What is Proof-of-Work and Proof-of-Stake?

Proof-of-Work and Proof-of-Stake are two of the most well-known consensus algorithms in cryptocurrencies. They offer proof-of-work mechanisms that differ in their structure.

What is Proof-of-Work?

Proof-of-Work (PoW – literally: proof of work) is an algorithm for protecting distributed systems from abuse (DoS- attacks, spam mailings, etc.), the essence of which boils down to two main points:

1. necessity to perform a certain rather complex and lengthy task;
2. features quickly and easily check result.

PoW tasks are not originally intended for humans, their solution by a computer is always achievable within a deadline, but requires large computing power . At the same time, verification of the resulting solution requires much less resources and time.

Bitcoin’s Proof-of-Work spawned an entire mining industry and became the impetus for the development of specialized hardware, since the computing resources expended for hashing blocks are huge and far exceed the power of the largest supercomputers.

At the same time, the notorious “reverse side of the coin” was not without: quite quickly, PoW turned into a monster devouring electricity in the race for mining profitability. In 2012, the total power of the Bitcoin network already exceeded performance, the most powerful supercomputer in the world, and the first alternative appeared on the horizon – Proof-of-Stake.

What is Proof-of-Stake?

An alternative consensus mechanism first implemented in 2012 in the PPCoin cryptocurrency (now known as PeerCoin). The idea is to use a “stake” as a resource that determines which node gets the right to mine the next block.

In the Proof-of-Stake approach, the nodes also try to hash data in search of a result less than a certain value, but the complexity in this case is distributed proportionally and in accordance with the balance of this node. In other words, according to the number of coins (tokens) on the user’s account.

Thus, the node with more balance is more likely to generate the next block. The scheme looks quite attractive, primarily because of the small requirements for computing resources, and also because there is no question of “wasted” power.

Generally, the following arguments are given in favor of using PoS:

• The attack requires significant resources to carry out, making it financially unfeasible point of view.
• At the same time, if the attacker has a large number of tokens, he himself will suffer from the attack, as this will violate the stability of the cryptocurrency.

Worried Arguments:

• PoS provides additional motivation to accumulate funds in one hand, which can negatively affect the decentralization of the network.
• If a small group forms and raises enough funds, it will be able to impose its rules on the network to other participants.

Additionally, we can note the Nothing-at-Stake (empty stack) problem, which makes PoS systems inherently unstable in the eyes of many cryptocurrency enthusiasts. An attacker may try to fork the blockchain, i.e., create a longer alternative chain by spending “non-existent” resources. Moreover, other miners can support it, since they also do not consume “genuine” resources. Through a fork, an attacker can reject certain transactions and perform a “double spend” attack.

What other proof mechanisms do cryptocurrencies have?