27 Apr

Understanding the so-called Proof-of-Stake (PoS) is one of the essential ideas to grasp to go deeper into the world of blockchain technology and cryptocurrencies.

The distinction between centralized and decentralized systems using the Proof-of-Stake Blockchain

A blockchain would only be a chain of linked blocks on its own, as the name implies.

However, it is not very significant that a file consists of a series of blocks, with each new block being concatenated to the preceding one.

Since the blockchain is essentially utilized as a database to record, save, and read data, the truth is that there are far more effective and potent ways to accomplish this.

However, as only decentralized blockchains can be considered actual blockchains, we need to think about how to let anyone record transactions inside of them while ensuring that everyone abides by the rules and causing no confusion.

Proof-of-Stake (PoS) consensus mechanism on the blockchain

The consensus mechanism, which is an open, automated process that allows anybody to validate transactions without the need for special permissions (permissionless), is at the center of this controversy.

Without depending on any one person to authorize transactions, the intention is to guarantee that only accurate and valid transactions are stored on the blockchain.

Blockchains cannot be fully decentralized if they contain unique individuals with specific rights or abilities; rather, all users must be on the same playing field in perfect P2P style.  

Consent mechanisms are the specific processes that are part of decentralized protocols that enable transaction validation as well as, more importantly, full verifiability by anybody.

Within the Bitcoin industry, Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the most widely utilized consensus mechanisms.

On the first decentralized blockchain ever to exist, the Bitcoin blockchain, proof of work (PoW) was the first consensus mechanism ever utilized in history.

Indeed, Ethereum, the second-largest cryptocurrency, was founded on proof-of-work (PoW) at first but moved to proof-of-stake (PoS) in 2022.

What makes Proof-of-Work (PoW) different

As the name suggests, proof of work is the foundation of PoW.
Miners are responsible for searching for and locating the hash code that authenticates a block to validate Bitcoin transactions. They usually take around ten minutes to locate it, but since there is a lot of hash rate on Bitcoin, this time generally ends up being less than ten minutes. However, this time relies on the total hashrate of the network.

The hashrate is the exact issue with proof-of-work (PoW) systems since mining is essentially a race in which the person with the highest hashrate wins and rewards those with higher hashrates. Nevertheless, increased hashrate also translates into increased energy usage, which explains why Bitcoin's Proof of Work uses a lot of energy.

The slowness of transaction approval is another problem. Before a transaction can be accepted, it must wait to be included in a legitimate block and for this block to be mined correctly, which usually takes at least ten minutes.

The third problem is fees, which are not dependent on proof of work (PoW) but rather on the fact that Bitcoin blocks have a maximum size of 1 MB, meaning that a little over 4,000 transactions can be contained in them.

With a few notable exceptions, they are mostly first- or second-generation cryptocurrencies rather than third.

As was previously mentioned, Ethereum started with PoW but changed to PoS in 2022.

Key characteristics of Proof-of-Stake

Proof-of-stake was developed to address some of the primary problems with Proof-of-Work.

There are no longer any miners and no need for hash research thanks to PoS.

As validator nodes, which can validate blocks in incredibly short amounts of time, have replaced miners, there is no longer even an exact block-time.

Since it is relatively simple and quick to validate proof of stake transaction technically, there isn't even a hashrate.

Therefore, while PoS requires far less energy and is faster than PoW, this does not imply that the fees are lower. Although they are now lower than those of Bitcoin, Ethereum's layer-2 fees, which are based on proof of stake, are still relatively hefty.

On Proof-of-Stake based blockchains, validation of transactions is accomplished quite simply: validator nodes stake, or lock up, a percentage of the network's native money (32 ETH in the case of Ethereum). This allows the nodes to validate blocks.

The variations

While blockchains based on proof-of-work (PoW) are undoubtedly more reliable and secure, they also require a lot more energy, which raises their cost significantly.

These days, PoW is perhaps only really necessary for Bitcoin; for all other blockchains, PoS might work just well.

If properly constructed and managed, blockchains based on proof-of-work can be faster, less expensive, and require less energy while maintaining a high level of security. They also permit staking, which incentivizes native coin holders to keep their money locked up rather than use it.

It is no surprise that just two of the top ten cryptocurrencies—BTC and DOGE—are based on proof of work (PoW). Of these two, one is only a memecoin with a questionable future. Tokens and stablecoins are not included in this list ahead of it (Dogecoin).

Instead, there are three others based on consensus techniques extremely close to PoS (Solana, XRP, and Tron) that have nothing to do with PoW, and five based on PoS (Ethereum, BNB, Toncoin, Cardano, and Avalanche).

In the cryptocurrency space, Proof-of-Stake and related consensus techniques have nearly complete domination, however, this does not apply to Bitcoin, which is the only cryptocurrency worth over half of the overall market capitalization.

April 2024, Cryptoniteuae

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