PoW vs PoW - what is consensus?

What is consensus in blockchain

Before I get to the comparison of PoS and PoW consensus, it is worth finding out what the consensus mechanism is and how it works. I will not describe the technical side, I will just explain how it works in an easy to understand way. In its general form, blockchain consensus is a form of agreement and validation of transactions on the network. This can easily be compared to the approval and adoption of a new law, regulation or act by politicians in the government. The idea is presented, and whether it will be approved and implemented depends on the result of the party's vote.

Now consider how blockchain works. After all, it is a distributed, public ledger of transactions, which must also be verified for authenticity. Each block consists of the appropriate number of transactions, each of these transactions must be approved by the appropriate number of nodes. Then each block also needs to be committed before the next block can be created. In the blockchain, there is also a human factor to approve transactions, because it is people who maintain electrical devices, called nodes, that are responsible for maintaining the consensus.

Centralization vs. decentralization

In any centralized system, such as a database containing key information about users, there is a central administrator who updates this database by entering new data, deleting obsolete data, etc. If this one entity fails, the entire network will come to a standstill or even disappear completely . In addition, often this data is kept in one place, which makes it more vulnerable to hacker attacks and theft. Blockchain is a much more secure form, its network functions as a decentralized, self-regulating system and operates on a global scale, without any single authority. It includes the input of hundreds of thousands of participants who work to verify and authenticate transactions taking place in the blockchain and its nodes. The blockchain network cannot disappear, there is no way to erase it - what has been written/created on the blockchain will stay there, and eventually people can stop using it, but it will still exist. Thanks to the distributed ledger and decentralized system, it is much more resistant to hacker attacks and new, even more secure blockchain networks are still being created.

Types of consensus

Several types of consensus have emerged over the years, and each is different, although they perform the same function. There are three basic types of consensus: PoW ( Proof-of-Work ), PoS ( Proof-of-Stake ) and DPoS ( Delegated Proof-of-Stake ). These three forms of blockchain consensus are currently the most popular and developed, and I will come back to them in a moment.

New forms of blockchain consensus are being refined to improve security, reduce energy consumption, or diversify the verification task that some of the above methods lack. These include PoA ( Proof-of-Authority ), which increases security by centralizing the transaction verification process by assigning tasks to network administrators. Another method is PoI ( Proof-of-Importance ), which works similarly to PoS in that it considers asset holdings, but also takes account of transfer history when determining who falls to verify the transaction. There are also lesser-known consensus mechanisms such as dBFT ( Delegated Byzantine Fault Tolerant ), which is supposed to solve the "Byzantine generals problem", but that is a topic for another article.

Examples of the use of consensus:

• PoW - Bitcoin, Etherum, Bitcoin Cash, Monero
• PoS - Stellar, Dash, Ontology, Nano
• DPoS - Eos, Tron, Lisk, Steem
• PoA - VeChain, Poa,
• PoI - Nem, Sense
• dBFT - Neo, Cosmos

PoW Proof-of-Work Consensus

While the idea existed before the invention of blockchain, Satoshi Nakamoto popularized the PoW consensus. The Bitcoin blockchain was the first major implementation of the PoW consensus protocol.

PoW features "miners" ( minner ). These are people who have specialized equipment and provide the computing power of these " mining pools " . At the beginning, Bitcoin could be mined using an ordinary home computer, later with powerful graphics cards, and today with specially dedicated ASICs. Over time, the difficulty of extracting it has grown so much that now they are huge equipment farms, most often placed in places where electricity charges are low. Miners use this equipment to solve a cryptographic puzzle so that the transaction is confirmed. Imagine a race where miners race to be the first to solve a puzzle. The answer to this puzzle is known as a shortcut. Cryptographic puzzles are extremely complex and difficult to solve, so they need enormous computing power. The complexity of the PoW puzzle depends on the number of nodes in this network, which means that the longer the blockchain is, the greater the complexity and thus the need for computing power increases with each new block. The more computing power is needed, the more expensive mining is and its profitability decreases.

What do miners get out of it? For each approved transaction, miners are rewarded with the cryptocurrency of the respective blockchain and a transaction fee. Therefore, with PoW, new cryptocurrencies are created until the maximum amount of coins is already in circulation.

There are two main disadvantages of Proof of Work systems:

• Electric energy usage. As computers do computational work, electricity is used. According to the latest data from the University of Cambridge, the Bitcoin network consumes as much energy annually as the whole of Belgium or Finland.
• Security. The PoW consensus only provides adequate security when there is a large network of miners vying for rewards. If the network is small, there is a possibility that a hacker can get most of the network's processing power and launch an attack which is known as a 51% attack

PoS Proof-of-Stake Consensus

Due to the problems associated with PoW consensus, the blockchain community was looking for a new, more favorable way to achieve consensus. The idea of PoS consensus was introduced by Scott Nadal and Sunny King in 2012.

PoS is virtual, excludes powerful cryptocurrency mining farms, so it does not consume electricity. Due to its advantages, even Etherum is planning to switch from PoW to PoS. In the PoS consensus, computing power is replaced by currency power. The strength of the node that maintains the network depends on the amount of tokens/coins you have. These are often called "shares" on the network, and how many of these shares you have determines your ability to validate transactions. There are no miners in the PoS system, instead there are validators or counterfeiters. Why? Because there are no block rewards, just a transaction fee. Moreover, new coins are not mined. Instead, they are created by the creators at the time of the network's launch. Often, some cryptocurrencies/tokens are blocked by developers and released in predetermined time frames, but no new coins are created. This number never changes.

PoS rewards stakers (from Staking ) in proportion to the resources held. There is no race to approve transactions, instead, PoS randomly selects network validators based on their shares. Suppose you have 5% of the value of staked (locked) chips, you can only validate 5% of the block and you will receive a pro-rated validation reward - paid from transaction fees.

PoS effectively eliminates the huge power consumption and the need for specialized equipment to maintain the network. Centralization risk is reduced because the reward is proportional to the amount of assets held in each deposit. A 51% attack is much less likely. This would mean that you would have to buy 51% or even more tokens from the market, which would successively increase its price even several times. In addition, you need to find people who are selling so much coins. But it is not free from vulnerabilities, the most popular being the "Fake Stake ".