The Proof of Work and Proof of Stake

Part 1

One of the major cryptocurrency advantages is total or partial decentralization of any transactional activity inside the system . However, the absence of intermediary in transactions creates one serious problem: any participant can abuse “double transactions” without inside control. In order to distinguish real transactions from invalid special consensus algorithms were created. These algorithms allow network participants to arrange the mechanism of transaction approval.

The method PoW (Proof of work) was the first of such algorithms used in Bitcoin technologies.

Actually the method itself was invented in the early 1990’s as the e-mail protection from spam letters. Letter sender should solve a simple mathematical task in order to the system could recognize a real person instead of spambot.

The mining itself is the process when a miner tries to find heading block hash (the Block chain part with a link to the previous block) and total amount of included transactions.

All miners make calculations of spent electricity and time resources to confirm network transactions. Despite all complexity of math calculations, however, it is easy to check the result. That’s why PoW is the consensus, the safety of which is scaled together with network capacity. Due to this feature PoW is recommended as the most reliable method of cryptocurrency Blockchain functioning.

By right, Proof of work is considered as the safest method of network transaction confirmation. For example, to commit 51% attack on just one block of Bitcoin network, you need to spent approximately $7,4 billion to purchase it and install special equipment and then prepare to pay about $13,2 million a day for electric energy consumption.In comparison, similar operations on Ethereum platform would cost considerably less — only $600 million.

The 51% attack essence is in the seizure more than half of network capacity. It enables the attacker to get false blocks and totally affect the cryptocurrency Blockchain.

But it is a lot easier to work such a trick on cryptocurrency platforms with low network capacity. Recently there has been 51% attack committed on XVG and ETP crtyptocurrencies at once. To attack XVG the hacker simply used the exploit inside currency software. This allowed attacker to reduce the speed of block mining for himself. When attacked the ETP, the hacker simply directed a huge amount of capacities to network and put other miners out.

24 hours later the attacker seized the ETP network totally and could mine a huge amount of project coins. In both cases the projects commands solved the attack problem with the hardforks help.

We will talk in details about one more consensus algorithm Proof of Stake in the next issue.

Part 2

However, in spite of all advantages of the Proof of Work consensus, the idea of alternative solution creation to confirm transactions emerged as early as 2011. It was just a small concept-remark on the Bitcointalk popular resource. The Proof of stake (the proof of share of possession) was designated as a new type of the consensus by the alternative for PoW.

The main feature in PoS is the absence of huge capacities for each new block mining. Instead of it, the algorithm of new block mining in the network is constructed around the idea of cryptocurrency storage by the user. This type of the consensus for the first time was realized as early as 2012 in PPCcoin platform — one of the most known old cryptocurrencies, at present renamed in PeerCoin.

If consider without each cryptocurrency nuances, every network participant who owns 5% of all cryptocurrencies could deal on the average with 5% of all the transactions on long distance. The cryptocurrency amount on network balance increases the blockchain check transaction processing probability. To replace physical computing capacities, PoS has its limitations on potential transactions checking quantity.This allows reduce the requirements to computing capacities significantly and replace expensive and energy-intensive equipment by nodes to mine new blocks.

Despite the apparent benefits of ecological cleanliness and faster Blockchain creation, the PoS method has its disadvantages. One of them is the profitability of huge cryptocurrency amount accumulation in the hands of a single person that decreases decentralization significantly. Moreover, if the user’ group accumulated a high percentage from total cryptocurrency emission in their hands,they could dictate the terms to the whole network.The nodes have a right to vote for internal network changes that allows to affect network and its participants directly.

It should be noted the 51% attack in the network with PoS consensus doesn’t make sense.The attacker of PoW network should purchase the physical equipment able to use for coins mining in the sized network afterwards. To provide similar attack in the PoW network it would be required to purchase a lot of cryptocurrency coins, but after seizure the network could become probably unstable that could significantly decrease the purchased actives price. At worst, the cryptocurrency would cease to exist.

In spite of continued disputes, they now even more often say about the advantage of few method combination at once, for example PoS + PoW. Similar decisions allow to take all best from a few types of transactions confirmation and faster and technologically improved cryptocurrency Blockchains.

We will talk in details about bitcoin transaction verification in the next issue.

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Dmytro Dvurechenskyi from openGeeksLab

Dmytro Dvurechenskyi from openGeeksLab — software r&d solutions

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