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Proof of Work VS Proof of Stake | Which is best for passive income?

Proof of Work VS Proof of Stake

Cryptocurrencies owe their successes to the financial incentives which underlie their various consensus mechanisms. Most crypto consensus mechanisms fall into the categories "Proof of work or Proof of stake". Now, over the last few months there's been a lot of debate over the efficiency, security, and sustainability of these two consensus mechanisms. Some would lead you to believe that this debate has been settled, but it turns out that proof of work and proof of stake each have their own benefits and drawbacks. Today I'm going to take a close look at these consensus mechanisms and how they work, so stick around to the end if you want to know which one I think is better and why.There's a disclaimer , I know Financial advice is fantastic, but this article, is not written to provide you that? Everything you see here is just meant to expand your knowledge sphere. If you need help with your cache, contact someone who's licensed to do that. If this is your first time on cryptolibrarynow, my name is "MrCrypt" and I reckon my crypto content is pretty good. That's because I strive to make the highest quality crypto content that will ever cross your eyes. Coins, tokens, News, DEFI, exchanges, technical analysis and such. When it comes to crypto, there's no such thing as too much. Now that you're in the loop, let's compare these two consensus groups. 

Consensus -:

To understand proof of work and proof of stake, you need to be familiar with the concept of consensus. Now, consensus in cryptocurrency is not all that different from consensus in real life. I'll build on an example I used in a recent article to help you understand. Imagine you're trying to decide whether to go to the movies or to a restaurant with a group of friends. Let's say there's ten of you in total. In this case, you have a dilemma and you need to reach consensus on what to do. There are various consensus thresholds, you could use to reach an agreement. So for instance, you could use a simple majority rule. At least six people need to vote for one of these activities for all of you to then go and do it. Alternatively, you could say that nine of the ten people present must vote in favour of the activity because you want to make sure everyone has a good time. If you wanted to go one step further, you could say that nine in your friend group must vote for the same activity and confirm they still want to do it 30 minutes later to be extra sure you'll all have fun. Now consensus in cryptocurrency follows the same principles, except its computers coming to a consensus, AKA an agreement about whether a transaction is valid or not. Usually the consensus threshold is more than half or 51%. The primary differences the cryptocurrency consensus mechanisms have built-in financial incentives to make sure valid transactions are confirmed. So let's go back to the friend group example to illustrate why this is important. To recap, your group of 10 is deciding on whether to go to the movies or to a restaurant. Suppose you've agreed that a simple six out of 10 majority vote determines where you all go, and it looked like it's going to be the movies. There's just one problem though, and that's that one of your friends really doesn't want to go to the movies. Maybe they're jaded from too many superheroes. Maybe they're just hungry. Now realizing that they're about to lose the majority vote, they come up with a clever idea. They invite three of their friends who are around the corner to join your group of 10 in the parking lot where you're all hanging out. Surprise, surprise, those three additional friends all want to go to the restaurant, and their three additional votes means the majority vote consensus threshold has swung in favour of going to the restaurant. It's 7 versus 6. Naturally, those who voted in favour of going to the movies start to object, saying that this isn't fair. But your sly little friend smirks and says you said majority vote rules are rules. Now this same risk of consensus manipulation is constantly present on cryptocurrency blockchains. The difference is that the participants on a cryptocurrency blockchain are deciding on whether to approve millions, sometimes billions, of dollars of transactions. So the stakes are much higher. This creates a huge incentive for someone to connect additional computers to a cryptocurrency blockchain to manipulate these transactions to their benefit. In the same way your hypothetical sneaky friend did with his additional friends. While you could solve the issue involving friends by simply preventing additional friends from participating in the vote on cryptocurrency blockchains, you want to connect as many computers as possible. This is because the more computers there are connected to a network, the more secure it is, especially if those computers are distributed around the world. This means there's only one solution, and that's to have some sort of skin in the game to incentivize computers connected to cryptocurrency networks to validate transactions properly. Proof of work and proof of stake are how most cryptocurrency blockchains achieve this goal. Now I'll continue using the friend's example to keep these consensus mechanisms as simple as possible. 

