Crypto Academy Season 4 Beginners' course - Task 6: Concensus Mechanisms

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What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?

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What difference is between PoW and PoS?

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PoW and PoS are both consensus mechanisms and as such it is imperative to understand what a consensus mechanism is all about.

CONSENSUS MECHANISM

Consensus mechanism is simply algorithm whereby complex mathematical puzzles in cryptography are solved by what is termed a miner or a validator, and for solving them they are rewarded.

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The decentralized nature of Blockchain technology requires that there should be a system to make verification for user transactions and that only legitimate ones are recorded.

This is where a consensus mechanism steps in, nodes have to be in agreement so that transactions which are false are not added to the ledger.

In essence a consensus mechanism is the truth of false mechanism that helps to determine whether a Blockchain is truely decentralized or not.

The effectiveness of a consensus mechanism is determined on its

• Security

• Decentralization

• Scalability

There are different types of consensus mechanism in use but we'll be talking about only the Proof of work and Proof of stake designated as PoW and PoS respectively.

PoW and PoS which are types of consensus mechanism function differently according to the network type which they are run. A network has to understand the mechanism which is best for their blockchain.

Proof of Work (PoW)

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Majorly consensus mechanism are a means of validating data on the blockchain.

Here miners are required to use computation gadgets to solve mathematical puzzles, this is used to verify a transaction and this creating a new block. The process of verification and creating a block is termed Mining.

Miners are in constant competition as rewards are earned for a valid block created. Upon solving, other miners are required to check the transaction legitimacy and subsequently record it.

The miners makes sure only transactions which have been verified are recorded and a trial to spend the same fund again will be rejected.

For a double transaction, only the first to be verified is recorded and any subsequent one is revoked.

Although a lot popular, PoW networks are slower as a lot of electricity is expended.

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Proof of Stake (PoS)

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Unlike the PoW where there is competition, here just as the name suggests stake plays an important role in becoming a validator.

A validator validates the transaction on the network, and influence is dependent on the stake. The more you stake, the more privileges enjoyed.

Upon validation of a transaction, validators are also rewarded with tokens which is gotten from network charge fee for transaction. As a result there is no mining operation since tokens have already been pre-mined.

Differences Between PoS and PoW

There are many differences between the PoW and PoS consensus mechanism, here are some of the major ones listed below

PoW	PoS
Requires more electricity to validate and create a block	Requires lesser electricity to perform same operation
Rewards are usually in the form of the blockchain newly printed tokens	Rewards are from transaction fee charged by the network
Competition is involved as reward is based on which miner validates a transaction first	Level of stake determine the level of influence enjoyed
It is the original consensus mechanism created	It was created to solve shortcomings of PoW
Mining is done during verification and block creation	Requires only validation as coins have been pre-mined
It is a much slower process	Faster compared to PoW
Used by Bitcoin, Litecoin	Used by Nxt, Blackcoin

Advantage and Disadvantages of PoW and PoS

Proof of Work

Advantage of Proof of work

• It is more decentralized as holders of large funds do not make decisions for the system.

• It is dependent on computational abilities to solve puzzles, making it costly for any miner to tamper with the system.

• It looks secure as attacks on the system requires very high computing capabilities.

• It's security has been tested and proven hence it's longevity so far.

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Disadvantage of Proof of work

• Wastage of time because many miners are trying to solve the same puzzle at the same time.

• Powerful hardware and gadgets is required to set it up making it quite expensive.

• Large computing power requires large amount of electricity making it not sit friendly.

• Miners can form a sort of coalition bro work together and get bigger rewards making it look like a centralized system.

• Transaction processing is much slower

Advantage of Proof of Stake

• It is more eco-friendly as less electricity is required by this consensus mechanism.

• It doesn't require a lot of gadgets to operate making it cost effective.

• Speed of transaction is a lot faster compared to PoW.

• Lesser transaction fee required durle to it's fast speed.

• Coin staking serves as a means of investment for validators.

• Entry is in the highside since lower cost means more entry.

• It has better scalability

• Better structured system to prevent 51% attack as the validators have a stake in the system.

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Disadvantage of Proof of Stake

• Percentage of stake plays a big role in the influence and power which a validator has.

• The security has not been verified to be as effective as proof of work.

• The rewards gotten for mining are better than those gotten for Staking.

• A staked coin can only be used after the staking time is over.

Which is better in scaling capacity?

Scaling capacity of consensus mechanism can be defined as the ability of that Blockchain to be able to manage transaction processing on the network over a time period.

The one able to process more transaction in the period has a better scaling capacity or scalability.

Looking at both PoW and PoS, we have earlier established that the PoS is a much faster consensus mechanism in terms of transaction processing, hence it has a better scaling capacity than PoW.

The energy consumption by PoW network makes it not sustainable when looking at the future which is why many PoW networks might have to switch to PoS. PoS is much more efficient to manage than the PoW.

Examples of application of PoS consensus mechanism

PoS is used by a number of cryptocurrencies as it's consensus mechanism, some of them are listed below.

•TEZOS
With acronym XTZ, Tezos is one of the cryptocurrencies that run on the PoS consensus mechanism. It is actually the first cryptocurrency using PoS which is accepted for staking on all the major Exchanges.

•DASH
Digital cash also known as DASH is one of the first cryptocurrencies to use the PoS consensus mechanism.

•PIVX
A cryptocurrency with it's aim on privacy the PIVX known as Private Instant Verified Transaction is one of the cryptocurrencies that stake has no limit.

It is a consensus mechanism that has its origin from DASH as early as 2016.

•NAV
It started operating as far back as 2014, and prides itself on its fast transaction and privacy.
Like PIVX, there is also no limit to staking.

CONCLUSION

Both PoW and PoS consensus mechanism have unique features that has to be decided by the blockchain on which is more suitable to be used.

Although in the long run, because of energy issues PoW might not be very sustainable for the world hence we might see a continuous shift from the use of PoW to PoS consensus mechanism.

PoS can improve it's popularity if it's level of security has been verified over time.

Looking forward to your review of my post professor @sapwood.