Difference between Proof of Work and Proof of Stake

Difference between Proof of Work and Proof of Stake

Back to New at Nirolution Blockchain Blog

Difference between Proof of Work and Proof of Stake

So what is the difference between Proof of Work and Proof of Stake. You probably might have heard of “Proof of Work” in context with blockchain. But did you know there is another method the so-called “Proof of Stake”? Therefore we will discuss the main difference between Proof of Work and Proof of Stake. We will also clarify which method is more relevant for the future.

“Difference between Proof of Work and Proof of Stake” – Content:

  1. Evolution of Proof of Work
  2. What is the Proof of Work?
  3. Problem with Proof of Work
  4. But how to trust the other validators?
  5. Problem with Proof of Stake
  6. “Difference between Proof of Work and Proof of Stake” – Summarized

Evolution of Proof of Work

The idea of Proof of Work existed even before Bitcoin. Only a few people know that Satoshi Nakamoto did not invent this type of protocol. In fact, it was Cynthia Work and Moni Naor who came up with this concept in 1993. The main goal was to deter cyber-attacks such as a distributed denial-of-service (DDOS) attack. They send several fake requests to exhaust the resources of the computer.

In 1999 Markus Jakobsson and Ari Juels were the ones who published the term ‘Proof of Work’ in a document. But nonetheless, Proof of Work is maybe the biggest idea behind Nakamoto’s Bitcoin white paper – allowing us a persistent transparent public append-only ledger. It is a mechanism of creating consensus between distributed parties. So you don´t need to trust each other but trust the system. In the following, we will explain to you the difference between Proof of Work and Proof of Stake.

What is the Proof of Work?

Because not everyone in the network is honest, there has to be a way to prevent cheating. So to secure the Network, miners validate incoming transactions and note them in the block. They all compete by solving a complicated cryptographic puzzle. The solution found is proof that the miner has performed his work to validate the transaction. The first one to find the solution gets a reward. For example, he gets an Ether as payment. We call this process mining. You can use this process for two things in the network. The first one is to verify the legitimacy of a transaction. Secondly to create a new digital currency by rewarding miners for performing the previous task.

This mathematical puzzle has a key feature, it is asymmetrical. That means that the puzzle must be hard to solve for the miners. But at the same time, it has to be easy for the network to check if the solution is correct. They can only solve the puzzle by randomly trying. This requires a huge number of attempts to get the right solution. If a miner finds the right solution, he announces it to the whole network and receives a reward. So the effort of a miner to validate and secure incoming transaction is called Proof of Work.

Problem with Proof of Work

However, this process requires a ton of computing power. Proof of works gives more rewards to people with better equipment and connection. This means the higher your hash rate is, the better is the chance to be the first one that solves the mathematical puzzle. This led to a situation where people are building huge mining farms. Miners even come together to push their chances even further to so-called Ethereum ‘mining-pools’. All miners of the pools then receive an equal reward. So this is causing the blockchain to become more centralized. Therefore we need to find a better way to validate a transaction with proof of work.

What is Proof of Stake?

To avoid getting to centralized with the Proof of Work method, we need to find a better solution to validate and create blocks. For this purpose, they invented Proof of Stake. For Proof of Work an algorithm rewards miners who solve mathematical problems. But with Proof of Stake, the creator of a new block is chosen in a deterministic way. Thus, it depends on your wealth and stake. They previously create all the digital currencies and their number never changes. The miners will not get any reward for creating a block. Instead, they get transactions fees as a reward.

To become a validator you have to deposit a certain amount of coins into the network as a stake. The size of this stake determines the chances of a validator to forge the next block. So the more you put in the higher your chances are.

That sounds unfair because it favors the ones who deposit the most money. But in reality, it’s by far fairer then Proof of Work. The price rich people pay for the mining equipment and electricity bills don’t go up in a linear fashion. Instead the more they buy the cheaper it will get.

But how to trust the other validators?

So a chosen person can validate and create the next block. If he approves a crooked transaction in this block, he will lose a part of his stake. But as long as the stake of the validator is higher than the reward of the transaction fees, we can trust him. If it doesn’t, they will lose more money than they gain. So there is a financial motivation to act properly and trustworthy.

Problem with Proof of Stake

There are some flaws in the Proof of Stake algorithm. Rich people will get chosen more often which means they will get more transaction fees. Making them richer and therefore increase the chance of being chosen as a validator. And even more problematic is that validator sometimes doesn’t show up to do their job. Therefore Proof of Stake is a better version then Proof of Work but still needs to be optimized. And these are the difference between Proof of Work and Proof of Stake. We hope you like and understand it.

“Difference between Proof of Work and Proof of Stake” – Summarized:

  • In the early development, the main goal was to deter cyber-attacks
  • They prevent cheating
  • Solving a complicated cryptographic puzzle is called Proof of Work
  • Proof of Stake chooses the creator of a new block in a deterministic way which depends on its wealth
  • Digital currencies are previously created and their number never changes
  • Proof of Stake is a better version then Proof of Work but still needs to be optimized.

If you want to be informed about the latest updates, follow us on Facebook, Pinterest and Steemit.

Stay current on your favorite topics

This Post Has 2 Comments

  1. Rob, many thanks for the explanation. What still puzzles me: We all know that “money makes the world go around”, so it does need a financial reward to attract enough miners in a PoS system. And, as you note, in PoWs, it is some sort of transaction fees which serves the purpose.
    So far, so good. But now we have a conflict: On one hand, a blockchain needs a lot of participants to mitigate on the problem of potential 50%-attacks, but on the other hand, the incentive scheme described for PoWs also privilege the rich (and make them even richer).

    But why is this? As you described, it would be enough that the stake at risk for a miner is higher that his potential reward. So this is just a _relative_ figure, not an _absolute_ one!? e.g., say that a miner puts $10 at risk for his PoS mining work, but only receives a reward of $0.01 per transaction. Obviously, you don’t have to be rich to invest $10, but the community would still be save as long as a detection of malbehavior could be detected & managed by the blockchain before that fraudulent miner could finalize more than 10/0.01=1000 transactions.

    -Shouldn’t it be possible to protect a PoS system with just such a “relative” backstop scheme? That way, literally each participant of a PoS chain could afford to be a validator/himself also, which would immediately lead to a large active validator community protecting the overall blockchain this way?

    1. Hey Kai,

      that´s an awesome question!

      It is quite difficult to answer this complex question in a view words.

      Short Answer: It is a relative figure, but has a minimum limit. At the beginning it was around 32 ETH, now it is around 1500 ETH.
      You also risk your deposit for every single transaction. Therefore, risking 1500 Eth for a 0,1€ transaction wouldn’t be smart and you have to risk your 1500 Eth also for the next 0,1 € transaction.

      If you want a more detailed answer, write as at Nirolution@gmail.com

      I hope you have a great day!

Leave a Reply

Close Menu