PROOF OF STAKE (POS) DEFINITION

Proof of Work vs Proof of Stake: Recently you might have heard about the idea to lớn move sầu from an Ethereum consensus based on the Proof of Work (PoW) system lớn one based on the so-called Proof of Stake.

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In this article, I will explain to you the main differences between Proof of Work vs Proof of Stake và I will provide you a definition of mining, or the process new digital currencies are released through the network.

Also, what will change regarding mining techniques if the Ethereum community decides lớn vì the transition from “work” lớn “stake”?

This article wants to be a basic guide khổng lồ understanding the problem above sầu. If you are looking for a more detailed walkthrough, please kiểm tra out our blockchain courses on Ethereum.

What is the Proof of work?

First of all, let’s start with basic definitions.

Proof of work is a protocol that has the main goal of deterring cyber-attacks such as a distributed denial-of-service attachồng (DDoS) which has the purpose of exhausting the resources of a computer system by sending multiple giả requests.

The Proof of work concept existed even before bitcoin, but Satoshi Nakamoto applied this technique to his/her – we still don’t know who Nakamoto lớn really is – digital currency revolutionizing the way traditional transactions are set.

In fact, PoW idea was originally published by Cynthia Dwork and Moni Naor bachồng in 1993, but the term “proof of work” was coined by Markus Jakobsson và Ari Juels in a document published in 1999.

But, returning khổng lồ date, Proof of work is maybe the biggest idea behind the Nakamoto’s bitcoin Trắng paper – published back in 2008 – because it allows trustless and distributed consensus.

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What’s trustless và distributed consensus?

A trustless and distributed consensus system means that if you want to skết thúc and/or receive sầu money from someone you don’t need lớn trust in third-tiệc nhỏ services.

When you use traditional methods of payment, you need to lớn trust in a third buổi tiệc ngọt khổng lồ mix your transaction (e.g. Visa, Mastercard, PayPal, banks). They keep their own private register which stores transaction history and balances of each tài khoản.

The common example khổng lồ better explain this behavior is the following: if Alice sent Bob $100, the trusted third-các buổi tiệc nhỏ service would debit Alice’s account & credit Bob’s one, so they both have sầu lớn trust this third-buổi tiệc ngọt is to go vị the right thing.

With bitcoin và a few other digital currencies, everyone has a copy of the ledger (blockchain), so no one has khổng lồ trust in third parties because anyone can directly verify the information written.

Proof of work and mining

Going deeper, proof of work is a requirement to define an expensive computer calculation, also called mining, that needs to be performed in order khổng lồ create a new group of trustless transactions (the so-called block) on a distributed ledger called blockchain.

Mining serves as two purposes:

To verify the legitimacy of a transaction, or avoiding the so-called double-spending;

To create new digital currencies by rewarding miners for performing the previous task.

When you want lớn mix a transaction this is what happens behind the scenes:

Transactions are bundled together into lớn what we hotline a block;

Miners verify that transactions within each bloông xã are legitimate;

To vị so, miners should solve sầu a mathematical puzzle known as proof-of-work problem;

A reward is given to lớn the first miner who solves each blocks problem;

Verified transactions are stored in the public blockchain

This “mathematical puzzle” has a key feature: asymmetry. The work, in fact, must be moderately hard on the requester side but easy khổng lồ kiểm tra for the network. This idea is also known as a CPU cost function, client puzzle, computational puzzle or CPU pricing function.

All the network miners compete lớn be the first to find a solution for the mathematical problem that concerns the candidate bloông chồng, a problem that cannot be solved in other ways than through brute force so that essentially requires a huge number of attempts.

When a miner finally finds the right solution, he/she announces it khổng lồ the whole network at the same time, receiving a cryptocurrency prize (the reward) provided by the protocol.

From a technical point of view, the mining process is an operation of inverse hashing: it determines a number (nonce), so the cryptographic hash algorithm of bloông chồng data results in less than a given threshold.

This threshold, called difficulty, is what determines the competitive nature of mining: more computing power is added to lớn the network, the higher this parameter increases, increasing also the average number of calculations needed khổng lồ create a new blochồng. This method also increases the cost of the bloông xã creation, pushing miners to lớn improve sầu the efficiency of their mining systems to maintain a positive sầu economic balance. This parameter update should occur approximately every 14 days, và a new blochồng is generated every 10 minutes.

Proof of work is not only used by the bitcoin blockchain but also by ethereum & many other blockchains.

