Welcome to my OnlyFinance (Pun intended 😈). Now that you know enough about Bitcoin and Blockchain, You may be wondering a lot about consensus mechanisms like Proof of stake and Proof of work. In This article, we are discussing two primary consensus mechanisms. Read along!!
Before we dive into jargon, let’s take the baby steps and understand the meaning of the consensus mechanism first. The consensus mechanism is basically where a network of individual nodes agree to something, just like a decision being made in a board meeting. In the context of blockchain, it is to decide whether a transaction is legit or not. If more than 50% of nodes decide that a transaction is not legit, it is not legit. Simple, right?
The two most popular methods of achieving consensus are 1. Proof of work, and 2. Proof of stake.
What is the Proof of Work Consensus Mechanism?
Thousands of individuals use Bitcoin, Ethereum, and other Proof of Work blockchains. Bitcoin transactions require 10 minutes to be validated as legitimate. In each 10-minute interval, a new "block" is generated. Each block contains many transactions, each of which must be confirmed individually. Someone must apply their computing power to solve a cryptographic algorithm, also known as Proof of Work, to verify the transaction without any third party. Once verified, the transaction is marked as genuine and uploaded to the public blockchain for all to see.
You might be asking why someone would spend money on gear and use a lot of power merely to verify Bitcoin transactions.
The primary explanation is that individuals are rewarded for their work with more Bitcoin (or whatever cryptocurrency Proof of Work is verifying). The most important thing to remember is that not everyone receives a prize. Thousands of devices compete for the honour of being the first to solve the cryptographic algorithm. Whoever arrives first gets the glory, i.e. mining reward. The work performed by all the other participants goes to waste.
One of the most severe problems with Proof of Work is that it is not a fair system since those with the most potent and costly hardware devices would always have the highest chance of winning the prize. As a result, the evidence of the work system is unjust.
Due to how the cryptographic puzzle is constructed, trial and error is the only way to solve it. Take a look at the following example, which I have greatly simplified:
Miner 1
Attempt 1: 5+7 = 10 *Incorrect*
Attempt 2: 5+7 = 13 *Incorrect*
Attempt 3: 5+7 = 9 *Incorrect*
Miner 2
Attempt 1: 5+7 = 17 *Incorrect*
Attempt 2: 5+7 = 8 *Incorrect*
Attempt 3: 5+7 = 12 *Correct*
Miner 2 predicted the correct answer on the third attempt, as you can see in the sample above. That implies they would have received the mining reward as the miner, and so is the case. Computers can estimate millions of distinct combinations each second, which is why they require so much power. The more powerful your hardware is, or the more hardware devices you have, the higher your chances are of solving the problem first. The more, the merrier?
What is the Proof of Stake Consensus Mechanism?
The Proof of Stake model employs a different method to confirm transactions and achieve consensus. Although the technique still uses a cryptographic algorithm, the mechanism's goal has changed.
Unlike Proof of Work, where the miner is rewarded for solving complicated equations, Proof of Stake awards the person who generates the next block depending on how much they have staked. So more like a shareholder’s meeting where the person or group with more than 50% equity will decide what happens within a company? Exactly!! Hence, the stake is determined by the number of coins a person owns for the blockchain they attempt to mine.
The user needs to deposit their money into a specified wallet to validate transactions. The coins are frozen in this wallet, indicating that they are being used to stake the network. Most Proofs of Stake blockchains have a minimum coin threshold to begin staking, requiring a substantial initial commitment.
For example, to validate transactions on the Dash network, you'd need to stake and freeze at least 1,000 Dash coins. Dash would have cost the real-world equivalent of $1.5 million during the cryptocurrency's all-time high in December 2017, when it hit above $1,500 per coin.
Nonetheless, suppose you've staked the requisite amount. In that case, your odds of earning the reward (transaction fees) are proportional to the total percentage of coins you own. Like dividend? Absolutely like a dividend.
Take a look at the sample below.
1. You decide to stake coins to receive Proof of Stake payouts.
2. There are 1000 coins in circulation on the blockchain.
3. You make a purchase and place a bet of 100 coins.
4. This indicates you've put a bet on 10% of all coins in circulation.
5. Now you have a 10% chance of winning every prize.
To clarify, I present a visual for you (EN: If OnlyFinance without graphic wasn’t enough for you)
Proof of Work requires all miners to attempt to calculate a complicated sum. The winner is chosen by who has the most potent/quantity of hardware devices.
The Proof of Stake model winner is chosen randomly based on their staked amount.
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