you mine the more money you get in the form of the cryptocurrency. In the case of proof of work a lot of resources are being used, first, the person who wants to mine any cryptocurrency has to buy expensive hardware or machines and then a considerable amount of electricity is used in the process. So in summary for proof of work miners mine the cryptocurrency and they get a handsome reward in the form of coinage. This process also results in new or more of the cryptocurrency being mined.

Proof of work coins:

Bitcoin >> Bitcoin is the most expensive cryptocurrency in today’s world and uses proof of work for mining. SHA256 is used for mining bitcoins and in return, the people mining the coins are rewarded with about 12.5 bitcoins for each block they mine successfully on the blockchain. The growth of bitcoin has been tremendous, although it is down to $11500 these days, it had touched over $18,000 during December of 2017.

Ethereum >> This is another popular cryptocurrency which is currently valued at over $1000. The algorithm used by Ethereum for mining is known as ethash designed to require more memory to make it harder to mine using expensive machines. Ethereum has grown rapidly too, it was worth just over $650 in December of 2017 and now it has crossed $1000.

Bitcoin Cash >> Similar to Bitcoin it is based on PoW too. Bitcoin cash uses Emergency Difficulty Adjustment algorithm. With its rising demand, the mining difficulty rose too and therefore mining it is not as profitable as it used to be.

Dash >> This cryptocurrency was formally known as Darkcoin or Xcoin. On top of bitcoins feature set it offers instant transactions through InstantSend and PrivateSend. The growth of Dash Coin was pretty rapid too, over 1.9 million coins were mined within the first 2 days after launch. This is roughly 10% of the entire supply of this cryptocurrency or of Dash and it uses the concept of proof of work for mining.

Proof of Work mining:

If you want to mine any cryptocurrency which uses the concept of proof of work for mining so that you can earn some money through the reward you earn in the form of that particular cryptocurrency then here are the steps you have to follow:

  • To get started you should get a custom hardware for mining. Even though even simple PC CPU should be good for mining the mining difficulty has become unreachable for this hardware. So to make sure the mining is profitable you should get a mining hardware.
  • Now you have to create a wallet which can be easily created on various platforms.
  • The second step is to either join a pool or do it alone, a pool allows you to share the resources and so the reward is shared too. If you join a pool then you get the return quickly and if you do it alone then it is very difficult to mine but you get to keep all the reward.
  • The last step is to download any mining software and start mining. Once the mining has started you may want to keep an eye on the temperature of the machine as the machines can heat up while mining and you might need to use extra fans to keep it all cool. The reason the machine heats up is that mining software pushes the hardware to its maximum limits.

PoW vs PoS

PoW PoS Protocol
The blockchain ledgers contain all the transactions in order to make sure the users do not spend any holdings twice. For this reason, the ledger is distributed aka public. XORed and arbitrarily biased distributions are the ones that provide with uniform distribution. Distribution
The PoW mining requires hardware, electricity, network and all in all a hard work. PoS distributes the work all over the network. Mining
PoW is not as profitable as it used to be. The rise of mining difficulty makes mining less available for many people. PoS is more profitable and for that reason, Ethereum decided to replace PoW with PoS. Profitability
PoW is considered safer. The safety of PoS is still in question due to the threat of hacker attacks and thefts. Safety
No need to trust or involve thirds parties. PoS aims to reduce the centralization risks. Decentralization

PoS PoW difference, which one is really better for blockchains?

Many people claim that Proof of Work is not the best algorithm for blockchain as the people who hold many coins keep making even more coins. This is unfair from the competitive point of view and is against the idea of decentralization. The issue of Proof of Work, as it has already been mentioned, is mainly the large consumption of electricity, which is required for securing the blockchain. For instance, the most popular cryptocurrencies Bitcoin and Ethereum spend $1 million of electricity and hardware expenses on daily bases. These costs are extremely high not only from the miners’ point of view but from the environmental viewpoint as well.

Proof of Importance

The debate between what is better Proof of Stake and Proof of Work does not end as easily as a new competitor is entering the game. Proof of Importance aka PoI is considered the future of the protocols that will be a good medium and will solve the issues people face when using Proof of Stake and Proof of Work.

  • Proof of Importance is a mechanism of blockchain consensus.
  • Proof of Importance was introduced by NEM (New Economy Movement).
  • It works somehow similar to Proof of Stake.
  • Proof of Importance uses more variables in the score.
  • The calculations come from the page rank and math of network cluster.
  • The inputs are net transfers, cluster nodes and vested amount of currency that was for creating nodes.

Bottom Line

As you see the cryptocurrencies and even their mining keep evolving and improving all the time. Despite their relatively new history, these technologies have been constantly doing their best to improve and fix the flaws of the previous ones. Hopefully, this article was helpful for you to understand the current mining protocols.

Make sure to check out our website for more articles that will help you to catch up and keep up with the crypto world. Thank you.