Considered as the most secured technology, Blockchain has gained popularity at the speed of light. The transparency of information that is being distributed, attracts various industries to use Blockchain as the anti-fraud platform that could leverage business value. Known as Proof-of-Work and Proof-of-Stake, Blockchain also provides security that protects from external attack. But how does it work? Let’s head down to Proof-of-Work.
Proof-of-Work is a system protocol that protects the computer from cyber attacks like distributed denial-of-service attack. Proof-of-Work was originally proposed to prevent things like email spam, by requiring each email to include a proof-of-work, meaning that mass-mailing wouldrequire enormous amounts of computing power.
Proof-of-Work was founded back in 1993 by Cynthia Dwork and Moni Naor. However, the term Proof-of-Work was later introduced by Markus Jakobsson and Ari Juels in 1999. As the heart of Bitcoin (and many other cryptocurrencies), Proof-of-Work serves as the necessary calculationfor creation of a new block.
But what really happens behind the screen? First, all of the transactions in the blockchain are bundled together into a block. When this happens, every miner(participant in the network) is expected to verify that each transaction on the block is legitimate. To verify it, the miners will be given a set of mathematical puzzle. The first miner who solves the problem will be rewarded and the verified transactions will be hashed and stored in the public blockchain.
As promising as it sounds, there are several concerns for using Proof-of-Work system. It’s the brute computing power alone that decides who will win this competition after performing a
massive number-crunching at high-speed. Then the question leads to how much investment is required to build computer rig that has a big probability? Another concern stands for it is the amount of electricity required. Running multiple high spec computers consumes a huge amount of electricity.
Several developers try to overcome this situation by coming together and creating the “mining pool”. In short, every miner in a mining pool combine their hashing power and distribute the reward evenly at the end of the day. So, can that be a feasible solution? Not quite, yet. Using mining pool means centralization of the blockchain while we all agree the fact that blockchain is a decentralized system.
Proof of stake
Even though it is still an algorithm and serves the same purpose with that of Proof-of-Work, the method that Proof-of-Stake uses is quite different. On the Proof-of-Work, one that has the better computing power has a bigger chance in producing a new block. While for Proof-of-Stake, the miners are selected in deterministic way, depending on the wealth or stake they own.
Behind the screen, to become a miner, one has to deposit a certain amount of coins as the stake. The bigger the stake, the bigger the chance for the miner to be chosen to forge. I know this doesn’t sound fair, since the rich will get even richer. However in Proof-of-Work, rich people gain an advantage due to economies of scale.
The price for getting a high spec mining equipment and electricity doesn’t go up in linear curve. Bigger purchase volume means better prices!
But how to trust the miner on the network? Do they really verify the transaction? Here’s where the stake gets in. Should the miner approve a fraudulent transaction, the stake that the miner has deposited earlier, will be cut off. This is true for some proof of stake schemes, but not others.
The real protection is that all nodes still have to verify the new block to make sure it's valid. If it's not, they simply reject the block. So if a forger submits an invalid block, it will be isolated by the network; all nodes will wait for a next block they agree is valid.As long as the stake is higher than the reward, miner will fear to lose its stake. Another plus point is, in the event of one wants to stop being a miner in a Proof-of-Stake system, the stake and transaction one earned will be released after a certain period of time to ensure that another miner can also verify that there is no fraudulent transaction been done. Energy-wise, Proof-of-Stake doesn’t rely on the computing power which requires huge amount of energy. In 2015, data from Motherboard VICE showed that one Bitcoin transaction required the same amount of electricity for 1.57 American households for one day.
Back to the mining pools. Known as 51% attack, mining pools possess a huge threat to blockchain. Now that mining pools centralizing bitcoin blockchain verification, imagine if the three biggest mining pools were likely to merge, it would allow them to re-write the recent history of the blockchain, erasing transactions that have already occurred. This means the attacker could sell some bitcoins, accept the cash, then rewrite the blockchain so the transaction never happened, they keep both, the coins AND the cash. However, because each transaction requires a digital signature, and the amounts are validated by every node, it is still impossible for a 51% attack to spend other people’s funds, or create coins out of nothing.
In Proof-of-Stake, they also have the risk of 51% attack. However, the attack itself is targeted into the total amount of the coin. Let’s use Bitcoin as an example. Current status of Bitcoin in distribution is 17,126,875 coins. To successfully gain the power, one has to own 873,470,625 coins. With the current price of bitcoin ($7324.01 as of 19th July’17 14:20 WITA) then one has to spend:
Be it energy-wise, economical, or even security, Proof-of-Stake offers a new way for the efficiency of Blockchain. What do you think? Let us know what you think.