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Author Topic: Distributed Consensus: PoW vs PoS - Simplified for Begginners  (Read 100 times)
ash_waz
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June 16, 2018, 02:31:29 PM
Merited by odolvlobo (1)
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Hello,

Thought to share about some concepts widely used but never really made a effort to learn in much detail until today. I have simplified the concepts as much possible so its easily comprehensible to any newbie as myself. If I  have missed out or wrongly stated anything please let me know. Hope its useful!

The concepts of Proof of work & Proof of stake have risen due to the consensus mechanism inherent in blockchain technology. Consensus mechanism is the process of collectively agreeing on the content to be added to a distributed ledger which is also more commonly known as a blockchain. The purpose of the consensus mechanism is to ensure the validity of information added, this in turn in prevents double spending in the case of a currency, or invalid data being added to the block chain.
There are several consensus mechanisms but for purpose of this article I would contrast the currently most discussed methods, which is Proof of work (PoW) and Proof of stake( PoS).

Proof of work
Bitcoin utilizes a proof of work (PoW) system and works in the following manner,
1. A set of transaction is bundled into a memory pool (mempool)
2. Miners verify each transaction in the memory pool by solving a mathematical puzzle
3. The first miner to solve the puzzle is awarded with newly mined bitcoin also knows as block reward
4.The verified mempool now addressed as block is attached to the block chain.

Proof of Stake
Under this method there is no need to solve a mathematical puzzle instead, a creator of new block is chosen based on their stake. Stake is the number of coins/tokens one possesses. Under this system all tokens/coins have been already created so there is no block reward instead the miners would get a transaction fee

Differences between proof of work (PoW) VS proof of stake (PoW)

Cost and Engery
PoW – Very energy intensive as it requires very high computational power which is required to solve complex mathematical computations

PoS – Fraction of the energy is required compared to that of PoW and is considered as the greener and more environmentally friendlier consensus mechanism. Due to the low energy and low cost the PoS has becomes more dispersed as opposed to PoW where mining has been increasingly reserved for large scale operations.

Security
PoW – Forking of blockchain is not desired as it is unhealthy for a network and can lead to instability. Under PoW system if a blockchain is forked miners will have to chose between the blockchains or if they plan to support both blockchains their computational power has to be split. As a result from an economic perspective forking is generally discouraged under a PoW system

PoS – This system does not inherently discourage forking and therefore when the blockchain is forked it can possibly result in a problem knows as “nothing at stake”. This essentially happens when a validator/miner receives a duplicate copy of their stake for a newly forked blockchain and he is able to sign off on both forks and potentially claim twice the amount of transaction fees as a reward and double spend their coins. A participant is not required to increase his/her stake to validate transactions on multiple blockchains and results in no economic incentive preventing the nothing of stake problem in the PoS system. A potential future solution to this issue is the introduction of a deposit system that would be introduced by Vitalik Beauterin in his proposed proof of stake consensus protocol named Casper which is a expected to be implemented for Ethereum in future possibly in 2018.

Centralization

PoW – High risk of centralization mainly due to the reason mining being a expensive process and therefore reserved predominantly for large scale operations. This is contrary to the main principle advocated by blockchain technology which is the concept of decentralization

PoS – A fairer concept in which the amount of network control granted is directly proportional to the the amount invested in the token/coin.


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June 16, 2018, 08:53:58 PM
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Centralization
PoW – High risk of centralization mainly due to the reason mining being a expensive process and therefore reserved predominantly for large scale operations. This is contrary to the main principle advocated by blockchain technology which is the concept of decentralization

PoS – A fairer concept in which the amount of network control granted is directly proportional to the the amount invested in the token/coin.

A couple notes on this point.

The degree of centralization is more complex than this. In POW, you can have mining concentration, centralization of mining chip manufacturing (see Bitmain), node centralization (lack of full nodes).

In POS, you can have node centralization and staking centralization. Regarding the latter, the closer to a majority of network validators that any one group has control of, the easier it is to mount an attack on the network. "Fairness" has nothing to do with centralization -- that is a separate concept regarding supply distribution itself. POS systems often have highly concentrated supplies, which is inherently unsafe for investors.

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June 17, 2018, 05:51:17 PM
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Very helpful, thank you.
odolvlobo
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June 17, 2018, 07:02:42 PM
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Some corrections and clarifications:

Bitcoin utilizes a proof of work (PoW) system and works in the following manner,
1. A set of transaction is bundled into a memory pool (mempool)
2. Miners verify each transaction in the memory pool by solving a mathematical puzzle
3. The first miner to solve the puzzle is awarded with newly mined bitcoin also knows as block reward
4.The verified mempool now addressed as block is attached to the block chain.

1. The "mempool" holds all unconfirmed transactions. A miner selects a portion to be added to their next block.
2. PoW is not verification. It's purpose is simply to add a cost to mining. Transaction verification is done before the PoW step.
3. More accurately stated: The "block reward" includes transaction fees plus the "subsidy".

Proof of Stake
Under this method there is no need to solve a mathematical puzzle instead, a creator of new block is chosen based on their stake. Stake is the number of coins/tokens one possesses. Under this system all tokens/coins have been already created so there is no block reward instead the miners would get a transaction fee

Many PoS coins include a subsidy in addition to transactions fees. Unlike Bitcoin, they have permanent inflation.

Security
PoW – Forking of blockchain is not desired as it is unhealthy for a network and can lead to instability. Under PoW system if a blockchain is forked miners will have to chose between the blockchains or if they plan to support both blockchains their computational power has to be split. As a result from an economic perspective forking is generally discouraged under a PoW system

Branches in the blockchain can add some minor instability, but it is not necessarily "unhealthy". The instability is minor because miners are motivated to choose one branch to follow.


PoS – This system does not inherently discourage forking and therefore when the blockchain is forked it can possibly result in a problem knows as “nothing at stake”. This essentially happens when a validator/miner receives a duplicate copy of their stake for a newly forked blockchain and he is able to sign off on both forks and potentially claim twice the amount of transaction fees as a reward and double spend their coins. A participant is not required to increase his/her stake to validate transactions on multiple blockchains and results in no economic incentive preventing the nothing of stake problem in the PoS system.

The "nothing-at-stake" problem occurs because validators are not motivated to follow a single branch (unlike PoW). They can choose to follow every branch and the result can be serious instability. A miner following multiple branches does not receive extra rewards, but they can potentially use the instability to spend coins that that they ultimately don't own.

Centralization
PoW – High risk of centralization mainly due to the reason mining being a expensive process and therefore reserved predominantly for large scale operations. This is contrary to the main principle advocated by blockchain technology which is the concept of decentralization

PoS – A fairer concept in which the amount of network control granted is directly proportional to the the amount invested in the token/coin.

PoW – Larger-scale mining has an advantage, but it does not preclude small miners. The degree of centralization depends on the ability of larger miners to reduce their costs more than smaller miners.

PoS – PoS can be just as centralized. For example, 10 addresses control 50% of the EOS tokens.

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ash_waz
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June 18, 2018, 06:32:04 AM
 #5

Some corrections and clarifications:

Thank you so much. This is the exact feedback I wanted. Please tell me if I need to adjust the original article to include the points you have mentioned as I want my work to be as much as accurate! Please excuse me if this is not generally done as it's somewhat recently I started writing articles on this forum and first time I am facing this situation.Thank you
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