Proof of Work vs Proof of Stake: You might have recently learned of the concept of switching from a Proof of Work (PoW) system-based Ethereum consensus to one based on the so-called Proof of Stake.
I will clarify to you in this article the key differences between Proof of Work vs Proof of Stake and I will provide you with a mining concept, or the process of releasing new digital currencies through the network.
Also if the Ethereum community wishes to make the transition from "work" to "stake", what will change about mining techniques?
This article seeks to be a fundamental guide to understanding the above issue.
What is the Proof of Work?
Let's begin with simple definitions first of all.
Proof of work is a protocol aimed primarily at deterring cyber-attacks such as a distributed denial-of-service (DDoS) attack that attempts to drain a computer system's resources by submitting several fake requests.
And before bitcoin, the Proof of work principle existed, But Satoshi Nakamoto applied this methodology to his/her, digital currency revolutionizing the way conventional transactions are set, we really don't understand who Nakamoto really is.
In reality, Cynthia Dwork and Moni Naor originally published the PoW concept back in 1993, but Markus Jakobsson and Ari Juels coined the word 'proof of work' in a document published in 1999.
Proof of work, however is probably the main concept behind the bitcoin white paper of Nakamoto, published back in 2008, because it allows for untrustworthy and distributed consensus.
What is agreement that is trustless and distributed?
A trustless and distributed system of consensus implies that you don't need to trust third-party providers if you want to send and/or receive money from others.
If you are using conventional payment methods, you must trust a third party to set up your transaction (e.g. Visa, Mastercard, PayPal, banks). They maintain their own private registry storing the history of transactions and each account balances.
The typical example to help understand this action is the following: if Alice sent Bob $100, Alice's account and Bob's credit will be debited by the trusted third-party service, so they both have to trust that this third party is going to do the right thing.
Everyone has a copy of the ledger (blockchain) with bitcoin and a few other digital currencies, so no one has to trust third parties because the details published can be checked directly by anyone.
Work-and-mining proof
Going deeper, proof of work is a prerequisite for defining an expensive computer calculation, also called mining, that needs to be performed on a distributed ledger called blockchain to establish a new group of trustless transactions (the so-called block).
The two aims of mining are:
1. Verification of the legality of a transaction or avoidance of so-called double expenditure;
2. By rewarding miners for performing the previous task, to generate new digital currencies.
This is what happens behind the scenes when you want to set up a transaction:
🌟 Transactions are packed into what we call a block together;
🌟 Miners verify that transactions are valid within and block;
🌟 To do so, miners can solve a proof-of-work issue known as a mathematical puzzle;
🌟 The first miner who solves each issue of blocks is given a reward;
🌟 In the public blockchain, checked transactions are stored
"There is a central aspect of this "mathematical puzzle": asymmetry. In reality, the job must be moderately difficult on the requesting side, but easy to verify for the network. This term is also known as a cost function for the Processor, a consumer puzzle, a computational puzzle or a pricing function for the CPU.
Both network miners compete to be the first to find a solution to the mathematical problem concerning the candidate block, a problem that can not be solved otherwise than by brute force, so that a large number of attempts are ultimately needed.
When a miner eventually discovers the right answer, he/she simultaneously reveals it to the entire network, earning the protocol's cryptocurrency award (the reward).
The mining method is from a technical point of view, an inverse hashing operation: it specifies a number (nonce), so the block data cryptographic hash algorithm results in less than a given threshold.
The competitive nature of mining is calculated by this threshold, called difficulty: the more computational power is applied to the network, the greater this parameter increases, also increasing the average number of calculations required to build a new block. This technique also raises the cost of producing a block, forcing miners to boost the effectiveness of their mining systems in order to maintain a positive economic balance. This parameter update should occur approximately every 14 days, and every 10 minutes, a new block is created.
Not only the bitcoin blockchain but also ethereum and several other blockchains use proof of work.
Some of the working framework proof functions are different since they were explicitly developed for each blockchain, but I don't want to confuse your ideas with too much technical details now.
The crucial thing you need to note is that the creators of Ethereum now want to turn the tables, using a new method of agreement called proof of stake.
