AI Trading

Decentralization is a rather new concept, but it definitely has its working and principle elaborated so many times by professionals that even a layman could differentiate decentralization from the centralized world of fiat currencies. Decentralization is an approach where the transfer of funds, information, and digital assets takes place in a peer-to-peer configuration without any particular state, country, or entity controlling the content of the transaction taking place.

Every cryptocurrency out there, may it be Bitcoin or Ether, have their own dedicated blockchain system and therefore, the use of algorithms to interpret, validate and record the transactions that are taking place is also different. Bitcoin, for example, uses a proof of work algorithm for the validation of transactions and the collection of data in the form of blocks. This specific type of algorithm requires a lot of electricity, and it can only handle a couple of transactions in a single go, which doesn’t validate the use of such an enormous amount of electricity.

Proof of stake is a revision to the proof of work algorithm, and it is based on using less energy for either the same or more amount of work done by a blockchain. There are no central elements controlling the crypto transactions for blockchain systems, and therefore they have to tackle various issues on their own. Some of these issues might be to ensure that no person present on the network is spending their money multiple times by repeating the same transaction over and over, which is definitely a blockchain error.

In the case of the centralized financial systems, the board members or some other group of executives would have to go through certain decisions on a daily basis, but for the blockchain systems, the whole crypto community must reach a consensus for the verification of the transactions taking place and the data that is stored within the blocks. Both proof of work and proof of stake are two different types of consensus algorithms that are used by cryptocurrencies out there for the sake of cryptographically validating transactions and saving the data in the form of blocks.

AI Trading

The proof of work algorithm simply employs multiple networks connected through various nodes to agree or reach a consensus for the transactions that are valid and thus need to be recorded. Proof of stake, on the other hand, is a little bit more technical as compared to proof of work, and many cryptocurrencies, in the beginning, would go with PoW rather than implementing PoS from the get-go.

What is Proof of Work Consensus?

You might be amazed to know that proof of work wasn’t born with Bitcoin, as it was used back in the day to actively fight spam emails received on a dedicated network and avoid denial of service attacks. Satoshi Nakamoto made the proof of work concept extremely popular when the bitcoin network became a reality. As you can grasp, the meaning of PoW is within its elongation; it employs a dedicated network of users that are working in harmony to prove that a dedicated transaction or computational task is accomplished or completed.

Every transaction taking place on Bitcoin is presented as a mathematical equation to these miners that run the problem using the computational power they have on hand, which is known as a node, and once they have found the answer to the equation, a new block on the blockchain is developed, but only after a transaction has been validated. A node can be comprehended as a personal computer or the same setup having multiple GPUs, CPUs, and processing systems stashed together, which are able to not only send but also receive data within a network consisting of other interconnected nodes.

The miner who is able to take on these mathematical equations in the most progressive manner will be able to develop a cryptographic link between the new and previous blocks on the blockchain. At the end of the day, they receive a dedicated share of the crypto token they have been helping in creating a ledger for. The combined effort of all the miners out there helps in keeping the blockchain secure and efficient through and through.

Working of PoW Consensus

Proof of work consensus algorithm works by developing multiple blocks on a single blockchain and then leveling these up in chronological order, such as when the first transaction take place on the blockchain to the very recent. The first block on the blockchain is known as the genesis block, and it is already hardcoded within the software in charge of running different processes for a blockchain. This block doesn’t refer to a previous block, but any recent block that comes after the genesis block will refer back to it. This way, a complete Ledger of these blocks is developed in a consistent beadlike formation hence the name blockchain.

A competitive race is going on for every blockchain out there among the miners and traders, whereas one performs the transaction and another is in charge of validating it. Proof of work makes sure that every transaction is housed in a definitive block, and every block has a hash number from which it could be recognized if needed. These hash numbers work as the identifier for a dedicated block containing specific transactions placed in chronological order.

This is also done to ensure that a user doesn’t have to go through the experience of spending their funds twice, and another way of looking on to this whole thing is because blockchain networks want to avoid tampering or manipulation of the information; hence the chronological ordering of the blocks is imminent. Not only this but as soon as the Ledger is updated, it is made available to other users on the network so that any altered revision or version of Ledger could be removed at once.

The identification of tampering could be made easily through hashes which are, as discussed earlier, specific identifiers referring to a specific block and a dedicated transaction performed in it. If the data that has generated the hash in the first place matches the original data present on the Ledger, only then a transaction is validated.

After the validation of transactions, the nodes will then go to prevent the double-spending of funds and at the very last is the decision made in consensus as to whether or not a transaction would be added to the block and the block in question to the blockchain?

Double spending is a phenomenon of executing the same payment twice using the same digital currency, which is done to majorly deceive the recipient of the funds initially promised. If double spending is to be left unchecked, then it would be major havoc on the network, and it would take away the core value of decentralization which is its restrictive nature to manipulation.

Proof of work might take up more electricity in the processing of transactions, but at the same time, it has made double-spending extremely difficult on the blockchain because if any subsequent part of the blockchain is altered, then it means the re-mining of all previous blocks would commence.

The processing power to do so doesn’t come cheap that is why users are not able to monopolize the processing capacity of the blockchain network. Cryptography is used as an added layer of security to ensure that the transactions recorded within the blocks and the blocks, in turn, recorded over the blockchain are accurate to the best of the content these carry in terms of information on the validated transactions.

Every hash identifying a dedicated block on the blockchain must be able to comply with the standard protocols of the consensus algorithm, or otherwise, the whole transaction along with the block would get thrown away. The miner who is able to complete the mathematical equation or unveil the hash would then have to broadcast it to the rest of the network. This way, other miners involved in the activity of solving the same equation are able to cross-check if the answer provided is correct or not. If the answer is indeed correct, then the block, along with the information that it carries, is added to the blockchain as is; the miner who solved a block initially would receive the reward.

