| Crypto Academy Season 3 Beginners' course - Task 4: Different types of Consensus Mechanisms |

Hello everyone. This is the submission of my fourth beginners' course homework. The chosen question for this lesson is as below:

What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?

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What is the difference between PoW & PoS?

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PoW Mechanism

Proof of Work is one of the popular consensus mechanisms. It is based on intense computations that are made by high-performance equipment with the aim of solving a math-based problem. The individuals responsible for this machinery and its complex calculations are referred to as miners. These miners invest their time and other resources into the mining operation because the first miner to successfully solve a block of operations is rewarded with a respective amount of cryptocurrency.

After the confirmation of the block, a new block of transactions, meant to be solved, then becomes a new addition to the blockchain or network. These blocks of transactions are generated at regular intervals, and the duration of the interval depends on the nature of the cryptocurrency. Since the addition of new blocks depends on the effort of miners, transaction confirmation, as well as the addition of coins to the market pool, can be affected in the absence of adequate miners and powerful mining rigs. The method of mining is also regarded as very power-consuming, and hence energy inefficient. This problem has led to a crackdown on various cryptocurrency mining sites in most developed and undeveloped nations.

On the other hand, the nature of the complexity regarding the mining process confers a tighter form of security to the Proof of Work consensus mechanism. Even better, it makes the concept of decentralization a strong reality by eliminating the need for third parties. Furthermore, during transactions, users are charged with transaction fees. These fees are extra rewards to miners whose technological equipment can confirm the respective transactions before others do. Hence in the event that all the max supply of a coin is reached, miners will benefit massively from the countless pool of transaction fees.

PoS Mechanism

Proof of Stake is another form of consensus mechanism that addresses the shortcomings of Proof of Work. PoS operates remarkably differently from PoW. In Proof of Stake, there are no miners and mining rigs are not needed. Instead, the core concept of this mechanism is centered on validators. These validators confirm the authenticity of transactions like as it is done in Proof of Work but without complex calculation. Rather validators are required to commit a significant number of their cryptocurrency on the respective blockchain or network for a longer period of time. This process is called Staking.

Validators are chosen arbitrarily to confirm the various transactions. After a whole block of transactions on that blockchain or network is confirmed, a new block of transactions becomes a new addition and awaits its confirmation. Validators also receive rewards in the form of fees from the transactions on the blockchain or network. This incentive motivates them to continue with their good and honest work.

Security in PoW is high, and confirmation is genuine as validators have committed their coins or tokens as collateral, which can be destroyed if the validator engages in an unlawful manner. Also, the absence of an expensive mining rig makes this mechanism a more preferred choice for environmentally conscious cryptocurrency entrepreneurs as it leaves behind very small carbon prints compared to those of the Proof of Work mechanism.

Criterion	Proof of Work	Proof of Stake
Energy	PoW is energy inefficient and consumes high electrical power	PoS is energy efficient and eliminates the need for mining rigs
Miners Reward	PoW miners who solve the complex calculations first are rewarded with a certain amount of the respective coins	PoS Validators receive fees from the transactions on the blockchain
Chances of selection	the higher the computational power of the miner, the higher the chance of solving the puzzle	the higher the staked amount of cryptocurrency, the higher the chance of being selected as a validator
Speed	PoW speed can be negatively affected when there are more participants and few mining rigs in operations	PoS has a quicker transaction rate than PoW

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Advantages & Disadvantages

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PoW Advantages

The PoW mechanism makes the projects that rely on it secure from attacks such as the “DDoS-attack”. This makes the network or blockchain safe for all, and investors do not have to worry about losing their capital.

PoW has a decentralized nature. Hence, no government or individual owns the network. It rather belongs to every single participant of the network. This provides an opportunity for fair and secure transactions.

Miners are rewarded with cryptocurrency, which further motivates them to spend more resources and time confirming transactions on the blockchain.

PoW Disadvantages

The equipment needed to mine the coins is very expensive and consumes a lot of power. Miners pay a huge fee for the usage of electricity and spend more money on maintenance as well as upgrades of the mining rigs. Hence, this can deter most individuals and organizations from partaking in the operations.

The event of halving, where the potential rewards of miners are reduced to half of the price amount can demotivate establishment miners from confirming transactions should they no longer find the endeavor lucrative.

This form of mechanism is prone to malicious attacks like the fifty-one percent attack through which hackers can take control over the network. This event can damage the decentralized reputation of that particular network.

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PoS Advantages

PoS uses less energy as the removes the need for high energy-consuming equipment. It simply uses validators to confirm a transaction, and this makes this form of mechanism a highly efficient one concerning energy consumption.

The absence of the mining rig in PoS makes it more affordable compared to the Proof of Work mechanism. This can attract more potential validators to the system and speed up the transaction confirmation process.

PoS has a high form of security. It is not prone to attacks from hackers. This makes the system safe for all as they are reassured that their investments are in good hands.

PoS is also of a decentralized nature. Hence, no central authority has absolute control over the operations of the network. Participants are the main deciders of the manner and types of activities to be carried out on the system.

PoS Disadvantages

Validators on the PoS blockchain who have staked more of their cryptocurrencies are more likely to be selected for the confirmation of transactions on the network. Hence, there could be the off chance that such stakeholders will exercise greater control over the activities of the blockchain, and this could possibly introduce centralization on a decentralized platform.

Also, if a selected validator fails to perform the assigned task of transaction confirmation, the network or blockchain can experience considerable setbacks in its operations. This can negatively affect individuals and firms that rely on the system for business or personal usages.

In the event of an ignorant or conscious malicious act, validators can lose their committed number of cryptocurrencies as a form of punishment.

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Which one is better in scaling Capacity? Examples?

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Proof of Stake has a better scaling technology. It is considerably faster than PoW and requires less energy for operation. In Proof of Work, the high energy requirement and the exorbitant price of electric bills and equipment maintenance make it difficult for some miners to stay in the mining game. In their absence, the speed of transaction confirmations takes a huge dip, and individuals dependent on the blockchain are affected. Proof of Stake in its design has eliminated this requirement and enables more transactions to be confirmed in a short space of time. Its energy-efficient nature also makes it more preferred for a variety of technological projects.

Examples of Proof-of-Work based coins include Litecoin, Bitcoin, Bitcoin Cash, Dogecoin, Ethereum, Ethereum Classic, Monero.

Examples of Proof-of-Stake based coins include Cardano, Tezos, Algorand, Celo, Mina, BitShares.

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Conclusion

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This lesson was very educative for me as I got the opportunity to learn about what Proof-of-work and Proof-stake are. I also got to know their merits and demerits as well as how they compare to each other. I believe I now have a better understanding of how certain cryptocurrencies function, as well as how scalable they are.