Proof of Work -:

Proof of work has its roots in a mechanism that was invented in 1993 to combat e-mail spam. It wasn't until 1999, though, that the mechanism became known as proof of work, and it never really got used for its original purpose. Instead, a clever entity who goes by the pseudonym Satoshi Nakamoto. Realized in 2008 that this odd proof of work mechanism was perfect for ensuring the security of a distributed digital payments network. Here's how proof of work works. Any computer that wants to process transactions on a proof of work cryptocurrency blockchain like bitcoins needs to essentially make a correct guess of an extremely random number in order to earn the right to do so. This costs time and energy to do. Now in the friend decision dilemma, let's use the example of giving a crossword puzzle to all your friends in the group and saying that whoever solves it first gets to vote on what everyone does. Again, time and energy. The likelihood that a computer will solve this arbitrary problem increases with its hashing power, which is basically a fancy term for computing power. The more hash power you have, the higher the likelihood that you're correctly guessed the number and get the opportunity to produce a Bitcoin blog containing transactions in the context of crossword puzzles computing power. Would be intelligence. The more intelligent you are, the faster you'll be able to solve the crossword puzzle and get a vote. To incentivize people to join a proof of work cryptocurrency blockchain, they earn fees from the transactions in each block plus a block reward in that cryptocurrency's native coin. In this case BTC. Now, in the aforementioned example, the incentive for solving the crossword puzzle is the ability to vote on what everyone gets to do every time a random number is guessed correctly and a new block containing transactions is minted, a new random number is generated, which must again be guessed from scratch to earn the right to process transactions in the next block. This would be akin to handing out a new crossword puzzle every single time someone solves the current one to get a vote. Note that in this case the same friend is allowed to vote more than once, so long as they are the first solve the crossword puzzle in each round now to ensure that some supercomputer doesn't always guess the random number before anyone else. Bitcoin adjusts its network difficulty based on how much computing power is connected to it. This is similar to increasing the difficulty of the crossword puzzles to make sure it's not always the same friend in your group getting the vote. This hash rate adjustment makes it very expensive for someone to attack a proof of work cryptocurrency because they would have to buy a lot of very powerful computers and pay for all the energy they then consume. The closest thing for our example would be the cost of genetically engineering a brain to make it insanely good at solving crossword puzzles. It would be a very costly thing to do compared to the reward, but I suppose it depends on the movie you're going to see, right? Anyways, since not everyone is able to afford the computing and energy costs to guess insanely random numbers and produce blocks alone, individual computers can pull their computing power together and split the reward if they manage to guess the random number and produce a block. This is akin to allowing friends to help each other with the crossword puzzles to increase their chances of getting a vote. It also allows them to compete with the Brainiac in your bunch. Now, if someone wanted to attack a proof of work cryptocurrency, they would need more than just powerful computers and lots of energy. They would also need to be continuously producing faulty blocks to ensure their faulty transactions go through. This is because as soon as someone else produces a conflicting set of transactions on a proof of work. Blockchain the blockchain temporarily forks and all the other computers continue building on the longest chain. This longest chain is hard to maintain for an entity that's manipulating the network in the same way that it would be hard for the same friend to solve increasingly difficult crossword puzzles enough times in a row to get his way. Now, if this sounds tedious and arbitrary, it's because it is. The idea of work exists exclusively as a means of protecting a cryptocurrency from manipulation by the computers connected to its blockchain.  

Proof of Stake -:

Proof of Stake

Now, proof of stake seeks to do the same with much less hassle. Interestingly enough, proof of stake was first proposed on the Bitcoin Talk forum in July 2011 by user "quantum mechanic" as an alternative consensus mechanism for Bitcoin. Here's how proof of state works. Instead of using large amounts of computing power and energy to guess a random number and process transactions, a cryptocurrency coin is staked, IE locked on the blockchain to earn the right to do so. The length of time a cryptocurrency must be staked to process transactions can vary, as can the minimum amount of coins or tokens a computer must lock up as a stake. Logically, the more cryptocurrency you stake, the more likely you are to process transactions and create a block.

How Proof of Stake Works -:

