Providing the Differences Between Proof of Work & Proof of Stake
Has it already been a week since my last post? No, it has not even been 24 hours. Something last night had me tossing in turning while I was trying to sleep. I "oversimplified" what staking was and how blockchain technology is incorporated into the process in my previous post. In another post (Algorithms, Hashing & ERC-20 Tokens Oh My!) I expressed how Bitcoin's SHA-256 algorithm was applied under Proof of Work.
I will mesh the two mentions of PoW and PoS into a more detailed post today. If you are new to the technology revolving around cryptocurrency, this will guide your understanding of the differences between the two and their significance.
---Disclaimer: I am not giving investment advice, I am only making you aware of the recent news regarding cryptocurrency so you can better understand the coin, technology, and the overall effect cryptocurrencies are currently having in the world we live in.---
Question: "What is Proof of Work?"
Answer: Proof of Work is a concept that Cynthia Dwork and Moni Noar presented in a journal article published in 1993. This concept emerged thirty years (the 1960s) after the idea of a global computer network (the internet) and six years before the internet becoming a mainstream source for data and information (1999). In 1999, Markus Jakobsson and Ari Juels actually named this process "Proof of Work" in a paper titled "Proof of Work and Bread Pudding Protocols."
Proof of Work was simply an idea created by Cynthia Dwork and Moni Noar and then proven by Markus Jakobsson and Ari Juels. Just nine years after Markus and Ari's paper, the process was established and thriving in the digital programming of Bitcoin and its SHA-256 algorithm (2008) by Satoshi Nakamoto.
To this day, the identity of Satoshi Nakamoto is unknown. Legend has it that the creator is one individual or a group of knowledgeable computer programmers. Nonetheless, the concept was proved and put into action in less than ten years.
Proof of Work is described as a strenuous technological process in which a network of computers executes complex mathematical problems. The large amount of computers solving this equation ensures that no single entity can control the network.
Proof of Work in the cryptocurrency industry is used to validate transactions and mining new coins to increase the total supply amount. When a computer solves the complicated mathematical problem, the miner is rewarded, and the network of computers approves the transaction and adds it to the blockchain ledger. This new and approved blockchain transaction is now the lead node in the blockchain. When another transaction needs to be validated and approved, the process starts over.
To go along with mining new tokens, Bitcoin has a halving sequence that happens every four years. In 2012, the halving process started with miners. The total amount of Bitcoin to ever be mined is totaled at 21,000,000. If you are a Bitcoin miner, your work's rewards for your work through validating transactions are cut in half.
2008: 10,500,000 Bitcoins were able to be mined.
2012: (1st halving of Bitcoin) The supply was cut to 5,250,000 Bitcoins.
2016: ( 2nd halving of Bitcoin) The supply was cut to 2,625,000 Bitcoins.
2020: (3rd halving of Bitcoin) The supply was cut to 1,312,500 Bitcoins.
2024: (4th halving of Bitcoin) The supply will be cut to 656,250 Bitcoins.
Since this year is 2021 and the third halving is in process, the total supply possible for circulation is 19,687,500. This is significant because that indicates that nearly 94% of all Bitcoins are available to be mined. The halving process is far from over, though. The final halving of Bitcoin is to be processed in the year 2140.
What is also significant with 19,687,500 Bitcoins possible for circulation is the number of Bitcoins lost due to human error. Somewhere around 3,937,500, or 20% of Bitcoins, have been locked in wallets that the owner has forgotten its encryption key. If you include the human error in the total supply, roughly 17,000,000 Bitcoins are all we will ever see.
The moral of the story, do NOT lose your private key!
I digress, but this whole process of halving and mining cryptocurrency, specifically Bitcoin, is due to the Proof of Work and its integration within blockchain technology.
Whew! Enough of the Proof of Work details. Let's get into the Proof of Stake.
Question: "What is Proof of Stake?"
Answer: Proof of Stake was created in 2012 by Sunny King and Scott Nadal. The main reason for Proof of Stake's creation was to limit the amount of energy used in the approval of transactions. Proof of Stake is similar to Proof of Work because it is a process that validates transactions on the blockchain. Still, the critical difference is Proof of Stake transactions are validated by the amount of cryptocurrency held by the miner.
Bitcoin and its Proof of Work process are costly in terms of money and energy. If you plan to become a miner, proof of stake is more cost-efficient and energy-efficient. Proof of Work miners needs to sell some of their mined tokens to simply keep the lights on (pun intended).
