Crypto Academy Season 4 Beginners' course - Task 6: Different types of Consensus Mechanisms
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(1)What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?
Proof of Work is a decentralized consensus method that requires network applicants to spend time solving an arbitrary mathematical puzzle to prevent the system from being hacked. The nodes of Ethereum for example uses PoW to find the hash of its transactions. This is widely used in cryptocurrency mining for validating transactions and mining new token. It helps in the processing of peer-to-peer transactions securely without the need for a trusted third party. Bitcoin uses Proof of Work to approve its transactions. There's also Proof of Work mining in which users earn coins as much as the block they dig. The first individual to solve this algorithm which is required to add the next block to the chain in the blockchain receives the prize. In this case, users who don't work actively for the block verification in this type of mining don't receive any rewards. New coins are produced when users or investors take active roles in verifying blocks of data. This process allows transactions to be verified.
But then, PoS which is Proof of Stake does not require its users to generate any new coins since it's not mining. The proof of Work method is referred to as minting. This deals with printing money and not mining actually. Users earn money with this method by keeping them in their electronic wallets. Thus, the rewards you will earn are directly proportional to the coins you have or keep in your wallet. Meaning, the more money you have in your wallet, the more prizes or rewards you earn. Moreover, how long you keep your coins in your wallet will also determine the kind of rewards you will earn. This means that the longer these coins stay in your wallet, the higher the prices will receive from the verification of a transaction.
| PoW | PoS |
|---|---|
| The first miner or user to solve the problem wins the price | As a result of the verification, rewards are distributed proportionally to the shareholders. Thus, the validator does not receive direct rewards. |
| A large amount of the energy is consumed for mining in PoW | Energy efficient. The energy is not consumed in a very high amount. |
| They are limited in scale and they are not as fast as the PoS mechanism | They are more scalable. PoS is faster in the verification of transactions. |
| It is necessary to purchase hardware when one wants to get started. | To start, it is just enough to register and stake in the system. |
| The optimizing processing power is costly. | PoS makes use of a server-grade unit. These standard servers are sufficient for the transaction to be made. |
Security:
In terms of security, the Proof of Work which is PoW protects the blockchain from being hacked. Hence Proof of Stake (PoS) is never compared to Proof of Work (PoW). In PoS, the validator can end both parties and double the transaction fees when the blockchain is hacked.
Rewards Distribution:
In Proof of Stake, users are motivated and encouraged to always accumulate coins since it is directly proportional to the rewards they earn. PoW on the other hand provides a more balance market liquidity since the miners can sell their coins.
The Consumption of Energy
PoW wastes a lot of energy. PoS consumes less energy since miners do not compete with electricity or energy to earn blocks.
The problem of decentralization.
Mining as we know has become limited to large-scale operators due to the required hardware and energy consumption. This becomes a problem for the decentralization of the network.
Proof of Stake (PoS) is more scalable than Proof of Work (PoW). This is because PoS provides easy usage since it does not need mining hardware or software. It also goes a long way to offer some solutions for Bitcoin scalability problems.
Click on this Link to view the top PoW Tokens by Market Capitalization.
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Ethereum and Bitcoin are the top Proof of Work tokens.
Click on this Link to view the top Proof of Stake tokens by Market Capitalization.
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Cardano and Solano are the top Proof of Stake tokens.
Much thanks to professor @sapwood for this insightful lecture. I have come to appreciate PoW and PoS. Not only the meanings of these terminologies but the differences, disadvantages, and advantages.