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CC#1.6. Proof of Work vs. Proof of Stake

April 19, 2022

We already talked about how blockchain technology is mainly a distributed database. To further understand how it actually works in practice, we need to look at  the two most common methods of validating transactions and creating new blocks – Proof of Work (PoW) and Proof of Stake (PoS).

Proof of Work

Proof of Work (PoW) is the original consensus algorithm in a Blockchain network. In this system, miners compete against each other to solve complex mathematical problems in order to validate transactions and create new blocks. The first miner to solve the problem gets to add the next block to the blockchain and receives a reward in return. Mempools are used in this system to keep track of all unconfirmed transactions, which are then bundled together into blocks by miners.

Although PoW is the most widely used consensus algorithm, it is not without its flaws. Firstly, PoW is a very energy-intensive process, as miners need to constantly run their computers in order to compete for the next block. Secondly, PoW is vulnerable to 51% attacks, where a group of miners could potentially control the majority of the network’s mining power and manipulate the blockchain for their own benefit. It’s true that this is very hard to do in practice, since it would require a huge amount of computing power and money, but it is still a potential risk. Moreover, because miners compete against each other, there is often a lot of duplication of work which leads to wastage.

Proof of Stake

Proof of Stake (PoS) is a newer consensus algorithm that has been designed to address some of the issues associated with PoW, such as high electricity consumption and centralization of mining power. In a PoS system, instead of miners competing against each other, validators stake their tokens in order to validate transactions and create new blocks. Staking is similar to putting your money in a savings account – the more you stake, the higher your chances of being chosen to validate a transaction and earn a reward.

PoW vs. PoS

PoS is a more energy-efficient way of running a blockchain network, as it does not require miners to constantly run their computers. PoS is also less vulnerable to 51% attacks, as it would be very difficult for an attacker to control a majority of the tokens in the network, making it even more secure and reliable than PoW. It allows for faster transactions and lower fees, because there is no need to compete for rewards. PoS also allows for a greater level of decentralization, since nodes are not incentivized to join or leave the network based on their profitability. Instead, they remain active as long as there is an economic incentive for them to do so.

If in a PoW there is the process of mining, in a PoS we have what is called “forging”. When a validator creates a new block, they are rewarded with a certain amount of tokens from the network. Forging rewards incentivize validators to stay online and continue to validate transactions, even when there are no transactions to validate. This helps to keep the PoS network secure, decentralized and more scalable.

PoS also allows for what is known as “sharding”.  Sharding is a process of partitioning the blockchain into multiple smaller pieces, each of which can be processed and validated independently. This allows for greater scalability, as more transactions can be processed in parallel.

Sharding is not possible with PoW, because all miners need to work on the same chain in order to find the next block. This often leads to congestion, as miners need to wait for each other in order to add new blocks.

Both systems have their advantages, but overall PoS is a more efficient and secure way of running a blockchain network. It is also more scalable and decentralized, which makes it a better choice for many applications, especially those that require fast transactions and low fees.

That’s why The Coop Network is a 100% PoS blockchain.

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