Crypto & Us : Bite 8 (PoW & PoS)

  1. PoW was initially set up as a mechanism to validate bitcoin transactions in an attempt to prevent ‘double spending’ or the user trying to spend the same token twice. The people in the network are expected to solve complex equations and computational problems which take around 10 mins. They are then awarded in bitcoin or the currency that they work on as a reward. Although PoS solves a similar problem, the major difference here is the ability to stake their coins. So, if a miner has more coins, he is able to validate more transactions and in turn, get more coins in rewards.
  2. PoW requires a lot of mining energy which only increases as the miners in the network increase. On the other hand in PoS, the mining power is distributed as per the stake of the miner. (The mining power refers to the electricity and power needed to run the computers to solve the equations)
  3. PoW may not be an energy-efficient system but is it in fact, a fairer system where the miners are chosen at random thereby giving everyone in the network a fair chance to mine and reap the rewards. Whereas in PoS your chance of working on the next block purely depends upon the amount that you are staking. This acts as a deterrent to the new miners as their probability of success reduces drastically unless they put a huge amount at stake.
  4. PoW has stood the test of time. Bitcoin still operates on the PoW model, so does Ethereum. Although Ethereum is slowly shifting to PoS and is expected to complete the transition by the end of 2021. Most of the altcoins (Coins other than bitcoin) are running on the newer and efficient PoS mechanism. The operational cost of the PoW mechanism is relatively higher that is another reason why the PoS mechanism is preferred because it is relatively inexpensive and easier to implement.
  5. The common threat to both the mechanisms is the ‘51% Attack’. it refers to the hacker or a group of hackers acquire 51% or more computing power thereby controlling the transactions. This can lead to huge financial losses as the miners in control increase the transaction processing time and since they will be getting the majority of the rewards, they can create a scenario of ‘double spending’. It is difficult to obtain a 51% majority on the PoS mechanism as it is extremely expensive and can drastically bring down the value of tokens he is holding too.

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Aditya Kohli

Aditya Kohli

A recently converted Fiat minimalist, sharing notes about Crypto and Decentralised Finance in an attempt to help people explore alternate investment options.