The Beginner’s Guide To PoW & PoS
All cryptocurrency is built on a network of computers. It secures software and regulates issuance.
This consensus mechanism is Proof of Work (or Proof of Stake) are two of the most widely used consensus mechanisms. Both of these mechanisms regulate the way transactions between users are verified and added to a blockchain’s public ledger.
Knowing the differences can help you to evaluate cryptocurrencies for your portfolio. Additional responsibilities and benefits may be associated with Proof of Stake cryptocurrency.
What is Proof of Work (PoW)?
Proof Of Work (PoW) was introduced in 1990 to combat spam mail.
Before sending an electronic message, computers might need to perform some work. This work is not necessary to send legitimate emails. However, it will require a lot of computing power and resources in order to allow users to send large amounts of messages.
However, it was Satoshi Nakamoto, the inventor of Bitcoin, who used the technology to create the first digital currency system by using Bitcoin’s whitepaper.
A Blockchain refers to a system that has a number of blocks or groups that were executed in a specific order.
The genesis block refers to the first block of a PoW Blockchain. This block is also known by the number 0. This block does not refer to any other block.
The blocks that follow the blockchain are a copy of the blocks before them. Each block contains a copy of the updated, complete ledger.
The winner of the race for the adjustment of the ledger is determined by PoW algorithms. Participants (miners) are encouraged to use computational power to create blocks that conform to the rules of the network.
Any computer that runs Bitcoin software is called a node. They verify transactions and prevent double-spending. This happens when funds are used for more than one recipient.
In order to create a new block, PoW network miners must solve complicated mathematical problems in order to win. This is known as hashing. These puzzles are often very difficult to solve but the network should be capable of verifying that the correct answer has been found.
PoW protocols combine cryptography with computational power to achieve consensus. This guarantees the validity of transactions stored on the blockchain.
To create new blocks in the hashing process, and to find the correct answer to mathematical problems, miners race to be the fastest.
Miners create a string made up of pseudorandom numbers, called a hash. This combination with data from the block should result in a match.
The hash of the winner is then sent to the network for verification by other miners. If the hash matches, the block is added onto the blockchain. Block reward is given to the miner.
Block reward refers to the new cryptocurrency that blockchain gives miners in exchange for each block that is accepted.
Some cryptocurrencies, such as Bitcoin, have a lower block reward after certain blocks are discovered.
This is to maintain an infinite money supply and deflationary.
What is Proof Of Stake (PoS)?
Proof Of Stake (PoS), a modification to PoW, was introduced in 2012 to alleviate its dependency on energy to determine the order of blockchain transactions.
Instead of relying on computers racing to generate the right hash, the idea behind PoS protocols is that participation can be determined by who owns the coin supply.
The protocol determines which factors the PoS algorithm uses to pseudo-randomly select a node (anyone with the coin) to suggest the next block to be added to the blockchain.
A node is elected to verify that transactions in a block are valid, sign them, and then propose them to the network to validate.
A PoS blockchain, which is similar to PoW, is a system that has a series of blocks that are arranged in chronological order according to their transactions.
A PoS blockchain’s first block is also hardcoded into the software. This block is often called the genesis block. Each block added to the blockchain refers to the blocks before it and contains a copy of the updated ledger.
It is important to note that in PoS cryptocurrency, there is no competition as to who adds blocks. The blocks are sometimes referred to as ‘forged’ or ‘minted’ instead of being mined.
PoS blockchains are not like PoW blockchains. They do not decide who can propose blocks. This is because they don’t rely on energy consumption and computing power. PoS is often referred to as an “energy-efficient” system in which nodes are given the responsibility for creating new blocks and not competing with other nodes.
PoW mining and PoS mining both consume energy. Therefore, miners and miners are motivated to use as little electricity as possible. This is usually from renewable sources such as wind, solar, or hydroelectric power.
PoS blockchains, along with other computing devices and PoW mining equipment (ASICs), require specialized hardware (GPUs).
PoS miners also need to maintain active internet connections. This requires an energy expense.
To be eligible to add blocks to the PoS blockchain, users must stake or lock a specific amount of blockchain cryptocurrency in a contract.
Their chances of being selected to become the next block producer will depend on how many coins they have staked. Users may be punished if they behave in a malicious way.
Other factors may also play a role in PoS, so that the poorest nodes are not always favored. These factors could include the time a node staked its coins as well as pure randomization.
The PoW algorithm is similar to the PoW block reward. It refers to cryptocurrency that the blockchain awards to users who have proposed valid blocks.
Block selection is made by coin ownership. However, some exchanges offer staking services, which allow users to stake funds for regular payouts.