Some functions of the proof of work system are different because created specifically for each blockchain, but now I don’t want khổng lồ confuse your ideas with too technical data.

The important thing you need to lớn understvà is that now Ethereum developers want to turn the tables, using a new consensus system called proof of stake.

What is Proof of stake?

Proof of stake will make the consensus mechanism completely virtual. While the overall process remains the same as proof of work (POW), the method of reaching the end goal is entirely different. In POW, the miners solve cryptographically hard puzzles by using their computational resources.

In POS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the blochồng gets added, the validators get a bloông xã reward in proportion to lớn their stake.

Why Ethereum wants to lớn use PoS?

The Ethereum community và its creator, Vitalik Buterin, are planning to bởi vì a hard fork lớn make a transition from proof of work lớn proof of stake.

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But why they want lớn switch from one to the other?

In a distributed consensus-based on the proof of Work, miners need a lot of energy. One Bitcoin transaction required the same amount of electriđô thị as powering 1.57 American households for one day (data from 2015).

And these energy costs are paid with fiat currencies, leading khổng lồ constant downward pressure on the digital currency value.

In recent research, experts argued that bitcoin transactions may consume as much electrithành phố as Denmark by 2020.

Developers are pretty worried about this problem, và the ethereum community wants to lớn exploit the proof of stake method for a more greener & cheaper distributed form of consensus.

Also, rewards for the creation of a new bloông xã are different: with Proof-of-Work, the miner may potentially own none of the digital currency he/she is mining.

In Proof-of-Stake, forgers are always those who own the coins minted.

How are forgers selected?

If Casper (the new proof of stake consensus protocol) will be implemented, there will exist a validator pool. Users can join this pool lớn be selected as the forger. This process will be available through a function of calling the Casper contract và sending Ether – or the coin who powers the Ethereum network – together with it.

“You automatically get inducted after some time,” explained Vitalik Buterin himself on a post shared on Reddit.

“There is no priority scheme for getting inducted into the validator pool itself; anyone can join in any round they want, irrespective of the number of other joiners,” he continued.

The reward of each validator will be “somewhere around 2-15%, ” but he is not sure yet.

Also, Buterin argued that there will be no imposed limit on the number of active validators (or forgers), but it will be regulated economically by cutting the interest rate if there are too many validators and increasing the reward if there are too few.

A safer system?

Any computer system wants lớn be free from the possibility of hacker attacks, especially if the service is related to money.

So, the main problem is: proof of stake is safer than proof of work?

Experts are worried about it, and there are several skeptics in the community.

Using a Proof-of-Work system, bad actors are cut out thanks khổng lồ technological and economic disincentives.

In fact, programming an attaông xã khổng lồ a PoW network is very expensive, and you would need more money than you can be able to steal.

Instead, the underlying PoS algorithm must be as bulletproof as possible because, without especially penalties, a proof of stake-based network could be cheaper lớn attaông xã.

To solve sầu this issue, Buterin created the Casper protocol, designing an algorithm that can use the set some circumstances under which a bad validator might chiến bại their deposit.

He explained: “Economic finality is accomplished in Casper by requiring validators to submit deposits lớn participate, and taking away their deposits if the protocol determines that they acted in some way that violates some phối of rules (‘slashing conditions’).”

Slashing conditions refer lớn the circumstances above sầu or laws that a user is not supposed to break.

Proof of Work vs Proof of Stake: Conclusion

Thanks khổng lồ a PoS system validators bởi vì not have sầu to use their computing power because the only factors that influence their chances are the total number of their own coins and the current complexity of the network.

So this possible future switch from PoW lớn PoS may provide the following benefits:

Energy savings;

A safer network as attacks become more expensive: if a hacker would lượt thích to lớn buy 51% of the total number of coins, the market reacts by the fast price appreciation.

This way, CASPER will be a security deposit protocol that relies on an economic consensus system. Nodes (or the validators) must pay a security deposit in order lớn be part of the consensus thanks khổng lồ the new blocks’ creation. Casper protocol will determine the specific amount of rewards received by the validators thanks to lớn its control over security deposits.

If one validator creates an “invalid” block, his security deposit will be deleted, as well as his privilege to be part of the network consensus.

In other words, the Casper security system is based on something lượt thích bets. In a PoS-based system, bets are the transactions that, according lớn the consensus rules, will reward their validator with a money prize together with each chain that the validator has bet on.

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So, Casper is based on the idea that validators will bet according to the others’ bets & leave sầu positive feedbacks that are able to lớn accelerate consensus.