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Battle of Proofs: Proof of Work Vs Proof of stake

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Crypto assets have been in existence for a while now. In 2008, A whitepaper 'Bitcoin: A Peer-to-Peer Electronic Cash System' was published and this paper, pushed the development in motion. A cash system which will allow transfer and payment of cash to be sent directly by one individual to another without the need for a trusted party as it exists with our traditional financial system architecture.

This transfer system will require a hash of the transaction and previous transactions as well as timestamp to form a digital signature on a chain, more blocks can be added to this chain. The initial block being referred to as Genesis block. This block of chains serves as a proof of sequence of events that have occurred on the transaction.

Quick overview
  • Electronic transfers exist, so why the Block Chain?
  • What is Proof of Work?
  • What is Proof of Stake?
  • Cons of the Algorithm?

Why the Block Chain?

Blockchain technology seeks to introduce new ways that disrupts the current financial system by eliminating the lead time involved in access crediting, efficiently allocating liquidity to productive sectors of the economy at extremely low cost and other bureaucratic procedures

It also seeks to permeate almost every business sector with its programmable asset known as smart contracts. With smart contracts, business contracts are encoded with logic as to what is expected and when the event happens or crystallizes, an outcome is produced automatically with no need for manual intervention. This will in a long way curb fraud and delays in transactions in the coming years as the technology gains mass adoption and use.

What is Proof of Work?

Proof of work is a what is generally referred to as mining in blockchain. The most notable two digital cryptographic assets utilize the proof of work algorithms, thus BTC and ETH. However, Ethereum is about to undergo a change in its algorithm in order to make the network more efficient in the coming year.

The proof of work consensus algorithm stems from the idea that for a transaction to be verified and added to a block on the network, the verifiers or miners need to undertake a competition to solve or guess a mathematical problem using computers before that transaction can be verified. This verification requires huge computing energy resources and miners get rewarded when they are able to solve this puzzle. The more computing power, the more chance of winning and representing majority decision for block verification on the network.

Proof of Stake

The Proof of Stake (PoS) algorithm is another consensus algorithm that does not require mining or miners to validate transaction blocks. There are no mining rewards due to generation of new coins, there are only transaction fees for the miners (more accurately validators, but we will keep using ‘miners’ so it gets easier to explain). In PoS, there are validators, who stake their funds (store and commit their cryptocurrency on the network) to enable them validate block transactions. The probability of a user validating a block is proportional to their staked funds; the more funds that are staked, the greater the chance to validate new blocks of transactions.

A validator who owns a percentage of crypto coins at a point in time on the network, would be able to mine that percentage of transactions on that network. With the up coming full integration of Ethereum 1.0 to Ethereum 2.0, it is expected that transaction fees will be reduced and transactions will be processed exceedingly fast as there is no harnessing of computing resources to solve a mathematical puzzle.

The current Ecosystem

As at 21st January 2022, the total value locked in Defi (Decentralized finance) stands at around US$92.36 billion.
With this huge liquidity and influx of fintech companies in the space. It is very promising to set center stage in the world of business. However, There has been calls for regulation in the blockchain and crypto space. The calls are well placed but will these calls lead to stifling the innovation in the blockchain space and curtailing its development? One thing is certain, this is a technical space and there is a huge amount of learning, if regulators need to get themselves abreast with thus if they want to regulate the eco-system.

Cons of using Proof of Work (PoW)
1. Proof of Work consensus is considered to be energy inefficient and damaging to the environment due to the huge computational power needed to validate only a single block of transaction. hence its carbon foot print is excessive. 2. Proof of Work places priority of block validation on the amount of fees, as a result, transactions with high fees get validated ahead of transactions with low fees. 3. The barrier to entry is high for miners who want to join the network. They have to invest in high grade technology and excessive electricity costs.

Cons of using Proof of Stake (PoS)
1. For miners, using PoS prevents them from selecting transactions that offer high fees ahead of transactions with low fees.
2. The cost of attacking a PoS network will be much easier than attacking a proof of Work network. With Proof of Work, an attacker will have to acquire 50% of computational power to make decisions on the network compared to PoS that will need majority of staked funds.

Conclusion


Proof of Work and Proof of Stake are noted to be the two most popular consensus mechanism on the blockchain used today. Each mechanism has its drawbacks and features. It is therefore necessary to know how these mechanisms shape the way the blockchain, crypto space and DeFi eco-system make use of them.

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