Mining Proof of Work (PoW) vs staking Proof of Stake (PoS) | by Igor Kondrashev

The essence of the algorithm

The world first heard about PoS in 2012, when the PPCoin platform (today PeerCoin) used it. The principle of the mechanism is to allocate stakes. These shares are used to determine which node will receive the mining reward.

Nodes hash the data, looking for those results whose numerical values are less than a given one. The difficulty is distributed proportionally in accordance with the balance of each specific node. That is, Proof of Stake takes into account the number of coins on the user’s balance. The more money you have in your account, the higher the probability of generating a block.

What is Proof of Stake

But the Proof-of-Stake consensus mechanism is already a “cryptocurrency” brainchild. That is, this method of protection was invented purely for use in cryptocurrencies. By the way, this idea was proposed on the BitcoinTalk forum in 2011 by the user QuantumMechanic as an alternative to the Proof-of-Work used in the Bitcoin blockchain.

Already in 2012, the first PoS cryptocurrency appeared - Peercoin (PPC). Although it used a “hybrid” algorithm. At first it was PoW - at the stage of the initial distribution of coins, and when they were all mined, the transition to PoS had already taken place. The first cryptocurrencies with a 100% Proof-of-Stake consensus mechanism are Nxt and Blackcoin.

In PoS, the share size (Stake) is used as a resource, which determines which node will ultimately find the block and receive the reward. To put it simply and very illiterately, here mining (extraction of new coins) occurs due to the presence of coins in the wallet, and the more there are, the higher the reward. The truth is not exactly mining, but forging. A node that receives a reward for holding a certain stake is also called a masternode.

The motivation for introducing Proof-of-Stake is as follows:

This network consensus mechanism requires much less resources compared to proof of work;
There cannot be a classic 51% attack in a PoS blockchain - since computing power does not play a role in ranking nodes;

A potential attack can only happen if 51% of all coins are concentrated in the hands of one node - and this is very, very expensive;
Even if an attack occurs, the operation of the blockchain will be disrupted and it will be difficult for the attacking party to benefit from it;
In the long term, transaction fees on PoS networks are lower. In general, Proof-of-Stake seems to be a cheaper, simpler, and less resource-intensive algorithm. The benefits seem obvious.

Meanwhile, PoS also has an obvious drawback - a monopoly could potentially arise in the network when the Stake of one participant exceeds 51%. Although it is difficult to benefit from this in a destabilized blockchain, other participants may suffer damage.

Another problem is the potential for collusion among a group of nodes, which could lead to changes in the rules of the blockchain. That is, in PoS there is a certain problem of centralization.

How Proof of Stake works

The algorithm is based on storing all performed operations in the blockchain. The node system is synchronized via a P2P peer-to-peer network. Proof of Stake allows you to sell cryptocurrency with maximum confidentiality and security from hacker attacks.

Typically, the algorithm is used in decentralized systems, making it impossible for fraudsters to know which version of the blockchain is true. To do this, they would have to attract such significant capacity that, if successful, they would not break even.

If you can only mine Bitcoin using energy-intensive equipment, then to receive coins based on PoS you only need to have a share in the system. The larger this share, the more profitable mining will be. Funds transferred to participants are taken from transaction fees.

The essence of the Proof-of-stake algorithm

The PoS algorithm is a specific alternative to PoW (Proof-of-Work). This protocol was created in 2012, and was first implemented within the PPCoin platform. The main idea of PoS is that a “share”, or Stake, is used to determine the network node that will be eligible to receive the next block during mining.

When mining using the Proof-of-stake algorithm, a record of the number of coins in the wallet is kept, which makes it possible to generate subsequent blocks using the node that has a larger balance. Many users use this algorithm when mining, since for this it is not necessary to have equipment with high system requirements, moreover, the possibility of wasting computing power is completely eliminated. It is enough just to have a significant share of electronic coins in your wallet.

By and large, Proof-of-stake technology is very similar to opening a deposit in a bank. You deposit money into an account and once a year you receive a certain percentage for it. The difference is only in the time intervals.

Important : despite the use of the term “mining” in this article, this is not true. In the PoS algorithm, there is no mining in the “traditional” form - payments are made through commissions to validators (users) who create blocks and confirm transactions. However, in this article this process will continue to be called mining to make it easier to understand.

Differences between Proof of Work and Proof of Stake

The main differences between these two technologies are:

PoW	PoS
A huge number of useless calculations that waste energy	No power consumption
Tendency towards gradual centralization	Centralization is almost impossible
The larger the transaction amount, the higher the commission	The commission does not depend on the transfer amount
The block reward is received by the miner who mined it.	There is no concept of “block reward”

Advantages and Disadvantages of PoS

The advantages of the PoS algorithm include:

Increased security. To carry out a serious attack on the system, you will have to take possession of many assets. But in this case, the attacker will simply start stealing from himself.
Instant transactions compared to PoW.

There are also disadvantages:

It is theoretically possible that a certain group of people will take possession of the absolute majority of assets, which will lead to the centralization of the system. But the probability of such a turn of events tends to zero.
Nothing-at-Stake. This is an economic problem that prevents PoS from completely “capturing” the market. It’s worth telling about it in more detail.

