There are two main consensus mechanisms utilized by many cryptocurrency today. Proof of Work is the more dated of both, and is used by Bitcoin and Ethereum 1.0 and a host of other. The more recent consensus mechanism is known as Proof of Stake which is the basis for Ethereum 2.0, Cardano, Tezos and other (generally more recent) cryptos. To comprehend the concept of proof of stake, it is helpful to first comprehend the proof of work. Therefore, we’ve combined them in this video explanation.
What is the proof of the effectiveness of your work?
Proof of work is the primary crypto consensus system, which was first utilized by Bitcoin. The concept of proof of work as well as mining are very similar concepts. The reason why it’s known as “proof of works” is that the network needs a massive quantity of computing power. Blockchains with proof of work are protected and validated by virtual miners from all over the globe who are competing to become the very first one to complete a math puzzle. The winner is able to upgrade the blockchain with the most current verified transactions and is awarded via the system with a set amount of cryptocurrency.
Proof of work offers important advantages, specifically for a simple, but extremely valuable cryptocurrency such as Bitcoin. It is a well-tested, reliable method of maintaining a safe decentralized blockchain. Since the price of cryptocurrency grows, more miners will be motivated to sign up for the blockchain, which increases the power and security. Due to the processing power required it is not practical for any person or group to interfere with the important cryptocurrency’s blockchain.
On the other hand this is a very energy-intensive procedure that may have difficulty growing to handle the huge quantity of transactions smart-contract compatible blockchains such as Ethereum are able to generate. Therefore, alternative solutions have been created one of the most popular that is known as proof of stake.
What is evidence of stake?
The Ethereum developers knew at the outset that the proof of work system would bring limits in scaling which would need to be overcome and actually in the past, as Ethereum-powered Decentralized Finance (or DeFi) protocols have gained popularity however, the blockchain has been unable to keep pace, causing costs to rise.
Although the Bitcoin blockchain is primarily used to process outgoing and incoming bitcoin transactions, similar to an enormous checkbook, the Ethereum blockchain is required to handle a wide range of DeFi transactions, stablecoin smart contracts, NFT minting and sales and any other innovations that developers can come up with in the near future.
The solution they came up with was to develop a brand new Ethereum2 blockchain that began to roll out in December 2020 and is expected to be completed by 2022. The new version of Ethereum uses a quicker and less resource-intensive consensus method known as the proof-of-stake. Cryptocurrencies such as Cardano, Tezos, and Atmos all employ proof-of-stake consensus methods with the aim of maximizing efficiency and speed while reducing charges.
In the system of proof of stake the staking process serves the same purpose as mining proof of work, in the sense that it’s the method that determines which network participant is selected to join the most recent set of transaction to blockchain, and earn crypto in exchange.
The specifics of each project, however, in general blockchains that use proof of stake employ an array comprised of “validators” who share – also known as “stake” -their own cryptocurrency to have a possibility of being able to verify a any new transaction, modify their blockchain and receive the reward.
- The network chooses the winner according to the amount of cryptocurrency each participant has in the pool, as well as the time they’ve been in the pool — and then awards those who have invested the most.
- After the winner has confirmed the most recent transaction block, additional validators can confirm this block to be correct. If a certain number of validations are received then the network will update the blockchain.
- Each validator who participates receives an award in the native currency that is divided by the system according to the stake staked by each validator.
Being a validator is a significant responsibility that requires a significant amount of technical expertise. The amount of cryptocurrency that validators must be able to stake is typically quite expensive (for ETH2, for example 32 ETH) and validators could lose a portion of their stake through a process known as cutting if their network is shut down or they authenticate the validity of a “bad” batch of transactions.
However, if it sounds like too much work it is possible to participate in stakes by joining a staking pool that is run by someone else and get rewards for cryptocurrency which would otherwise sit in the sand.
What are the main differentiators between the proof of work and the evidence of stake?
The consumption of energy is the primary differentiator in the different consensus systems. Because blockchains that use proof of stake don’t need miners to pay for electricity to run duplicate process (competing to solve the same problem) Proof of stake permits networks to function with a much lower consumption of resources.
Both consensus mechanisms come with economic implications which penalize network breakdowns and deter criminal actors. For proof-of-work, the punishment for miners who provide incorrect information (blocks) is the sunk costs of energy, computing power and time. For proof of stakes, tokens that the validators have staked in crypto provide an incentive to do what is in the network’s best interests. If an authenticator does not accept a good block, a part of the funds they staked are “slashed” to pay a punishment. The amount that a validator is able to be forced to pay is contingent on the network.