Among the frequently used terms and associated with digital currencies are “proof of work” and “proof of stake”. Briefly, they are similar to the systems in which mobile phones operate, such as Android, DOS or others. But what does each of them mean and what is the difference between each term?
Proof of Work System and Safety Key
The Proof of Work System is the key to security in the currency mining process that relies on this system, the first of which used in Bitcoin mining, and then the Ethereum, which are the largest digital currencies in terms of market value.
Proof of Work (PoW) consensus algorithm involves solving a computational challenging puzzle in order to create new blocks in the Bitcoin blockchain. With PoW, miners compete against each other to complete transactions on the network and get rewarded.
Thus, this system is the guarantee of the absence of fraud and manipulation within the team working on mining the currency, which is also what makes all transactions on the blockchain reliable.
Proof of Work and Hashcash
PoW system is seen by many as Hashcash, which belongs to its owner Adam Back who created it in 1979, more than 25 years before existence of Blockchain and Bitcoin.
The proof of work algorithm was applied for the first time in 2008 in the whitepaper submitted by Satoshi Nakamoto when he introduced the bitcoin, to avoid the so-called double-spending, once was the weakness of digital currencies.
Bitcoin creator, through proof of work system, was able to confirm the reliability of digital currencies, stating they could be exchanged around the world without fear of decoding or seizure, especially since they are all in the space between millions of mining devices.
To ensure the strength and credibility of the process, it must be confirmed by 3 other miners.
Proof of Stake
The Proof of Stake system works primarily on selecting a node to be responsible for checking the next block using a set of random steps, thus, it is a process for validating existing transactions and achieving distributed compliance.
Thus, the proof of work (PoW) depends on the currencies you mined, while proof of the stake (PoS) depends on the currencies that are already in your digital portfolio, whatever their source is (mining, buying, or ownership transfer).
The PoW system requires the mining process, which in turn requires a large amount of energy used to operate supercomputers working in the mining process. Each bitcoin transaction represented roughly enough electricity to power 1.57 American households for a day.
Accordingly, miners would need to sell all their currencies in order to pay the electricity bill, and this would lead to a devaluation of the currency, and possibly its fading.
Therefore, proof of stake system came to solve this problem, by retaining the mining force to the size of the coins the miner possesses, not the volume of electricity used in the process.
Proof of Stake, the Issue and its Solution
Some believe that Proof of Stake system may result a decline in the numbers of miners, as the reward is given for the number of coins owned and not mined.
Thus, if the number of miners decreases, the network becomes more vulnerable to attacks, and this attack may result controlling 51% of it, and thus controlling all operations.
And if the answer to that lies in the problem itself, which is that the miner who will own 51% of a particular currency, he will never attack the network, since the value of what he owns will what will suffers the damage.