Proof of Work vs Proof of Stake: Basic Mining Guide
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The Proof of work concept existed even before bitcoin , but Satoshi Nakamoto applied this technique to the digital currency revolutionizing the way traditional transactions are set.
In fact, PoW idea was originally published by Cynthia Dwork and Moni Naor back in 1993, but the term “proof of work” was coined by Markus Jakobsson and Ari Juels in a document published in 1999.
But, returning to date, Proof of work is maybe the biggest idea behind the Nakamoto’s bitcoin white paper – published back in 2008 – because it allows trustless and distributed consensus.
A trustless and distributed consensus system means that if you want to send and/or receive money from someone you don’t need to trust in third-party services.
When you use traditional methods of payment, you need to trust in a third party to set your transaction (e.g. Visa, Mastercard, PayPal, banks). They keep their own private register which stores transaction history and balances of each account.
Going deeper, proof of work is a requirement to define an expensive computer calculation, also called mining, that needs to be performed in order to create a new group of trustless transactions (the so-called block) on a distributed ledger called blockchain .
Mining serves as two purposes:
Proof of stake will make the consensus mechanism completely virtual. While the overall process remains the same as proof of work (POW), the method of reaching the end goal is entirely different. In POW, the miners solve cryptographically hard puzzles by using their computational resources.
In POS, instead of miners, there are validators. The validators lock up some of their Ether as a stake in the ecosystem. Following that, the validators bet on the blocks that they feel will be added next to the chain. When the block gets added, the validators get a block reward in proportion to their stake.
In a distributed consensus-based on the proof of Work, miners need a lot of energy. One Bitcoin transaction required the same amount of electricity as powering 1.57 American households for one day (data from 2015 ).
And these energy costs are paid with fiat currencies, leading to constant downward pressure on the digital currency value.
Thanks to a PoS system validators do not have to use their computing power because the only factors that influence their chances are the total number of their own coins and the current complexity of the network.
So this possible future switch from PoW to PoS may provide the following benefits:
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