Now in terms of our friends example, it would be like saying that the friends who put the most money in a shared jar have the highest chance of getting a vote. Maybe the minimum amount of time they have to leave their money in that jar is 2 voting rounds and the minimum amount of money they have to put down to participate is $10. This alone would not make for a very secure system, which is why proof of stake consensus mechanisms employ some degree of randomness to determine which computer gets to produce a block containing transactions. The example equivalent of this would be to give varying degrees of loaded dice to friends in proportion to how much money they committed to their vote, even though the ones who put down more are likely to roll high thanks to their dice, it's not guaranteed that they'll roll higher than everyone else every time. Now another neat feature employed by proof of stake consensus. Mechanisms is something called slashing. Basically, if a computer tries to break the rules of the blockchain in some way, some of the crypto coins they staked will be destroyed. Now recall that sneaky friend from earlier. If they happen to be some rich kid who was trying to win votes by using them and perhaps their friend's money as a stake to get better dice, you could take his cash and throw it down the parking lot drain as a punishment for breaking the rules. However, it's possible that your friendship circle is OK with delegated staking now in cryptocurrency. This is when users,who don't want to run their computer 24/7 or who don't have the minimum stake required to join the network can lend their cryptocurrency to another computer to earn a cut of their rewards. For simplicity sake, let's just say that these so-called staking pools are like mining pools, except they involve pooling capital instead of computing power. Now, one cool thing about proof of stake cryptocurrencies is that this staking process makes it easy to create an Unchained governance system that allows stakers to vote on how the cryptocurrency should be changed. For example, maybe the minimum amount of cryptocurrency a computer needs to stake to process transactions could be lowered to allow for more participation. To balance that out. The staking lockup. Could be extended to ensure the network remains secure. There's more computers join thanks to that , lowered staking minimum.Not only that, but proof of stake makes transactions more efficient, since putting down money and rolling loaded dice is faster than solving increasingly complex crossword puzzles. 

Advantages and Disadvantages of Proof of Stake -:

This brings me to the advantages and disadvantages of proof of work and proof of stake. In theory, anyone can connect their computer to a proof of work cryptocurrency to process transactions and earn cryptocurrency as a reward for doing so. However, over the years, companies have developed specialized computers called "application specific integrated circuit machines, or ASICS for short. ASICS are specifically designed to perform proof of work computations, and they can cost a pretty penny. Not only that, but the likelihood that you're profitably mine a proof of work cryptocurrency like Bitcoin with a single ASIC is very slim unless you're willing to shell out millions of dollars to start a large scale mining operation, you'll be stuck joining a mining pool. This phenomenon has gradually led to a surprising degree of minor centralization, wherein a handful of mining pools control a significant portion of all the computing power on Bitcoin and ethereum. 

Mining Pool

Even though most of these entities are known, deciding on any changes to a proof of work, cryptocurrency is an extremely difficult thing to coordinate. This has made it hard for proof of work cryptos to keep up with proof of state competitors, as they cannot implement improvements very quickly, if at all. What's worse is that when a new and improved ASIC is released, the older model usually ends up in landfill, and this is one of the many environmental concerns about proof of work cryptocurrency mining. To know how crypto mining affects our enviornment and how you are getting fooled,click on me, in that article,I highlighted the fact that proof of work crypto mining can incentivize the growth and adoption of renewable energy by subsidizing costs. This is because miners go to where power is cheapest, and that's usually renewable energy. But sometimes this can still be an issue, especially if it causes energy shortages. As it has in countries like Iran. One of the other major drawbacks of proof of work cryptocurrencies is that they are not very fast. This is because most of the computing power goes towards guessing these random numbers and not actually processing transactions. On the flip side, the slower block times and block sizes you often find with proof of work cryptocurrencies means. That the size of their blockchains is generally much smaller than proof of stake cryptocurrencies. This in turn makes it relatively easy for someone to run nodes which store the full transaction history of a cryptocurrency blockchain. These nodes play a huge role in maintaining the decentralization of cryptos like Bitcoin and Ethereum. Which is something that's often forgotten by zealous proof of stakers. They should know that they have their own fair share of issues too. In theory, anyone can connect their computer to a proof of state cryptocurrency to process transactions and earn crypto as a reward for doing so. This is facilitated by the minimal hardware and energy requirements to participate in most proof of stake crypto blockchains. However, most proof of stake cryptocurrency blockchains. Have high thresholds when it comes to the minimum stake you need to put down to connect to it as an independent node. Moreover, most proof of stake cryptocurrencies had something called a premine, which is where a bunch of coins or tokens are minted in advance and distributed to the team and large investors. This is in stark contrast to most proof of work cryptocurrencies, which had something called a fair launch, wherein the community collectively started mining that cryptocurrency from zero. Consequently, most proof of stake cryptos are more centralised than Bitcoin and ethereum, because the average users only option is to join a staking pool and the largest validators usually belong to the company behind the crypto and its venture capitalist backers. Moving on, are the tokenomics issues proof of stake cryptocurrencies have are derived from inflation. The annual inflation rate of most proof of stake cryptos is much higher than most proof of work cryptos. This inflation is meant to incentivize staking, but it essentially turns staking into a requirement, as anyone who hoddles their proof of stake coins. Could see the value of their holdings erode overtime. Besides the unintended consequences of most stakers lazily delegating to the largest staking pools, inflationary staking rewards also open the door to taxation. In most countries, any cryptocurrency earned from staking is taxed as a capital gain. If the value of that cryptocurrency happens to fall by the end of the year, you could still owe the dollar amount you earned when the inflationary rewards were credited to your account earlier in the year when the price was higher. While the proof of stake consensus is convenient for creating robust governance structures which facilitate upgrades and changes, these governance structures can be an additional attack vector. Although it may be expensive to buy, the cryptocurrency required to corrupt the network by manipulating transactions, sometimes the threshold to do the same via governance is much lower. Now, in all fairness, most proof of state governance processes have fail safes in place to prevent this from happening, and even employ slashing as a means to manage bad actors. Speaking of slashing, it's worth pointing out that most proof of stake cryptos do not currently have slashing enabled. This seems to be because wealthy individual investors and institutions don't like the idea that their stakes could be slashed over unexpected downtime, something which is not a risk when mining a proof of work cryptocurrency,this is obviously a problem because slashing is one of the main ways proof of stake cryptos protects their blockchains from manipulation. Still, there's no question that the proof of stake set-up is more efficient when it comes to processing transactions. Most proof of stake cryptos are thousands of times faster than most proof of work cryptos now. Funnily enough, this leads to another issue related to blockchain size and storage

