Consensus Mechanisms Explained: Proof-of-Work and Proof-of-Stake

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Most people mine or trade cryptocurrencies as a digital asset. While a responsible investment after doing your research makes great sense, many fail to understand the basics of cryptocurrencies before jumping in. One of the basics of cryptocurrencies is their consensus mechanisms. Let’s have a closer look.

Sure, buddy!

Proof-of-Work (PoW)

PoW is a protocol (or system) that has the main purpose of deterring cyber attacks. Such threats are likely to come from a distributed denial-of-service attack (DDoS). Think of it like a group of people crowding the gate to a shop and not letting shoppers in simply to disrupt normal operations.

The concept dates back to 1992 and was first applied to money by Hal Finney in 2004. Finney is the first person to have received a bitcoin transaction. He is also my top pick for the “who the real Satoshi Nakamoto is” mystery.

To protect its blockchain, Bitcoin implemented a PoW system, known as Hashcash, developed by Adam Back. Hashcash is responsible for securing the mining process.

Adam Back, the cryptographer behind Bitcoin’s PoW system, Hashcash

To sum it up, PoW is the validation of work that already occurred and proof that it was handled correctly.

Now, how does all of this benefit a blockchain?

In the Bitcoin whitepaper, Satoshi Nakamoto (don’t email him, he won’t reply. And don’t beg him for free bitcoins. I heard he won’t reply to those emails, either), had the brilliant idea to introduce PoW to create a distributed trustless consensus and solve potential double-spending problems.

Satoshi Nakamoto states, “We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work.”

So, PoW is a requirement to validate computer calculations (i.e. mining) in order to create a new group of combined transactions (i.e. blocks) on a distributed ledger (i.e. blockchain).

PoW is under scrutiny due to its huge power consumption. Knowing that most of this power comes from burning fossil fuel, everyone but Trump can understand the jeopardy toward life on earth.

Proof-of-Stake

A crypto-vegan’s heaven

Unlike PoW, a Proof of Stake (PoS) mechanism requires the engaged nodes to own a number of cryptocurrency units – or coins. To create a new block, a node or creator is chosen in a pseudo-random way based on his wealth or “stake.”

The terminology differs in the proof-of-stake mechanism where blocks are forged not mined. Users (nodes) who validate transactions and create new blocks are called forgers.

Forgers are first asked to hold their coins at stake, which is similar to placing them in escrow. This means that validating fraudulent transactions means losing one’s own holdings, not to mention being banished.

Most cryptocurrencies adopting PoS issue a fixed number of coins in genesis. There is no further creation of coins, usually after the ICO. Unlike PoW, there are no new coins to be mined as incentives for block validation/creation. Instead, forgers receive transaction fees. In a few cases, however, new coins can be created by inflating the coin supply, and forgers can be rewarded with new coins.

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Fell down the rabbit hole two years ago. Time to write about it.

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