The world of cryptocurrency is backed by technologies that make bitcoin and other virtual currencies worth investing in. Blockchain technology is the source that has made virtual currency valuable and trustworthy. Blockchain allows two parties to become a part of a transaction that is completely secure and independent, without the interference of third-party involvement.
Blockchain is not confined to a is a singular design, or it does only offer a single way of dealing with the transactions. The design varies, especially with regard to the consensus mechanism that helps in verifying network data. This article would help you get a real insight and understanding of two blockchain designs that exist behind the world-famous digital currencies.
Consensus mechanisms in the blockchain provide a structure or common algorithm through which the participants in the decentralized system could make a consensus on the transactions occurring on the network.
For example, a centralized system that holds important information about the employees in a large-scale manufacturing business, where thousands of employees work. All the information is stored in the database that is handled and updated by a central administrator. Any changes like adding new employees, deleting, updating designations are done by a central authority, who only holds the authority of maintaining records.
On the other hand, the decentralized system works differently, public ledgers or blockchains do not involve any central authority that acts as a sole in-charge, instead, the contribution of thousands of individuals are involved in the process of authentication and validation of transactions taking place on a public ledger or activities that involve block mining. In order to make sure that the status of the ledger is authentic and all individuals involved in the process accept the consensus, the consensus mechanism act as an agreement on a single data value.
There are two different types of consensus mechanisms that follow that different set of principles.
Proof-of-work refers to the mechanism that enables the blockchain to verify the transactions without the interference of a third party. So proof-of-work was created by Satoshi Nakamoto in order to verify the bitcoin transactions.
The proof-of-work network makes sure the validation of the transaction with the help of cryptography which is considered the most modern and advanced form of mathematics, and that is why virtual coins like bitcoin and Litecoins are called cryptocurrencies. The mathematical equations used by cryptography are only solved by high-intensity computers, the equations keep on changing and become more complicated, the network considers it authentic when the equation is solved. This leads to better security and POW systems are distributed, which makes it almost impossible to attack.
The proof-of-work network design of blockchain makes it quite difficult and expensive to attack. Secondly, the block miners get two incentives, first if the block reward, and second is share of the transaction fee.
The proof-of-work network requires an immense amount of electricity to solve the equation which leads to adverse impact on the environment and electricity wastage. Secondly, an important drawback is that it can only process limited transactions at the same time.
Proof-of-stake blockchain is the second type of consensus mechanism that has managed to overcome the deficiencies that proof-of-work have, like electricity wastage, speed, and scalability. EOS, Polkadot, and Ethereum are examples of POS mechanisms. Ethereum was initially based on POW, but transition for POS is in progress with Ethereum 2.0.
In the proof-of-stake algorithm, the validator of the next block is selected by the process of pseudo-random election which is based on randomization, node’s wealth, and staking age.
The proof-of-stake reward is usually related to transaction fees, whereas the creation of cryptocurrency is the reward for proof-of-work miners. Cryptocurrencies that are using a proof-of-stake mechanism differ in the methods and rules, each cryptocurrency sets rules and methods, according to the most suitable combination of their users.
The Proof-of-stake algorithm is much suitable for the environment as it does not require a high immense amount of electricity to secure the blockchain. The risks of centralization are minimized due to the reward system.
The worst thing about Proof-of-stake is that users have the same incentives that are not based on the investment made. In POS, the profit tends to be high when dealing with all currencies.
There is no doubt that that proof-of-work has a good history with many cryptocurrency projects. The proof-of-work algorithm is so secure that it is almost impossible for existing computing technology to attack blockchain, but problems associated with it are more likely to make it unviable in the future.
Problems like high electricity cost, environmental issues, and negative media coverage. Cryptocurrencies that are on a proof-of-work algorithm like bitcoin consumes an immense amount of energy as a result many countries have shown a matter of concern in the past, such as China was very close to banning mining operations.
Whereas on the other hand, proof-of-stake has much better scalability and higher transaction capacity as compared to proof-of-work. Secondly, Proof-of-work is much more secure than Proof-of-stake due to a completely decentralized mechanism.
If the transition of Etherum from POW to POS resulted successfully then, there are very high chances that the cryptocurrency community would move forward towards its adoption, as they would be assured that the POS algorithm has the ability to keep the network safe.
The future seems to be bending towards the proof-of-stake algorithm due to its environmentally friendly nature. Proof-of-work is the more reliable and well-tested consensus mechanism as compared to proof-of-stake. The reward in POW is much higher for miners in comparison to POS. it’s hard to finalize whether a proof-of-stake consensus mechanism is going to be the future or not until Ethereum succeeds in the transition.