What is Proof of Stake?

Proof of stake is a new approach used by cryptocurrencies to tackle the inefficiencies proposed by the proof of work consensus mechanism. It was proposed back in 2011, and the sole idea of proof of stake was to lower the overall expense of electricity and the intensity of computational resources required to validate transactions. It doesn’t work by providing proof of the work done by the miner but takes a rather unique approach by verifying a stake that is developed within the ecosystem.

This makes the validation of transactions rather easier and less resource-intensive because not all the nodes have to engage in solving mathematical equations. The user who wants to form a block would have to come up with the proof that they indeed own a dedicated amount of crypto tokens for a dedicated blockchain. By showcasing the proof that a dedicated user has a specific amount of crypto tokens, the consensus is reached because no other user in the blockchain could provide the same proof as the user who actually owns the crypto have.

Working Mechanism of Proof of Stake

Just like the proof of work, proof of stake also has an initial block hardcoded within the program known as genesis block or zero block. The blocks that come after the genesis block are referred to as the prior blocks, and these usually contain an updated and fully fetched copy of the entire Ledger. In a proof of stake network, miners are not competing with each other to obtain the right so they can add a consecutive block into the blockchain, but these blocks are minted or forged; these are not mined. Proof of stake also lifts the limitation, such as the users having the most elementary processing power can propose blocks only, which is true for proof of work.

Proof of stake doesn’t require mining for the sake of validating transactions, and therefore there is no need for mining at all. One of the most elementary benefits of proof of stake over proof of work consensus mechanism is the efficiency of the energy because the minting of new blocks doesn’t require much. At the same time, the need to have top-of-the-line processing equipment to be able to develop new blocks is also eliminated, and as a result, the whole network is going to have more nodes which adds more security to the whole blockchain.

Anyone who wishes to become a part of validating transactions or being selected in the process of adding blocks on a proof of stake blockchain network has to either stake or lock a dedicated amount of crypto onto the blockchain in the form of a unique contract. The very odds for a dedicated user to be chosen as the next block producer depends on the overall quantity of crypto they have locked or staked.

If malicious activity is associated with a dedicated user, then they might lose their right to produce blocks as well as their stake. Other factors which are brought into attention for the sake of choosing the next block producer include the overall length of time for which a node has been active and the length of time for which the node has staked its crypto. Unlike proof of work in which a dedicated reward is given to the person or miner who was able to solve the mathematical equation, in the proof of stake, the person who produces the block is awarded a network fee which the blockchain itself generates.

If you don’t want to meddle with the affairs of developing a block but want to get rewards nonetheless, then it is advised that you use the services of crypto exchanges because these allow users to stake money on their behalf through the exchange for a consistent period of time. This allows multiple stakeholders to be able to band together and then join a pool for the sake of making their computing resources available for transaction validation and hence improving their chance of getting the reward.

Proof of Work Vs. Proof of Stake

A blockchain network is going to get recognized by the specific consensus mechanism that it has employed for the validation of transactions and recording them in the form of blocks over the blockchain. It is done to ensure that the centralization of the digital assets is reduced to their absolute value. A consensus mechanism is also required to keep a blockchain network entirely trustless, immutable, and equally distributed for each and every user out there.

The very purpose of a network is to define the type of consensus mechanism which is required because both proof of work and proof of stake have different principles when it comes to their action and has their own specific use case. Proof of work is fit to prevent frauds and induce trust building along with enhancing the security of the network.

Protection that the proof of work provides allows miners not to get misled about anything, whether it is about a transaction or some other piece of information available on the blockchain. Proof of work should be employed to ensure that the transaction history for a dedicated cryptocurrency would indeed remain intact over the years, and at the same time, it provides the system with suitable tools to increase the difficulty of the data that is changing over time.

Proof of work is also associated with increasing the legitimacy of the network by verifying the most legitimate copy of a Ledger from multiple other ones distributed along with the nodes and recorded in real-time by them. Proof of work is also able to develop a distributed clock using which miners can enter and exit the network whenever they want, which ensures a consistent operation rate.

Proof of stake, on the other hand, is required where the speed of transaction is of the utmost importance. Also, if the validators of a specific blockchain are more likely to own a dedicated amount of crypto tokens which would incentivize them financially to keep the blockchain secure, then sure proof of stake is a more tempting solution for that specific blockchain as a consensus algorithm.

Both proof of stake and proof of work does a pretty great job of enhancing the security as well as efficiency of the transactions, but there are often doubts that certain threats might not get neutralized by these consensus algorithms, and therefore a completely different validation mechanism is under development by the name of proof of space.

This will help to resolve some of the most frustrating issues associated with both proofs of work and proof of stake consensus algorithms. At the very moment, many blockchains out there are using proof of work, and some of them are going to shift their consensus algorithm to proof of stake to enhance security, so it could be a while before proof of space becomes active among the cryptocurrencies and the crypto community.

AI Trading produces top quality content for crypto companies. We provide brand exposure for hundreds of companies. All of our clients appreciate our services. If you have any questions you may contact us. Cryptocurrencies and Digital tokens are highly volatile, conduct your own research before making any investment decisions. Some of the posts on this website are guest posts or paid posts that are not written by our authors and the views expressed in them do not reflect the views of this website. Herald Sheets is not responsible for the content, accuracy, quality, advertising, products or any other content posted on the site. Read full terms and conditions / disclaimer.

Larry Wright

By Larry Wright

Larry Wright is a Pulitzer Prize-winning journalist and author. He is known for his insightful reporting and his ability to delve into complex issues with clarity and precision. His writing has been widely acclaimed for its depth and intelligence.