A blockchain needs to have a distributed and trustless consensus system. This means that if you want to send or receive money from someone, you don’t have to use or trust any third-party services.
Just take your bank, for instance. When you want to pay for your restaurant bill and you want to use your credit card, you need to trust Mastercard, Visa, or whatever company you are using. After all, they are the ones responsible for registering all your operations, balances, and history of your accounts.
With Bitcoin and other digital currencies, when you want to make this same operation, everyone will have a copy of the blockchain (ledger). This way, you don’t need to trust any third-party since no one can directly verify the information that is written.
However, there are different blockchain consensus protocols. The two most used ones are the proof of work and the proof of stake. Let’s take a look at each one of them and see their similarities and differences.
Proof of Work:
Simply put, proof of work is a protocol which its main goal is deterring cyber attacks like DDoS (distributed denial-of-service) attacks. This kind of cyber attacks purpose is to bring all the resources to exhaustion by sending multiple requests at the same time.
Although proof of work already existed, Satoshi Nakamoto started to apply this technique to digital currency which ended up by revolutionizing the way how traditional transactions are made.
Ultimately, proof of work allows both trustless and distributed consensus.
When you want to create a new group of trustless transactions, you need to do mining. And mining serves two different purposes. It allows you to create new digital currencies as well as to verify the legitimacy of a specific transaction. It can also serve to avoid double-spending.
So, when you simply want to set a transaction, the first thing that will happen is that all transactions are bundled together into a block. Miners will then verify all the transactions that are in each block to make sure they are legitimate. At this point, and in order to perform their task, miners will need to use the proof of work system to solve a mathematical problem. The first miner who is able to solve a block problem gets a reward. After all the transactions are verified, they are all stored in a public blockchain.
Proof of work is the consensus protocol that is used not only by Bitcoin blockchain but by Ethereum, as well as other blockchains. However, Ethereum is about to change their consensus system and move into the proof of stake.
Proof of Stake:
The proof of stake is another different consensus protocol that is also used by some blockchains. Their main goal is also to validate transactions but the way proof of stake does it is different from the way that proof of work does. Even though, it is still an algorithm.
The idea of the proof of stake emerged in a forum back in 2011. Unlike proof of work, with the proof of stake, the new block creator is chosen, depending on its wealth. While in proof of work, there is a reward for miners, there isn’t any kind of compensation for each block in what concerns proof of stake. Plus, all digital currencies are all created in the beginning, and their numbers never change. What this means is that in a proof of stake system, miners aren’t rewarded and they still need to take the transaction fees.
This is one of the reasons why miners in the proof of stake system are called forgers.
One of the latest news that has been having a lot of buzz is the fact that Ethereum wants to start using the proof of stake system, replacing the proof of work they are currently using.
Why does Ethereum want to change to the proof of stake system?
The truth is that one of the main reasons why Ethereum is going to change its system for the proof of stake is related to the costs. At the moment, with their proof of work distributed consensus, miners need a lot of energy. One single Bitcoin transaction required the exact same amount of electricity to power 1.57 America households for an entire day. And this is using 2015 data.
Since all these energy costs are paid using fiat currencies, this is leading to a huge pressure on this digital currency value.
This has been worrying developers and this is why they want to try out the proof of take system. This way, they would have a cheaper and greener distributed form of consensus.
Plus, the rewards will also be different when there is a new block creation. While with proof of work, miners could not even own one digital currency that he is mining, with proof of stake, forgers are the ones who own all the coins mined.
Is proof of stake safer than proof of work system?
The truth is that we all want to maintain computers safe, especially if they are being served to any activity involving money. And safety is exactly one of the questions that many experts in the field have been posing.
According to them, with the proof of work system, bad actors aren’t usually attracted because they don’t have any economic or technological incentives. In fact, attacking such a network would be incredibly hard and would be very costly.
In the other hand, there is the need to have the proof of stake algorithm safer. After all, it is much cheaper to attack.