, 2 years ago
Cryptocurrencies are completely dependant on the idea that consensus between nodes must be achieved in order to validated transactions. Some cryptocurrencies are more centralized, but faster and also considered to be less secure in terms of manipulation. Others like Bitcoin are decentralized and offer maximum security, but have to sacrifice speed and transaction throughput for on-chain transactions.
But no matter where a cryptocurrency is positioning itself it needs to have consensus over all past and new blocks which include all transactions. There are two basic concepts how this consensus should be reached and secured. Both have a strong proposition, advantages and disadvantages. In this article we are going to explore the question what to expect from both consensus mechanisms.
Bitcoin was the first cryptocurrency and it is based on proof of work. Each new block must be verified by miners who spend a lot of energy and hardware to solve a cryptographic puzzle. One of the major features of proof of work is asymmetry between miners and all other nodes in the network. It costs quite some effort from the miners, but their results are very easy to check and verify by the rest of the network.
Proof of work typically serves two purposes. During the process new coins are created and minted as an additional reward for miners along with the transaction fees that have been spent by the network participants. The second is the verification of the transactions and therefore securing the network. Bitcoin works so well, because it was the first successful attempt to solve the double spending problem. And proof of work is one the key components to that solution.
The fact that proof of work relies heavily on hardware and energy consumption has its benefits. It would cost an attacker a tremendous amount of money to go against the network. In fact, he could use the same resources and instead support the network and get rewarded for sure, while attacking the network bears the risk of failure and losing all of his resources.
But this equilibrium comes with a high cost. While networks that rely on proof of work are tiny and cute in their early days, they become hungry beasts as the grow larger over time. The ecological effects of mining have become part of a broader discussion in western societies and are even considered by political parties. It remains open to debate if the power consumption is justified by the fact that the technology offers benefits to all mankind without making any distinction between race, religion, sexual orientation or nationality. It seems that Bitcoins purpose of serving all human beings equally is a strong counterargument and therefore a firm statement pro proof of work.
Proof of stake is trying to achieve the same goals as proof of work. During the process new coins are minted and used as a reward for the validators. The consensus mechanism also protects the network from manipulation, but without using a lot of hardware or energy. Instead, validators have to hold a significant share or stake in the particular cryptocurrency. The more coins a validator holds, the more likely he is going to become the participant that is going to verify the next block.
In the end one idea remains the same. In order to verify transactions and to secure the network one must have resources at hand and put them at risk. A stakeholder has no interest to manipulate the blockchain, because he would then devalue his own stake. Just like with proof of work he would risk burning his own resources by trying to manipulate the network, while willingly sacrificing the opportunity to earn money with fair play.
The downside of this system is that it favours those who are already rich and perpetuates the circumstances. In a proof of stake network, a billionaire will always remain a billionaire. There is no mining software or hardware invention that is going to turn the favours for smaller players. On the upside, a proof of work network requires only a fraction of the resources that are used by proof of work networks. It is worth to mention that there are a variety of different approaches to proof of stake and that most of them somehow try to mitigate the fact that bigger players are always in a better position.
The answer to this question strongly depends on the views one holds on a couple of topics. People who believe that global warming is the biggest threat to mankind might argue that the energy consumption is simply unacceptable, because it will cost lives in a not so far future. On the other hand, many people around the world live under very bad circumstances. They lack the freedom and the economical option to change their lives. One could argue that Bitcoin and other cryptocurrencies could have a serious impact on the lives of those people and change it for the better.
It seems that both options provide enough security for running a blockchain and a cryptocurrency. There might also be other implications, namely that proof of stake provides faster transaction times as proof of work. Ethereum will shift from proof of work to proof of stake withing the next two years effectively abandon the old ways and entering a completely new area.
It remains to be seen if proof of stake will prove itself as battle-hardened as proof of work did. Bitcoin is a success story and aside from a couple of small hiccups in its early days the network runs rock solid and BTC is the most trusted cryptocurrency worldwide for exactly that reason. With Bitcoin entering a stage where it is traded closely to 60.000 US-Dollars, it becomes clear that this is the most trusted cryptocurrency and therefore proof of work is the most trusted consensus model.
May 19, 2023
We wrote about it earlier: Jason Lowery believes Bitcoin could become the world's reserve currency and that countries should engage in a peaceful "arms race" to mine Bitcoin. He believes Bitcoin is a form of digital property that will be defended similar to how navies secure maritime thoroughfare. Not everyone is sold on this concept. Let's discuss a contrarian view.
May 12, 2023
MakerDAO is a decentralized autonomous organization and the issuer of the decentralized stablecoin DAI. Maker has been a success story for many years, surviving a stablecoin crisis, bear and bull markets, and skepticism regarding its decentralized organization from politicians and authorities. Crypto is an everchanging market, and Maker is no exception when it comes down to adapting its protocol to new technologies.
May 10, 2023
Banking is something that ought to become obsolete with the inception of Bitcoin. Bitcoin has evolved into what many believe is the only sound money on earth. On the other hand, financial products have been introduced on other blockchains, such as Ethereum. At the same time, banks might face competition from central banks looking extensively into central bank digital currencies (CBDC). Yesterday, a German company announced it would become the world’s first DeFi bank.
May 09, 2023
Polkadot has a unique approach to solving a struggle that many blockchain technologies face. In order to scale to a large number of transactions, each blockchain serves a specific purpose, and no single chain has to deal with all types of transactions. Each of the so-called parachain offers an advantage to its users by running its own protocol. KILT is one of these parachains that provides identity solutions that attract prominent international players.
Sign up to stay informed via our email updates