A blockchain company uses blockchain technology to create new revenue streams and transform the way that it offers products and services to consumers. Whether your company is in the banking sector, retail or personal identity security, blockchain technology can change the way that you do business. This article will compare POW and POS, which are two popular consensus mechanisms that are used with blockchain technology.
What is blockchain technology?
Every blockchain company wants to ensure that they maintain the security of their system as they conduct transactions with customers. A blockchain company uses blockchain technology because it cannot be hacked and no one can just make a quick change to an account and give themselves billions of dollars. The distributed nature of blockchain technology provides added security, since other users would quickly spot and reject false alterations. However, the type of consensus mechanism that is used with their blocks also provides them with benefits.
Blockchain technology uses a system of recording information that makes it difficult for anyone to hack or change that information. A blockchain is a digital ledger of transactions, which are duplicated and distributed right across the network of computers on the blockchain. Every time a new transaction occurs on the blockchain, that transaction is recorded in every participant's ledger.
The decentralized database is managed by multiple participants and it is called Distributed Ledger Technology (DLT). Blockchain is not the only type of DLT but it is one of the better known applications. Each transaction that's done on the blockchain is recorded with an immutable cryptographic signature, which is known as a hash. Each transaction goes through several steps before it is added to the blockchain.
The blockchain is used in payment structures such as RippleNet, which has managed to speed up payments through this application of the technology. Digital asset exchanges and payment providers can easily connect by using the structure and they can seamlessly transfer money, even if they are in different countries. This technology allows banks and other financial institutions to settle cross-border payments in real time.
What are POW and POS?
POW and POS are both consensus mechanisms. They help to ensure that all the nodes on a particular network are synchronized. As explained earlier in this article, one of the chief advantages of blockchain is that transactions are updated on all blocks at the same time. The consensus mechanism helps to ensure that this takes place.
POW and POS also ensure that all transactions that are done by a blockchain company are legitimate. Blockchain networks use these mechanisms to make sure that every node is connected to the same network. These mechanisms also ensure that transactions on the blockchain are regularly verified. Public blockchains operate as decentralized, self-regulating systems, so there's no central authority that updates and maintains the database.
The task of making updates to the blockchain is crucial. In a centralized system, this is handled by the administrator but in a decentralized system, such as with Bitcoin, Ethereum, or another cryptocurrency where blockchain is used, a consensus mechanism is utilized to maintain accurate records. On the blockchain, hundreds of thousands of participants are constantly authenticating and verifying transactions in real time.
Since the status of the blockchain is constantly being changed, a fair, real-time mechanism must be used to ensure that all participants can come to a consensus on the status of the ledger. POW and POS are towi of the most common mechanisms which are used for this purpose.
Benefits of POW
POW is an abbreviation for Proof of Work. Proof of Work is used by both Bitcoin and Litecoin. It requires a participant node to prove that it has done and submitted work which qualifies it to receive the right to add a new transaction to the blockchain. This is a mining mechanism and it takes longer to process and requires more energy than POS.
While the energy consumption can be a drawback, POW is designed in this way to discourage spammy activity. For example, POW deters frivolous use of computing power for purposes such as sending spam emails. Hackers who want to launch denial of service attacks will think twice about doing so as well. Bitcoin was the first widely adopted allocation of POW but it has been used in other systems since then.
The following are just some of the mineable coins which use Proof of Work:
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Bitcoin
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Ethereum
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Litecoin
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Monero
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Dash
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Crown
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Scala
While Ethereum is currently on this list, it may not continue to be on it for long. It is currently in the process of switching to a POS system. This is due to the increased safety associated with using POS instead of POW.
In practice, a blockchain company on systems that utilize POW can detect tampering through the use of hashes. Hashes are long strings of numbers and they serve as proof of work. Whenever you put a set of data through a hash function, a hash will be generated but it's important to note that the hash function will generate that number only once. if the data changes in any way, an unrecognizable hash will be generated.
Hashes which are associated with POW are one-way functions. They cannot be used to obtain the original data that was used to generate them. You can only use the hash to check that the data generated by it matches the original data.
POW makes it very hard for anyone to alter any part of the blockchain. To do that, they would have to re-mine all subsequent blocks. This is why a blockchain company can conduct financial transactions with a high level of confidence. They know that the blockchain is secure and no one can easily tamper with data in any way, no matter where in the world they are located.
POW also encourages users to maintain a level of equality in the system. It does not benefit them when they try to monopolize the system. If a pool of users tries to gain control over the network's computing power, they would face a high cost, related to the machinery and power required to complete the hash functions.