Nothing-at-Stake means “nothing is at stake.” An axiom: for a coin to be profitable, it itself must be worth something. But, as we know, the marginal price per row in the database is zero, despite all kinds of cryptographic signatures. Therefore, the profit from a set of zero rows will also be zero. Here the fact of maximizing profit takes place - you can create as many forks and zero lines as you like.

The result is that the unlimited creation of forks in some coins interferes with the reorganization of the chain, that is, the chain cannot be reorganized beyond the depth of a certain number of blocks (for example, for NXT this is 720). There is another option, the introduction of so-called “obligations”. In order to become a validator, the participant makes a contribution, which is blocked for some time. However, this does not completely solve the problem.

PoS mining: advantages and disadvantages

The following arguments are given in favor of PoS:

To carry out an attack on a network requires significant resources. Even if such a network can be hacked, it is not financially feasible. And if the attacker has a large number of tokens, he himself will suffer from this attack, since the stability of the cryptocurrency will be disrupted.
There is no question of wasted capacity. In the case of PoW mining, a huge amount of power is wasted - computers perform calculations for which they may not receive rewards. In PoS, the energy costs are much less and no energy is wasted. Low requirements for computing resources. There is no need to buy ICs and other expensive equipment.

Argument against:

PoS gives motivation to accumulate funds in one hand. This could have a negative impact on the decentralization of the network. A small group of users can collect enough funds and impose their rules for the network on other participants.

The debate between Pos and Pow proponents has been going on for a long time, because each algorithm has its own advantages and disadvantages. Many consider a hybrid version of PoS and PoW systems to be the safest solution. And some cryptocurrencies choose exactly this approach - PoW at the issuance stage through classical mining, and the PoS stage after the completion of the emission. PoS systems are easier to implement and almost as reliable from a security point of view.

What cryptocurrencies does Proof of Stake support?

The most popular currencies are Bitcoin, Ethereum, Litecoin, etc. — Proof of Stake is not supported. Let's look at some interesting options from the remaining ones.

LeoCoin

A coin that places transaction registers exclusively on the PCs of network participants and does not allow third-party interference. The platform is completely decentralized, funds are transferred from client to client using smart contracts, so that transactions are not controlled by any supreme authority.

Transactions are secure by combining transparent ledgers that track every transaction. There is a small amount of commissions in the system, which is due to the absence of any intermediaries and regulators.

annual rate - 20%;
traded on five major exchanges;
market capitalization $24,831,797 (April 2018);
the site supports Russian language.

ReddCoin

The developers position this currency as a social one. It was created to give “tips” on various social networks - YouTube, Twitter, Reddit, etc. In other words, to monetize content. The ultimate goal is to make cryptocurrencies as widespread and accessible as possible.

ReddCoin's approach to making cryptocurrencies easier for the general public to understand is noteworthy. Mining, trading and other attributes of this area are not accessible and understandable to everyone. But an alternative to the usual likes on social networks may be in demand in the future.

annual rate - 5%;
traded on eight exchanges, including Bittrex;
market capitalization $121,058,329.

ClubCoin

A peer-to-peer decentralized system where every transaction appears on a public ledger. Thus, translations are available for everyone to view, but no one can control them. The concept of a currency is to give all possible power to a collection of users.

The high power of the platform is ensured by open source code and full transparency. No member has more power than another. The only parameter for the distribution of powers is the number of ClubCoins on the balance sheet.

annual rate - 20%;
traded on two exchanges, in particular Bittrex;
market capitalization $43,108,009.

NovaCoin

One of the Bitcoin forks was also included in our list, the peculiarity of which is a hybrid method of confirming transactions. This method significantly increases the platform’s resistance to hacker penetration, as well as to overloads and power surges. The network is peer-to-peer, that is, all participants have equal rights.

When performing transactions, there is no need to indicate your private data, which guarantees maximum anonymity and security. And the peer-to-peer architecture of the network is protected from any influence.

annual rate - 100%;
traded on eight different exchanges;
market capitalization $6,642,668.

BlackCoin

The list of cryptocurrencies that support Proof of Stake also includes a fork of the previous coin. It split from NovaCoin in early 2014. The creator is Russian Pavel Vasin. The initial goal of the development was to let the world know that “proof of work”, PoW, is not the only guarantor of cryptocurrency security.

The network operates on “minting” technology, that is, new blocks are created in the blockchain to prove ownership. It doesn’t matter what the performance of the participant’s computer is, it is enough to keep it turned on and the wallet open to receive a constant income from your amount, instead of mining in the usual sense of the word.

annual rate - 1%;
traded on Poloniex and Bittrex in large volumes;
market capitalization $17,408,552

OKCash

The last one on our list of Proof of Stake cryptocurrencies for today. This, in turn, is a fork of BlackCoin. It stands out for its instant confirmation of transactions and a convenient application for working with your balance.

annual rate 20%;
traded on Bittrex, volumes are insignificant;
market capitalization $9,068,224.