Proof of Stake is here to combat the energy crisis that Proof of Work is witnessing. As a Proof of Stake miner, the percentage of coins you hold is the amount you can mine. For example, if your job day and night is to mine through Proof of Stake and you own 10% of the coins, you can approve 10% of the blocks in the blockchain. (Frankenfield)
As previously mentioned, the Bitcoin supply will reach an end in 2140. As time draws near, the cost of mining for such a small amount of coins will become very costly. So much in the fact that most miners will stop, limiting the number of miners to only a few who can pay for the excessive energy cost. This decrease in miners can harm the cryptocurrency and have it become susceptible to a 51% attack.
Side question: "What is a 51% attack?"
Answer: Imagine you are in a business meeting with a company, and they propose that they own 51% of the business, and you are left with the other 49%. Sure, you get a significant amount of the company, but your proposal will permanently lose if your intentions differ from the opposing party because they hold the majority.
Let us use this in terms of the blockchain and cryptocurrency now. Suppose Proof of Work miners had been mining since day one of Bitcoin and never had any detrimental cost to energy hence never needing to sell their share. They accumulated over 50% of the Bitcoin supply. In that case, they could manipulate the cryptocurrency to their desire. This is highly unlikely, though, so don't go sell your position just yet.
Proof of Stake further limits the possibility of a 51% attack. This can be seen as if you own 51% of the coins and can now mine 51% of the blocks; it would be silly to manipulate the cryptocurrency because you would see the effects significantly more than other Proof of Stake miners since you hold the majority. (Frankenfield)
A cryptocurrency that is well-known within the Proof of Stake concept is Ethereum. Unlike Bitcoin, Ethereum will never have an end supply. Ethereum does have a limit on the amount that can be mined annually, though. Since 2013, the year Ethereum was created, 18,000,000 Ethereum tokens can be mined. To date, there are roughly 144,000,000 (144 million) Ethereum tokens.
Even with the energy efficiency of Proof of Stake, it is costly to the average Joe who is trying to mine Ethereum.
Personally, I have done some research on how to create an Ethereum mine. For the sake of the blog, I'll be short here.
The start cost for a middle-of-the-road mining rig is $2,000-$2,400. That is if you can find 470rx GB GPU systems. Any and all stores that have these sell like it is black Friday. So, good luck trying to purchase these. Even after you have all the components and make your at-home rig, you will not see profits until after a year. That's with the rig running 24/7, 365 days a year.
Man, I love going off on little side stories! Anyways, both Proofs of Work and Proof of Stake have their positives and negatives. The main differences being the energy substitution and deflation/ inflation regulations.
I'm just enjoying that both of these forms of validation are getting the spotlight they deserve. Who knows, maybe the next wave of transaction approval is being developed as I type this blog.
Until next time,
Seth Hinkle
Information used:
Chawla, Shivam. “Proof Of Work vs Proof Of Stake Comparison.” Blockchaind.Net, 9 Jan. 2018, blockchaind.net/proof-of-work-proof-of-stake-comparison/#:~:text=Both%20Proof%20of%20Work%20and%20Proof%20of%20Stake,saves%20a%20ton%20of%20money%20spent%20in%20energy.
Conway, Luke. “Bitcoin Halving: What You Need to Know.” Investopedia, Investopedia, 18 Mar. 2021, www.investopedia.com/bitcoin-halving-4843769.
Frankenfield, Jake. “Proof of Stake (PoS).” Investopedia, Investopedia, 21 Apr. 2021, www.investopedia.com/terms/p/proof-stake-pos.asp.
Frankenfield, Jake. “Proof of Work (PoW).” Investopedia, Investopedia, 29 Mar. 2021, www.investopedia.com/terms/p/proof-work.asp#:~:text=Proof%20of%20work%20describes%20a%20system%20that%20requires,through%20the%20idea%20of%20%22reusable%20proof%20of%20work.%22.
“How Does Blockchain Work? - Blockchain Transaction - Intellipaat.” Intellipaat Blog, intellipaat.com/blog/tutorial/blockchain-tutorial/how-does-blockchain-work/#:~:text=Whenever%20a%20blockchain%20is%20introduced%20to%20a%20new,and%20process%20the%20history%20of%20the%20blockchain%20block.
Phillips, Daniel. “Lost Bitcoin: 3.7 Million Bitcoin Are Probably Gone Forever.” Decrypt, Decrypt, 3 Jan. 2021, decrypt.co/37171/lost-bitcoin-3-7-million-bitcoin-are-probably-gone-forever.
“Proof of Work.” Wikipedia, Wikimedia Foundation, 25 Apr. 2021, en.wikipedia.org/wiki/Proof_of_work#:~:text=The%20term%20%22proof%20of%20work%22%20was%20first%20coined,success%20probability%20proportional%20to%20their%20computational%20effort%20expended.
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