Consensus Mechanisms Explained: Proof-of-Work vs. Proof-of-Stake

Welcome back to ‘The Blockchain with OnChain’! In this 3rd installment we’re delving into the world of consensus mechanisms.

So sit down in your favourite chair, grab a coffee and let’s jump right in.

In the world of blockchain technology, a consensus mechanism is a critical component that maintains the integrity of the network. A consensus mechanism is a protocol that governs how nodes on a blockchain network reach agreement on the validity of data. Without a consensus mechanism, the blockchain network would be prone to problems, such as double-spending, that could compromise the entire system’s integrity. In this article, we will take an in-depth look at how consensus mechanisms work, focusing on the two most popular ones: Proof-of-Work (PoW) and Proof-of-Stake (PoS).

Proof-of-Work (PoW)

Proof-of-Work is the most popular consensus mechanism used in blockchain networks, and it is best known for being the underlying mechanism behind the Bitcoin blockchain. In PoW, nodes on the network (known as miners) use their computing power to solve complex mathematical problems (hash puzzles) competitively in order to validate transactions and add new blocks to the blockchain.

The hash puzzle is a mathematical problem that involves finding a hash value that meets a certain difficulty level. The hash function used in PoW is an irreversible function that takes an input of any length and produces a fixed-length output. The output is unique to the input, and even a small change in the input will result in a completely different output. In Bitcoin, the hash function is called Secure Hash Algorithm 256-bit (SHA — 256).

To have the best chances of solving the hash puzzle, most miners use specialized hardware called Application-Specific Integrated Circuits(ASICs) or Graphics Processing Units (GPU) to be able to perform a large number of calculations in a short amount of time. These calculations involve repeatedly guessing a random number (called a “nonce”) and hashing it with the contents of the block. The miner must keep guessing the nonce until the resulting hash meets the required difficulty level set by the network.

The difficulty level is adjusted periodically to maintain a consistent rate of block creation. The more miners that compete to solve the puzzle, the higher the difficulty level becomes, and vice versa. The measure of the computational power of a blockchain network is called the “hash rate.”

Once a miner solves the hash puzzle, they broadcast the new block to the network for validation. Other nodes in the network then verify the block’s contents and the solution to the hash puzzle. If the solution is correct and the block meets all the criteria for validity, it is added to the blockchain, and the miner is rewarded with newly minted cryptocurrency and transaction fees.

Proof-of-Work was designed by the pseudonymous creator of Bitcoin, Satoshi Nakamoto, to solve the double spending problem.

The double-spending problem occurs when a user tries to spend the same cryptocurrency twice. This can happen when a malicious user attempts to manipulate the network by submitting multiple transactions with the same cryptocurrency. When a transaction is initiated on a blockchain network, it is broadcast to all the nodes in the network. The nodes then validate the transaction and add it to the current block that will be appended to the blockchain. However, since the nodes in the network are not all connected directly to each other, there may be a delay in the propagation of a transaction to all of them.

This delay can create a potential vulnerability in the system, where a malicious user could attempt to spend the same coins twice by initiating two separate transactions that spend the same coins. The double-spending attack is considered successful if one of these transactions is added to the blockchain before the other. Proof of Work prevents this by requiring miners to solve the complex mathematical problem, which takes significant time and computational power to complete, making it financially unfeasible for attackers to attempt a double-spending attack.

Strengths and Weaknesses of PoW

One of the main strengths of PoW is that it provides a high level of security for the blockchain network. Since miners need to use their computing power to solve mathematical problems to validate transactions, it is extremely difficult for malicious users to manipulate the network. Additionally, PoW has proven to be a reliable and secure mechanism for validating transactions and adding new blocks to the blockchain. However, one of the main weaknesses of PoW is that it is extremely energy-intensive. Solving complex mathematical problems requires a lot of computational power in today’s blockchain environment, meaning miners need to use a lot of electricity to validate transactions and add new blocks to the blockchain. This energy consumption has been a major concern for many people in and out of the blockchain community because it significantly impacts the environment and the overall cost of operating the network, especially if the source of energy is non-renewable.

Proof-of-Stake (PoS)

Proof-of-Stake is a newer consensus mechanism that has gained popularity in recent years. In PoS, nodes on the network (known as validators) are nominated to validate transactions and add new blocks to the blockchain based on the amount of cryptocurrency they hold.

Validators are required to stake a certain amount of cryptocurrency as collateral in order to participate in the validation process. They are rewarded with a certain amount of cryptocurrency for each block they validate.

The process of selecting validators is based on randomness and the amount of staked cryptocurrency. Validators who are selected to create a new block and validate transactions are required to follow the rules of the network and add transactions to the blockchain in a transparent and verifiable manner.

PoS uses a “skin in the game” technique to ensure validators don’t act maliciously. Validators who fail to follow the rules of the network or validate transactions in a fraudulent manner risk losing their staked cryptocurrency, which serves as a financial disincentive for bad behavior. Those with a significant amount of cryptocurrency staked in the network are more likely to act responsibly, as they have a financial stake in the network’s success, which is why they are also more likely to be chosen for validation purposes.

Strengths and Weaknesses of PoS

One of the main strengths of PoS is its low energy consumption. Since validators do not need much computational power to validate transactions and add new blocks to the blockchain, PoS is much more environmentally friendly than PoW. Additionally, PoS has a much lower barrier to entry than PoW because validators only need to hold a certain amount of cryptocurrency in order to participate in the validation process.

However, one of the main weaknesses of PoS is that it is less secure than PoW. Since validators are selected based on the amount of cryptocurrency they hold, there is a risk that a malicious actor could acquire a large amount of cryptocurrency and use it to manipulate the network. This is known as the “nothing at stake” problem, where validators can fork and validate multiple versions of the blockchain in the hopes of double-spending their cryptocurrency because the cost of doing so is minimal compared to PoW.

Some PoS-based blockchains have implemented delegated staking to mitigate this risk, where validators delegate their staking power to trusted nodes known as “delegators.” These delegators are responsible for validating transactions and adding new blocks to the blockchain and are incentivized to act in the network’s best interests.

Other Honourable Mentions

While PoW and PoS are the two most popular consensus mechanisms used in blockchain networks, some projects use other consensus mechanisms that are worth mentioning. Some of these include:

Proof-of-Capacity (PoC)

PoC is used in blockchains like Chia and Filecoin, where miners use their hard drive space to solve mathematical problems and validate transactions.

Proof-of-Weight (PoWeight)

PoWeight is used in the Algorand blockchain. In this case, validators are swapped for miners, and they use their hard drive space to store a large amount of data known as “plots,” which are used to validate transactions and add new blocks to the blockchain.

Proof-of-Authority (PoA)

PoA is used in private blockchain networks, where a group of trusted validators is selected and made responsible for validating transactions and adding new blocks to the blockchain. This sounds centralized but has other benefits, like very high scalability.

Proof-of-History (PoH)

PoH is used in the Solana blockchain, where a verifiable delay function is used to order transactions and prevent spam.

Conclusion

In conclusion, consensus mechanisms are a critical component of blockchain technology, and they play a crucial role in ensuring the security and integrity of the network. While PoW and PoS are the two most popular consensus mechanisms used in blockchain networks, other consensus mechanisms are worth considering depending on the network’s specific needs. It is important to weigh the strengths and weaknesses of each consensus mechanism before choosing the one that is best suited for your project.

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