If you are an avid cryptocurrency enthusiast, you must have heard some phrases such as “proof of work” and “proof of stake”. Well, we know the two terms can be really confusing, especially if you are just starting out in this industry. But don’t worry, because that’s why we have created this post. We are going to take you through these two terms, helping you understand how new cryptocurrencies are released into the market.
Let’s start with Proof-of-work because it’s the most popular one. In simple terms, proof-of-work is basically a piece of data that’s costly and time consuming to produce, but extremely easy to verify by sustaining specific requirements. Its main goal is to deter cyber-attacks, especially DDoS (distributed denial-of-service), which sends a number of fake requests in a bid to exhaust the resources of computer systems.
Bitcoin is the most common cryptocurrency that uses proof-of-work, but that doesn’t mean that the concept did not exist before the digital currency. In fact, before Satoshi Nakamoto applied the technique, it had already been published in 1993 by Moni Naor and Cynthia Dwork.
So, how does proof-of-work protocol work? Now, view it this way: traditionally, when you wanted to make payments, you had to try a third party (in this case banks, Paypal, Mastercard or Visa), right? Well, these institutions keep their register that stores balances and transaction history. Now, with proof-of work, everyone on the blockchain has access to a copy of the ledger, meaning that you don’t have to trust your money with a third party. Anyone within the network can easily and directly verify the entire information written.
Proof-of-work and Mining
Let’s go a bit deeper. Proof-of-work is required in order to define difficult computer calculations called mining that have to be performed to created blocks (a group of trustless transactions) on blockchain. This serves two purposes: one, it helps verify the legitimacy of transactions; and two, it helps create new cryptocurrencies by simply rewarding miners that perform the task.
When transaction, there’s a lot that happens behind the scenes. Firstly, the transactions executed are bundled together and put in block, and then miners start to verify the transactions within each of the blocks. They solve proof-of-work problem or simply mathematical puzzle and the first miner to manage it receives a reward.
Apart from bitcoin, other cryptos mined using this protocol include Dash, Litecoin, BitConnect, Steem, Ethereum Classic, Ethereum, Zcash, and Bitcoin Cash among many others.
When transactions are executed on the blockchain network, they have to be validated. However, the validation doesn’t have to be through proof-of-work; there’s a different way to do it and achieve the distributed consensus – this is what is called proof-of-stake.
This protocol aims to achieve basically the same thing as its counterpart proof-of-work, but the difference comes in the process of achieving the goal. The idea was suggested in 2011 in a bitcoin talk forum, but the first crypto to use the method was Peercoin, which was launched in 2012, followed by Nav Coin, Qora, NuShares?NUBits, BlacksCoin, NXT and ShadowCash..
In simple terms, Proof-of-stake is an algorithm by which the cryptocurrency network achives distributed consensus. In this system, the creator of a block is selected through a combination of random selections based on age (i.e the stake) and wealth. Unlike PoW, it doesn’t require solving intensive puzzles in order to validate transactions. In PoS system, miners don’t earn via block rewards. Instead, they get the transaction fees.
Here’s how this system works: let’s say you have 100 altcoins, right? The coins have will have a specific age attached to them depending on how long you have had them. This age is only reset when you move them from one address to another. Those tasked with validating, known as forgers, earn part or even the entire transaction fees.
No need to get expensive hardware, because a simple PC would work well provided it is online. The validations or verification is also timely and faster, and the system doesn’t require a lot of energy. Some of the common coins that use this system include Ripple, IOTA, NEM, Qtum, Omisego, Lisk, Stratis, and Waves.
The world of cryptocurrency has been a blessing to the way transactions are done online. But just like the traditional system, where verification of transactions is needed, a way had to be devised to ensure accurate verification of cryptocurrency transaction is developed. Now this is where these two systems came in: proof-of-work and proof-of-stake. They both aim at the same thing, but the process at arriving to it is different, as you have seen in the post. But one two things are certain: they both guarantee utmost security and transparency!