A consensus algorithm is basically a series of rules to determine which copy of the blockchain is valid and which is not.
These rules are basically summarized in two:The longest chain. The blockchain with the most blocks will always be considered more correct. Because an “honest miner” would only add blocks to an entire chain of blocks (in which there are no discrepancies).The chain with more support. The blockchain that has the most support among the members of the network will be considered “valid”.Precisely how to measure “network support” is the basic differentiation factor between the consensus algorithms Proof of Work and Proof of Stake.In a Proof of Work consensus algorithm, the string with “most support” is the string with the most “work” (hashrate) behind it.
In a Proof of Stake consensus algorithm, the “most support” chain is the chain with the most “collateral” (stake) destined.How PoW cryptocurrencies are the most successful (Bitcoin, Monero, Litecoin …) We will use this as a reference, and we will compare each of its advantages and disadvantages over PoS algorithms.As an investment in hardware and software optimization is necessary, the miner is tied, for a time, to the success of cryptocurrency in order to make the investment of time and capital profitable.
Establishing a mine, especially “on a large scale” is difficult. It takes a lot of money to buy your computer equipment, rent / buy an industrial warehouse, pay for electricity … You need important knowledge: electrical, hardware and software. And you will also face two enemies: heat and dust.
The logical thing is that this miner, after the dedication and investment that he needed to establish his mine, will participate in the progress and improvement of the cryptocurrency in the medium-long term.In contrast, in a Proof of Stake consensus algorithm, the “staker” can instantly buy, transfer and sell its “collateral”.Establishing a “forge” of tokens is almost instantaneous and does not require knowledge: you do not need powerful and optimized hardware, nor an industrial warehouse where to place it, nor optimized software, nor a complicated electrical installation …You just need a sufficiently liquid market to buy and sell your tokens without attracting too much attention.Security linked to adoption.
To attack a blockchain, in short, you have to convince the majority (reach a consensus), that your transaction, or whatever your trap, is valid.The more participants there are in the network and the more decentralized their nature, the more complicated it is to pervert the consensus in your favor.In a cryptocurrency with a Proof of Work algorithm, the profitability of the participants is tied to the value of the tokens.
Then the following happens:The greater the adoption of cryptocurrency, the higher its market price (due to the law of supply and demand).If the market price rises, greater profitability in securing the network (because the miners are rewarded with cryptocurrency tokens)The greater the profitability in securing the network, the greater the number of people interested in participating in the networkThe more participants, the more secure the network.On the other hand, in a Proof-of-Stake consensus algorithm, the profitability obtained by the stakers is independent of the market value of the cryptocurrency. If there is a reward.Profitability is a fixed percentage, then there is no connection between security and adoption.Incentive honesty.
In a PoW blockchain, the economic incentive encourages miners to comply with the rules. If a miner wastes his hashrate in trying to cheat, they will not get any reward.A miner can not use his computing power at the same time to try to cheat and mine honestly. Then a miner will always choose the most profitable thing: mine honestly and compete for the reward of the block.However, a staker can “try to cheat” and validate blocks honestly at the same time.
In fact, the economic incentive pushes the stakers to try to cheat constantly. Because “cheating” does not require any economic effort and there is a possible reward (for the rest of the network to “accept” your version of the story)Blur of the offer.A miner needs to transform his profits into electricity, then he necessarily needs buyers for his tokens.In addition, a miner has hardware, and gets tokens as a reward. So a miner basically converts tokens into fiat constantly, exerting downward pressure on the price in search of buyers.Effectively, it is collaborating in diluting the distribution of the offer.
However, in a Proof-of-Stake algorithm, a staker needs to buy tokens to validate blocks, exerting upward pressure in search of sellers. You have no costs to cover (then, you do not have to sell your rewards) and all your investment has been “reduced” to accumulate tokens.In a PoW consensus algorithm a miner purchases computer equipment and pays recurring expenses (electricity, mainly). The money to do this is obtained by selling tokens in the market, which he has obtained in exchange for the work contributed to secure the network.That is, the investments to ensure the network of certain cryptocurrency are made in external companies (distributors of hardware and electrical companies) at the expense of the money of the buyers of said cryptocurrency.In a Proof of Stake algorithm, something diametrically opposed occurs.
A staker buys cryptocurrencies and there they finish their expenses. There is no “recurrent” or “repetitive” expense. Assuming that the staker believes in cryptocurrency and its potential, it will not sell those tokens.And all this results in a positive cashflow.Inflation or commissionsA Proof of Work algorithm does not work without reward. Nobody “works” (work) if there is no “reward”.
A miner buys specific hardware to mine cryptocurrencies. No one would invest in expensive computer equipment or the electricity they consume if there were no financial reward.If there is no reward per block, users will have to pay commissions for making transactions (~ $ 0.15 per bitcoin transaction right now, despite the reward per block of 12.5 BTC).
And according to the example we mentioned a little above, currently the electricity cost of each bitcoin transaction is $ 2.Paying $ 2.15 per transaction is not viable. That is, without inflation or high commissions, the Proof of Work consensus algorithms are destined to fail.In simple words, these types of mining differ in that in the PoW mining you must work to make a profit, while in the PoS mining you should keep the cryptocurrencies to obtain more and more profits.