The world of Cryptocurrencies is changing quickly, and there are a lot of people who are looking to get more involved. Before someone can make educated decisions about what they want to do with their money and how they want to invest it in this market, there are several terms that everyone should understand. By understanding these concepts, people will be able to make more educated decisions regarding what they are going to do with their assets in the world of Cryptocurrencies. One notion that people often bring up is called Proof of Stake.
What Is Proof of Stake (PoS)?
Proof of Stake (PoS) is a concept that states that an individual can validate block transactions in accordance with how many coins that person currently holds. As a result, this means that the more coins someone has, the more they can stake and the more power they hold. Everyone should note a few key points when it comes to Proof of Stake and the world of Cryptocurrency. These include:
- With the concept of Proof of Stake (POS), those who mine coins can mine and/or validate various block transactions in direct accordance with the number of coins that a person currently holds.
- Proof of Stake (POS) was first created as a different option compared to Proof of Work (POW). The PoW is the original and proven consensus algorithm in the world of Blockchain technology. In this manner, PoW is used to confirm transactions, which ultimately adds new blocks to the chain.
- Proof of Work (POW) requires a tremendous amount of power and energy. In contrast, the idea of Proof of Stake (PoS) provides “mining power” based on the percentage of coins that are possessed by that person.
- For people to understand the idea of Proof of Stake, it is crucial to know how this concept works when compared to Proof of Work. When someone initiates a transaction on the system, the data is fitted into a block. After this, the information is duplicated throughout various nodes and computers connected to the network.
In this manner, nodes act as an administrative body. They are the closest thing to controllers when it comes to the blockchain itself. For a block to get added to the blockchain, the block has to be verified. In PoW, the mining nodes will solve a computation puzzle, which is called the nonce. When a miner completes the problem, they are rewarded with Bitcoins. Before the reward can be given out, it needs to be verified. That is where the other nodes play a role. This is where the idea of Proof of Work came from. The network has been designed in such a way that all transactions are tracked and verified.
The process of Bitcoin mining itself requires a tremendous amount of computing power. This power is needed to run the calculations that are necessary to unlock new Bitcoins and blocks. The computing power is directly related to the amount of energy and power, in the form of electricity, that is needed to solve the proof of work. This led to the birth of the Proof of Stake concept. The idea of Proof of Stake is to address the issue of power consumption by taking mining power and building it in proportion to the number of coins that are held by each miner. In this manner, a staker who uses the Proof of Stake concept is limited to mining a certain number of transactions that are entirely reflective of their ownership stake.
Why Proof of Stake is Less Secure Than Proof of Work
A proof-of-work-based Nakamoto consensus blockchain is a subjective system of accounts, balances, and smart contracts, anchored on an objective physical foundation that uses large amounts of energy to produce blocks of data to a chain of highly secure blocks in the system. By doing this anchoring, the subjective layer acquires orders of magnitude more objectivity, and therefore security, than if it were not linked to basic physical proof of work.
In the quest for scalability, proof of stake systems removes the physical basis of non-scalable proof of work, making their systems again highly subjective. These are not systems that expend large amounts of energy to create and secure blocks of data. In fact, the reason they create batches of transaction data and tie them together as if they were blockchains is just a call to authority by mimicking the actual design of the chain. blocks. However, it is not useless to increase or decrease the objectivity, and therefore the security, in the distributed registers.
Satoshi Nakamoto’s brilliant invention was to anchor these subjective, and therefore insecure, systems to an objective physical basis. Without this anchor, distributed proof-of-stake ledgers fundamentally revert to traditional subjectively managed systems. Whatever plans and complex choices they make, ultimately, it all depends on subjective human incentives, not some other form of objective security.
It’s all about Fault Tolerance
Before Bitcoin, distributed systems achieved 33% fault tolerance. Proof of Work, introduced by Bitcoin, has a 50% fault tolerance. If proof of stake removes the physical labour anchor from proof, a 33% fault tolerance system remains. As an external physical signal, PoW allows a clear objective choice of the fork in the form of the “longest proof-of-work chain.” It is objective because only with the entire network’s computing power can the longest chain be established.
Since PoS systems do not count with such an objective amount to decide on the right channel, they must use participants’ subjective decision-making. This means they have to consult offchain with block explorers, developers, miners, or other sources to be able to decide which chain to follow. This applies, in the event of a split, to participating nodes in the network, new entrants, and nodes that leave and join.
One of the basic physical characteristics of sound money is that it is very expensive to produce to prevent it from being falsified. PoW provides this cost of tokens because the miners incur huge costs, in data centers and in electricity, to build blocks. This makes PoW tokens, like Bitcoin tamper-proof in practice, but in Proof of Stake systems, because the database with accounts and balances is easy to write by nodes and actors in the system, there is no has no objective cost.
Proof of Work is accumulated Work
While the miners of PoW blockchains work block by block, this work is not only an obstacle for rogue nodes to tamper with current or newer blocks, but this work actually accumulates as the chain is built. This means that the chain that is buried lower in the chain becomes exponentially more difficult for attackers to change or forge. In PoS distributed registers, because they don’t use PoW, reversing the whole chain is trivial in terms of computational work, so it can be done in minutes.
There are many reasons why PoS is less secure than PoW. However, PoS is better than traditional systems because they have additional power distribution levels and are more diverse at the jurisdictional level. You could say that they are somewhere in the middle, in terms of security and social scalability, between PoW and traditional fiat systems, but much closer to fiat systems than to PoW.