Proof of Work (PoW) and Proof of Stake (PoS) Consensus Mechanism - Steemit Crypto Academy Season 4 - Homework Post for Task 6

Homework Task-6
What is the difference between PoW & PoS? Advantages & Disadvantages? Which one is better in scaling Capacity? Examples?

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Introduction - Concensus Mechanism

It is the consensus mechanism that is used to come to agreement among nodes of a decentralized Blockchain network. To understand what consensus is, one needs to understand what a "Blockchain" is; Its adopted "Decentralized system" and the "Nodes" that form the network. The Blockchain is a public digital leger that records transactions and distributes these information to a large number of computers participating in the network. The Blockchain adopts a peer to peer network whereby information or transaction recorded are not stored on a single computer but rather have them duplicated and distributed across many computers. This type of network is known to be Decentralized and the participating computers that stores data are called the Nodes. Being a Decentralized system, there is no control from a central authority and thus the nodes come to agreement using a consensus Mechanism. Examples of such mechanism include Proof of Work, Proof of Stake, Delegated Proof of Stake, Proof of Elapsed Time, Proof of Capacity, Proof of Brain, Proof of burn, Byzantine Fault Tolerance and so on.

Proof of Work (PoW)

The Proof of Work is a type of Consensus mechanism that involves mining of new blocks by solving computational puzzle. This consensus is primarily adopted by the Bitcoin Blockchain where Nodes which are called miners are tasked with the duty to solve computational puzzle and one who successfully find a solution creates the block and receives its reward. The process of using Proof of work to create blocks is known as Cryptocurrency Mining. This process anchor on the expense of energy and computational power of many computers at the same time which is the evidence of Work done. Other examples of blockchain that uses Proof of work Consensus include Ethereum 1.0, Litecoin and Dogecoin. This Consensus is used to agree on the state of the blockchain and validate transactions.

Proof of Stake (PoS)

The Proof of stake is an alternative way of mining blocks in a blockchain. The Proof of stake was created to reduce the wasteful expense of energy posed by the proof of work mechanism. The Proof of Stake is a type of Consensus mechanism in which the participating nodes stakes their token to be recognized as validators of the network. Validators in PoS perform the same duty as miners in PoW. They compile transactions and create new blocks. The validators are chosen at random to create new blocks while the reward is however distributed to all validators according to their stake. This mechanism is known to be more energy efficient to that of proof of work.

Advantages of Proof of Work (PoW)

• High Security: the proof of work mechanism provides one of the highest security fit to the decentralized Blockchain network. This helps to pull down every malicious attempt against the network and to detect manipulation of data on the Blockchain.
• Block Time is Constant: Even with the use of advance mining software, the time to mine a block is kept constant. For example the Bitcoin Blockchain has a new block mined in 10 minutes. An attempt to solve the computational puzzle in a lesser time is checked by the Mining Difficulty.

Disadvantages of Proof of Work (PoW)

• High Computer Capability Demand: In order to have a say in the proof of work mining competition there is need of a computer that can solve the cryptographic puzzle at a very fast rate. Thus big mining rigs make use of super computers and advance specialized software for mining. This high computer capability demand shut out miners of smaller computer capacity.
• High Energy Cost: Using the proof of work mechanism, many miners put their resources to work at the same time hoping to end up winning the reward. However, only one miner gets the reward while others go at loss of their expended energy and resources. The economic cost of energy (electricity) also vary across different regions of the world. Some miners have access to cheaper electric while others would have to face the scorching cost.
• Coin Price: the reward of the mining any coin by proof of work is as valuable as the coin itself. If the coin has a good economic standing then it will be a profit to the miner and a compensation for the energy and resources expended. If otherwise, then miners would be running at loss.
• Poor Scalability: One the biggest challenges of the PoW is its poor Scalability and this a good reason why some blockchains like Ethereum has upgraded off such consensus mechanism. A blockchain is poorly scalable when it can't support its ever growing network due to low transaction per seconds(TPS) thus causing congestion and delays.

Advantages of Proof of Stake (PoS)

• Less Energy Consumption: The proof of stake does not need to prove an evidence of work and as such energy is not consumed in solving cryptographic problems. Hence, proof of stake is known to be energy efficient.
• Staking Involves Low Investment: To become a node in PoS network is much easier and much less an investment than PoW. There is no need to acquire expensive supercomputers or fall under high cost of managing a mining rig. It takes a stake of token to become a node in PoS.
• Increased Decentralized Network: Due to the lower entry requirements for nodes in PoS, more participants are active as nodes and ensuring the security of the network. This maintains a decentralized governance of the network.

Disadvantages of Proof of Stake (PoS)

• 51% Attack: The Proof of stake consensus is still threatened by the 51% attack especially to lower market capital cryptocurrencies. This is a weakness whereby the credibility of the network can no longer be trusted when 51% of the nodes is being dominated.

Which one is better in scaling Capacity?

The Scaling Capacity is a measure of the ability of the Blockchain technology to support high transactional throughput. With the increase in adoption of cryptocurrencies globally, the number of transactions performed has increased greatly. However, a blockchain is said to be scalable if it supports the increasing growth of transactions performed on blockchain. PoW as adopted by Bitcoin Blockchain burn resources towards solving cryptographic puzzle that ensure the credibility of the block creator and not towards maximizing transaction throughput. Bitcoin Blockchain process 1 to 3.5 transactions per second with a block size of 1MB. As such this type of consensus mechanism is known to have poor Scalability.
The first version of Ethereum was founded on the PoW consensus. Having plagued by the low Scalability of the PoW, Ethereum adopted the PoS in a second version. This gives room for a particular improvement called Sharding. This improvement is favoured by the PoS mechanism as block creators are randomly selected from a pool of validators. Sharding involves breaking transactions into smaller data sets that are validated simultaneously and thus forming a branched chain. This definitely improves the throughput (TPS) of the Blockchain and preferably adopted over the PoW mechanism.
For example the Ethereum 1.O under the PoW mechanism has a Scalability of 10 to 30 transactions per seconds while the upgraded version Ethereum 2.0 under the PoS mechanism can process up to 100,000 transactions per seconds.

Cc: @sapwood

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