Consensus Algorithms. What Does Proof-of-Stake (PoS) and Proof-of-Work (PoW) Mean in Crypto?

Proof-of-Work (PoW)

Proof-of-Work (PoW) is an algorithm that adds a new block to the blockchain, serves to validate transactions, and maintains a single version of the registry across all copies of the registry stored by individual nodes.

Proof-of-Work (PoW) has a number of key features to understand: 

• The need to perform a specific complex and time-consuming task;
• The ability to check the result quickly and easily.

PoW is designed so that it can't be done by a single person. It takes a lot of computing power to solve an encryption puzzle. This decentralized consensus mechanism is also known as mining. PoW is also called mining, which is a process of getting a reward for work done.

Proof-of-Stake (PoS) consensus algorithm

Proof-of-Stake (PoS) is the most popular blockchain algorithm today. Ethereum, Cardano, Solana, Tezos and Algorand are based on it. 

Its popularity can be explained by the fact that you don't need to buy super expensive mining equipment. You use less energy, contribute to the ecology, save your own money and also support the security of the blockchain. 

In the PoS mechanism, there are validators who hold and stake tokens and earn transaction fees based on the amount of coins they have staked. This is called "Proof of Ownership Interest". In the PoS algorithm, owners put up their coins as collateral to get the chance to validate blocks and earn rewards. Unlike Pow, PoS validators are randomly selected, so there is no competitive element.

Who coined the term proof-of-work?

The term Proof-of-Work has several origins, as different brilliant minds simultaneously came up with the idea of the mining process or other related concepts. The term " Proof-of-Work", attributed to Shay M. D. Mao originated in 1993 when he introduced it in his seminal paper entitled "Toward a Simple Model of Web Security". In this paper, Mao advocated the use of computation as a powerful defence against spam and DDoS attacks.

The concept was also described in the same year in "Pricing via Processing, Or, Combatting Junk Mail, Advances in Cryptology". This paper didn't literally use the term PoS, but described a similar process: "To access a shared resource, the user must compute a function: quite complex, but doable; this is how to protect the resource from misuse. 

The term Proof-of-Work itself appeared in 1999 in the article "Proofs of Work and Bread Pudding Protocols" (by Markus Jakobsson and Ari Juels) in the journal Communications and Multimedia Security.

Thus, the 'Proof-of-Work' concept underwent various iterations until it was fully explained in the profound work of Satoshi Nakamoto. Nakamoto's influential document "Bitcoin: A Peer-to-Peer Electronic Cash System" was published in 2008. This was the turning point for Proof-of-Work. Here, the mechanism was not only fully described, but also successfully implemented within the Bitcoin blockchain. This improved the consensus algorithm and ensured the inclusive security of the network.

As a result, the Proof of Work concept became much bigger than it needed to be, from its application in web security to its widespread adoption in blockchain technology, becoming the basis of numerous protocols and ensuring the highest levels of transparency and protection.

What is the importance of Proof-of-Work for cryptocurrencies?

The importance of the Proof-of-Work (PoW) consensus mechanism for cryptocurrencies has been unlimited since the emergence of Bitcoin in 2009. 

Firstly, PoW has a well-developed mechanism of competition between miners when a new block is added. The faster you solve a complex mathematical problem known as Proof-of-Work, the better your chances of winning a reward.  This is a symbolic entry ticket for miners, celebrating their commitment and computational energy investment in the blockchain.

The consensus algorithm ensures that each node is able to verify that the miner (played by another node that adds a new block to the blockchain) has actually performed the necessary calculations. In short, this process is an attempt to find a block header hash (the part of the blockchain that holds a reference to the previous block and the summary value of the transactions it contains) that matches the current level of complexity.

Overall, PoW is a process that allows all nodes to agree on the unified blockchain version and also confirm the data on the new transactions in the block. PoW is also responsible for the issuance of new coins in the blockchain. 

Despite its effectiveness in achieving consensus and ensuring security, PoW has been criticised for its high energy consumption. The main claim is that PoW has a negative impact on the environment. This is one of the reasons why other participants in the system started to look for other solutions. Proof-of-Stake (PoS) has emerged as a prominent competitor. It doesn't require complex and expensive mining equipment that consumes a lot of energy.