Blockchain Size and Storage -:

Even though most proof of stake blockchains have only been around for a few years. Many of them have blockchain sizes that are multiple times larger than the Bitcoin blockchain. What's more is that most proof of stake cryptos do not require the computers connected to them to store the entire transaction history. Instead, many of them. Rely on cloud storage from tech giants such as Amazon and Google to store their full blockchain histories. This point of centralization can become a huge problem if there's ever any issue on these sorts of proof of stake blockchains. You could even argue this nullifies their decentralization entirely. Now that said, some proof of stake cryptocurrencies such as Sallana have worked around this issue by storing their blockchain data on decentralized data storage cryptocurrency networks. It's likely that other proof of stake cryptos will adopt similar solutions for their blockchain storage in the future. After all, it seems that the CRYPTOSPACE is headed in a proof of stake direction, for better or for worse. 

Proof Wor or Proof of Stake? Which One is Better -:

Now for a big moment. Proof of work or proof of stake, which one is better? Well, I'll start by saying that neither of these two consensus mechanisms is perfect proof of work is more resilient to manipulation because it's hard to buy the hardware necessary to do so for an extended period of time, especially with thousands of nodes keeping track of the real transaction history. Still, it's only a matter of time before proof of work cryptocurrency mining. Become centralized and it wouldn't be all that hard to whip up a few thousand nodes to convince the network that faulty transactions are legitimate. Proof of stake cryptocurrencies have the same issue in this regard, and I would argue that it's much worse because of the premine many proof of stake cryptos had. Most proof of stake cryptos are centralized out of the gates and their governance processes are only going to make things worse. Lazy staking is one thing, but imagine what will happen when only a few parties are calling the shots for a cryptocurrency as large as Ethereum when it transitions to proof of stake. The larger proof of stake crypto blockchains become the more valued bad actors will stand again, and they won't have to go hunting for any ASICS or cheap energy to do it. They could buy out a proof of stake crypto from the comfort of their own yacht or government office. As flawed as proof of work, cryptos are, at least it requires much more than capital to decide the direction of the project. All the stakeholders involved have to agree, or else they'll just fork the chain. Now this might stifle innovation, but it's simultaneously protects these cryptocurrencies from governance takeovers. In my mind, the long term success of proof of work cryptos depends on ASIC resistance and the cost of energy. Both of these can easily be addressed and some proof of work cryptos do just that. The long term success of proof of stake cryptos depends on an equitable distribution of supply and the ability to store them. Massive transaction histories in a decentralized way. As I mentioned a few moments ago, there is no shortage of decentralized storage solutions. However, an equitable distribution of supply is something rare amongst proof of stake cryptos, and I reckon it's going to become even more rare as institutions continue to invest. So what's your view on the battle of the blockchain staking or working? Drop me a comment with your thoughts and please share this article if you learned something new today. That's all for today, folks.
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