What is Stake Proof?
The consensus process can be made entirely virtual by proof of stake. Although the overall mechanism is the same as proof of work (POW), there is a completely different method of achieving the end goal. In POW, by using its computing power, the miners solve cryptographically complicated puzzles.
In POS, there are validators instead of miners. Some of their Ethers are locked by the validators as a stake in the ecosystem. Following that the validators bet on the blocks next to the chain that they feel will be added.
The validators receive a block incentive in proportion to their stake when the block is inserted.
Why does Ethereum want PoS to be used?
The group of Ethereum and its founder, Vitalik Buterin, are preparing to create a hard fork to switch from proof of work to proof of stake.
But why do they choose to turn between one and the other?
Miners need a lot of energy in a distributed consensus, based on proof of work. The same amount of electricity as powering 1.57 American households for one day was required by one Bitcoin transaction (data from 2015).
And these energy costs are being charged in fiat currencies, resulting in a steady downward pressure on the value of the digital currency.
Experts have argued in recent research that bitcoin transactions could consume as much electricity as Denmark by 2020.
Developers are very worried about this problem, and for a greener and cheaper distributed form of consensus, the ethereum community wants to exploit the proof of stake process.
Rewards for the development of a new block are also different: the miner may likely own none of the digital currency he/she is mining with Proof-of-Work.
Forgers, in Proof-of-Stake, are often those who own the minted coins.
How do forgers get selected?
If Casper (the latest stake consensus protocol proof) is introduced, a validator pool will be open. In order to be chosen as the forger, users should enter this pool. This method is accessible by calling the Casper contract and sending Ether along with it or the coin that powers the Ethereum network.
"In the validator pool itself, there is no priority scheme for getting inducted; anyone can join any round they want, regardless of the number of other joiners," he added.
Each validator's reward would be somewhere around 2-15%," but he is not yet sure.
Buterin also argued that there would be no cap imposed on the number of active validators (or forgers), but it will be economically controlled by lowering the interest rate if there are too many validators and if there are too few, by increasing the reward.
A better scheme?
Any computer system, especially if the service is connected to money, wants to be free from the possibility of hacker attacks.
So the key issue is is proof of involvement better than proof of employment?
Experts are concerned about it and the group has many skeptics.
Bad actors are cut out due to technical and economic disincentives using a Proof-of-Work scheme.
In reality, it's very costly to program an assault on a PoW network, and you'd need more money than you could steal.
Instead the underlying PoS algorithm must be as bulletproof as possible because it could be cheaper to attack a stake-based network evidence without strict penalties.
Buterin designed the Casper protocol to solve this problem, designing an algorithm that can use the set under some conditions in which a bad validator may lose its deposit.
"He explained: "In Casper, economic aim is achieved by requiring validators to send deposits to participate, and withdrawing their deposits if the protocol decides that they have behaved in some way that breaches some set of rules ('slashing conditions').
Slashing conditions apply to the above situations or rules that are not expected to be violated by a customer.
Job Proof vs Proof of Stake: Conclusion
Validators do not have to use their computational resources due to a PoS method, since the total number of their own coins and the current complexity of the network are the only factors affecting their chances.
This potential future transition from PoW to PoS could therefore have the following advantages:
1. Savings in energy;
2. When attacks become more costly, a safer network becomes more expensive: if a hacker tries to purchase 51 percent of the total amount of coins, the market responds to the rapid price appreciation.
CASPER would therefore be a security deposit protocol that relies on a system of economic consensus. Nodes (or validators) have to pay a security deposit to be part of the consensus, thanks to the formation of new blocks. The exact amount of incentives received by the validators will be calculated by the Casper protocol through its power over security deposits.
If a "invalid" block is created by one validator, his security deposit will be withdrawn as well as his right to be part of the consensus on the network.
The Casper protection scheme, in other words, is based on something like betting. In a PoS-based method, bets are transactions that will reward their validator with a cash prize along with each chain that the validator has bet on, according to the consensus rules.
So, Casper is based on the premise that validators can bet on the bets of others and leave constructive feedback that can speed up consensus.
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