What is Delegated Proof-of-Stake?

Delegated Proof-of-Stake (DPoS) is an innovative consensus mechanism in the blockchain space, which improves the efficiency and scalability of the system. It is derived from Proof-of-Stake (PoS). In 2013, Daniel Larimer, an American programmer and crypto entrepreneur, used this concept to create the Delegated Proof-of-Stake (DPoS) mechanism.

A key element of DPoS is based on the concept of delegation, which encourages network participants to delegate their cryptocurrency stakes to other participants, known as delegates. These delegates are in turn selected to create new blocks and validate transactions based on the size of the stakes they have been given.

DPoS is an analogue of democracy in blockchain work and a fairer distribution of rights, where each delegate's voting influence is equal to the amount of stakes delegated to them. In this way, delegates are actively involved in critical decision-making processes related to all important aspects of the network.

It can be very useful for those crypto owners who do not wish to actively participate in network updates. They delegate their ownership and the delegates do this part of the work for them, charging their commission. 

DPoS was first implemented in the BitShares blockchain platform, and then in different variants was embodied in the most famous crypto projects EOS, Cardano, Tezos, etc. Today, the delegation function has become an industry standard and is used in almost all PoS implementations.

The number of coins needed to become a validator varies: it usually depends on the specifics of the network and its architecture. For example, in Ethereum, the lowest threshold is 32 ETH.

Proof-of-Work cryptocurrencies

According to CoinMarketCap data, these are the most successful examples of cryptocurrencies using the Proof-of-Work (PoW) mechanism as of the end of August 2022:

Bitcoin (BTC): the pioneering cryptocurrency. Bitcoin's PoW-based consensus remains the gold standard that still inspires confidence and attracts investor attention. .

Ethereum (ETH): the second largest cryptocurrency by market capitalization. Ethereum has undergone many changes in the last 5 years, including Merge, Sharding and other transformations. This is the revolutionary blockchain that gave birth to concepts such as smart contracts, stablecoins and dApps. 

Dogecoin  (DOGE): it was created as a marketing experiment and turned into a much bigger idea.  Its unexpected popularity turned into a springboard for growing popularity. To date, DOGE issuance is unlimited and has a fixed annual inflation rate of 5.2 billion coins (~3.6%).

Ethereum Classic (ETC): Based on a fork of Ethereum in response to the DAO hack, Ethereum Classic stands out as a PoW project in its own right. Ethereum Classic has undergone many software upgrades, but still has some scalability issues. 

Litecoin  (LTC): This is one of the oldest and most resilient PoW projects. Litecoin is a global decentralised p2p payment network built on top of the Bitcoin source code. However, as a fork of Bitcoin, it has some advantages. The lightweight nature of its network allows transactions to be confirmed 4 times faster than the bitcoin blockchain.

Monero (XMR): One of the biggest benefits of this blockchain is privacy and anonymity, Monero offers users the ability to maintain financial confidentiality.

Bitcoin Cash (BCH): Bitcoin Cash offers a much larger block size - 8MB compared to 1MB in the current version of Bitcoin. The block size in Bitcoin Cash is expected to be configurable as needed. It also has a built-in security mechanism. 

Bitcoin SV (BSV): Another fork that still supports all the original principles of bitcoin. The Bitcoin Cash hardfork is considered the most "original" or "pure" version of Bitcoin (BTC).

Zcash  (ZEC): Protected by the zk-SNARKs protocol, Zcash provides an enhanced level of privacy for its users.

Kadena (KDA): This innovative PoW project focuses on business needs, offering high performance and scalability.

All of these cryptocurrencies are now shaping the landscape of PoW technologies, offering different opportunities and solutions for all types of users and investors. 

Conclusion

Both PoW and PoS are effective consensus algorithms. However, they differ in their approach to improving blockchains. 

PoW is sometimes considered outdated, but it has a number of advantages, including higher security due to the complex algorithm mining concept.  

PoS is popular because of its low fees, staking and smart contract concepts, and decentralized nature. Now that more and more networks are on the rise, we're sure to see new improvements and breakthroughs related to the implementation of these two algorithms.