Despite demonstrating that a digital form of money can exist in a decentralized financial protocol, there had to be a security algorithm that prevents double-spend of digital financial assets, ensures peer-to-peer transactions with or without a third party, and a trustful system for adding new transaction blocks to the blockchain.
Although other security paradigms exist, Proof of Work and Proof of Stake is the most popular security algorithms on the line for discussion in this article. You will understand what they mean in blockchain, how they work, and their use cases in the blockchain.
Definition of Proof of Work (POW)
Proof of work is a type of consensus algorithm in blockchain technology that ensures that coin miners do not cheat in the procedure of coin generation. Coin miners are tasked to solve a difficult mathematical computation, for every time a computation is solved correctly, the coin is created.
However, this does not guarantee the validity of the computation until it is confirmed by other miners. When the computation is successfully confirmed, the coin gets added to the blockchain and the miner gets a reward. That simply explains what POW entails.
Background History of POW
Invented by Hal Finney way back in 2004, the theory of Reusable Proof of Work, RPOW, is an experiment for digital money based on Nick Szabo's theory of collectibles.
Following Nick Szabo's idea, he thought of digital cash that will be recognized, be limited in supply, and be difficult to create.
The RPOW was designed to fast-track the correctness of a transaction in real-time. Finney's page reads in part " it takes a long time to compute but can be checked quickly". Perhaps this is so because its computation has too many bits of zeros
The RPOW is a forerunner for POW. RPOW issues strings of equations marked by a private key. The server registers each token as belonging to a marked key. To give out a token to another person, a transfer order has to be signed to a public key. The server then keeps the new ownership of the token registered. This procedure according to Finney solves the double-spend issue on digital currency.
Later in 2009, following bitcoin's Invention, POW was adopted as a consensus mechanism for bitcoin mining and block validation. Subsequent token inventors followed suit as it made the mining of tokens a solvable big deal, yet open and easy to verify.
Definition of Proof of Stake(POS)
Proof of stake is an alternative consensus algorithm that considers the use of block validations instead of miners when adding a new block to the blockchain. In POS users stake their tokens while the block Validators reward the stakers according to the number of tokens they staked.
Origin of POS
POS was born out of the pitfall of bitcoin. Bitcoin has a pitfall that is of severe environmental concern; very high energy is required to mine bitcoin. As of June 29th, 2021, a report has it that bitcoin's energy consumption index rates about 132.5 terawatt-hours per year.
Then came the idea presented by Sunny King and Scott Nadal in 2012 suggesting a new block algorithm. According to them, there should be an algorithm that can choose reward-getting nodes based on the number of tokens individual wallets have.
Although POS adopts the same number of nodes it takes to validate a transaction like POW which is 51%, it does not consume as much energy, nor does it require a rigorous computation. Instead, the POS, as proposed by the duo, charges a transaction fee that is used to reward validators.
How POW Works
Bitcoin is one of the major cryptocurrencies that adopts the POW, we will use it to illustrate how the POW works.
So bitcoin has a blockchain where every transaction is recorded. So miners get to work, trying to solve a mathematical computation. One of the miners luckily gets the computation correctly. Getting a computation correctly in bitcoin mining means that a new bitcoin has been mined and a block is added to the blockchain.
However, to confirm that the miner who got it correctly did not cheat, nodes must have proof that it is correct. Now that is the proof of work algorithm. When the confirmation is successful, the block is then registered in the blockchain and the miner gets rewarded with bitcoins.
The mathematical computation is presented in a hash, a long string of alpha-numeric digits. A click on the hash takes you to the bitcoin explorer to confirm the transaction as a user and to guide you against double-spending.
How POS Works
Proof of Stake relies on validators to add new blocks to the blockchain. There are validators and users side by side. Users are encouraged to stake tokens of a particular blockchain to generate liquidity for the token. Validators are there to validate transactions. Validators are rewarded with transaction fees. The users who have staked their tokens are rewarded equally by validators.
However, for the users, the reward they get for staking is highly dependent on the amount staked. Stakers can be rewarded with the same token they staked or with a new token launched within the same blockchain.
Use Cases of POW
The use cases of POW in blockchain are as follows;
- To lock blockchain manipulators and keep secure the decentralized system.
- To mine new coins, validate blockchain transactions, and add new blocks to the blockchain.
- To ensure a secure peer-to-peer transaction without the need for a third party.
- To keep every blockchain transaction recorded and serially.
Use Cases of Proof of Stake
The use cases of Proof of Stake includes;
- To validate transactions
- To generate liquidity to the blockchain
- To keep stakers and validators incentivized
- Keeps block adding open and makes both stakers and validators active participants in the blockchain.
Notable Differences Between POW and POS
Both POW and POS are consensus algorithms in blockchain technology. Although each of them was built to meet almost the same need, POS was born out of the outrageous gas consumption and high transaction fees. Again the POW algorithm takes a long time to confirm a transaction that the POS was able to overcome. Speculations have it that blockchains that use POW like bitcoin may not be able to keep up with the high gas fee in the nearest future as more bitcoins are mined.