POS
POS or Proof of Stake, is another consensus mechanism that is very popular. POS was developed as a low-cost alternative to POW. It also consumes less energy than the POW algorithm. it allocates responsibility in maintaining the public ledger to different nodes based on their stake, or the number of virtual cryptocurrency tokens that they hold. As you would imagine, this encourages each node to hold on to a significant number of tokens, in order to receive a greater allocation of responsibility.
Since currency is really meant to be used in transactions and not hoarded, the cryptocurrency saving that's encouraged by POS could potentially be a problem. To solve this, other consensus mechanisms have been developed. However, these will not be addressed in this particular article.
With Proof of Stake, miners can validate cryptocurrency transactions based on the amount of cryptocurrency that they already hold. This leads to problems, since if for example, a bank wants to have more power within the system, all they need to do is hold onto more of the cryptocurrencies than individuals or groups at other nodes. In fact, this has happened to an extent within different systems. You are less likely to encounter this type of problem in a blockchain that uses POW.
Unlike Poof of Work, which requires a large amount of energy to process transactions, Proof of Stake requires very little energy. Miners end up having to sell their cryptocurrnecy in order to foot the bill for the massive amount of energy that they use with a POW blockchain. With Proof of Stake, the network actually gives mining power to you based on the percentage of coins that you hold. If another miner holds a higher percentage of coins than you in a POS system, they will have more mining power than you do.
Which system is less risky?
POS is seen as less risky than POW, although both systems are seen as safe. The advantage that POS is seen as having comes from its structure. Miners are less likely to attack the network because they will not receive enough compensation for doing so. POS miners are always limited to mining a percentage of transactions that is reflective of their ownership stake.
For example, if a miner only owns 4% of the cryptocurrency, she can only mine 4% of the blocks. If she decides to attack the system, she won't benefit much because she still will be limited to mining just 4% of the total cryptocurrency that's available.
Bitcoin uses POW and that makes it susceptible to a particular type of attack which is known as a Tragedy of Commons. The Tragedy of Commons is a type of inescapable point, at which fewer Bitcoin miners will be available because there are few or no rewards from Bitcoin mining. At this point, the only fees that you can earn will come from transaction fees and those will also decrease over time, since users may decide to pay less for their transactions.
At this point, a miner or mining pool may control 51% of the computational power that is available in the network. They can use that power to create fraudulent transactions that work to benefit them. While doing so, they may also invalidate the transactions of others in the network. Proof of Stake avoids this type of tragedy.
It would never be advantageous for a group if miners with a 51% stake to attack a network that uses POS. If they attack the system and the value of the cryptocurrency falls, this means that their won holdings would also fall instantly. It‘s never in their best interests to attack a network in which they hold a majority share. NXT is one of the cryptocurrencies that uses a POS system.
Which system is more resource friendly?
POS is much more resource friendly than POW. In POW, you are always required to waste a lot of resources to go with the protocol but with POS, you don't. Bitcoin and several other cryptocurrencies use POW, so every time a new entry is done, it must be accompanied by proof of work. This is resource intensive.
The POW consensus model uses algorithms that are computationally expensive. Even though POW offers security, this is only achieved by utilizing the processing power of multiple nodes.
How do the systems compare in terms of scalability?
When it comes to scalability, POS is a better option than POW and a number of scalability problems can be addressed more easily with it. If you're using a POW database to store your data, problems arise when you try to scale by putting transaction sets that will never rely on each other into two separate databases.
One of the databases may have less hashpower, so it will be easier to control. With POS, you can scale in this way without affecting the security properties of the system.
Which system balances mining across the world?
POW can lead to an unequal distribution of miners because it's easier to mine cryptocurrency that uses it, in areas where electricity is cheap. For example, Bitcoin uses POW but it's really expensive to mine Bitcoin in areas where electricity is expensive. This leads to a situation where more mining is occurring in certain countries.
In effect, that slightly defeats one of the purposes for which Bitcoin was formed. Bitcoin was developed as a currency that would be free from political manipulation. If some countries can mine Bitcoin more easily because electricity is cheaper in those regions, it could give them greater power over the cryptocurrency.
The same applies to other cryptocurrencies that use POW. The POS consensus mechanism is less susceptible to this particular type of geographic influence. It does not rely as much on the use of sizable amounts of electricity, so there's a more even distribution of miners across the globe. POS is also easier to use since it doesn't require special hardware.
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