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PoW and PoS: consensus algorithms in blockchains

3 min read

Many people today use to earn money online – some of them take part in live casino games, but others prefer mining which became very popular recently. The world of cryptocurrencies has completely captured the minds of the smartest inhabitants of our planet. 

Every second person in the world has heard the mention of cryptocurrency at least once, and anyone who invests today has bitcoin in his portfolio and distinguishes between the concepts of “mining” and “consensus”. One of the main tools in mining is the blockchain consensus algorithm. In this review, we will understand what this algorithm means and what is the difference between PoW and PoS.

Mining

To understand this topic, you need to start with the main thing and understand what mining is. Mining is the process of solving complex mathematical problems by which miners can create new blocks and add them to the blockchain.

Why is blockchain consensus so important?

The main advantage of blockchain is decentralization. There is a specific database maintained by the computers involved in it, called “nodes”. All nodes store the entire history of transactions in the blockchain.

Records of information, called “blocks”, are interconnected through a protocol program, and none of the existing blocks can be deleted or changed. Adding a new block is the only way to update the blockchain, any node can do it without any central command.

If a node ignores the predefined standards and creates a block, other nodes ignore it. However, if the incompatible node continues to create non-compliant blocks and other nodes start creating blocks on top of the non-compliant blocks, then there will be conflict in the community. A consensus mechanism is needed to prevent incompatible nodes from creating so-called forks.

Proof of Work

A Proof-of-Work (PoW) algorithm is a form of cryptographic proof that proves that a miner has expended a certain amount of computational effort. This algorithm is used when solving complex mathematical problems. For adding a verified block to the blockchain, the miner receives a reward in the form of cryptocurrency. Once the miner’s computer finds a solution, it sends a message to the other computers in the community for verification. If it is confirmed that the miner solved the problem correctly, then he will receive a reward.

An important feature of the mathematical problem is that it should be moderately difficult for the miner, but easy enough for the network as a whole. This is made possible by cryptography. Every miner in the network tries to solve the problem first; at the same time, it can be found only by direct enumeration, so many attempts are required for a successful solution.

Proof of Stake

Today, the Proof-of-Stake method is used by many cryptocurrencies ShadowCash, Peercoin, Nxt, NuShares/NuBits, BlackCoin, Qora, and Nav Coin.

In the Proof-of-Work system, the algorithm rewards miners for performing calculations to validate transactions and create new blocks. The Proof-of-Stake algorithm works differently – here the system pre-selects the creator of a new block based on its state, that is, its share in the total amount of cryptocurrency.

The idea of ​​proof-of-stake is to solve the problem of proof-of-work associated with high energy consumption. What matters here is not the computing power of the participants, but the amount of cryptocurrency in their account. So, instead of using a large amount of electricity to solve the PoW problem, the PoS participant has a limited percentage of possible transaction verifications. The limit corresponds to the amount of cryptocurrency in the account of the participant.

Proof of Stake (PoS) is used when a miner blocks a predetermined number of coins to validate a block of transactions. Cryptographic calculations in PoS are much easier for computers. You only need to prove that you own a certain percentage of all the coins available in that currency. For example, if someone owns 2% of all ether (ETH), they will be able to mine 2% of all transactions through Ethereum.

Some believe that PoS is a fairer system than PoW since technically anyone can become a miner. In addition, according to experts, the transition to PoS can contribute to greater participation of the global community, as well as a more complete decentralization of capacity.

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All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.

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