Proof-of-Work, Proof-of-Stake, and delegated Proof–of-Stake: A Concise Breakdown of Major Crypto Mining Algorithms
June 11, 2021 - How-To Articles
Blockchain assets have specific defining concepts.
Anyone who has taken a casual interest in crypto has heard of decentralization. This feature is a core idea in the development of cryptocurrencies.
The goal of Bitcoin founder, Satoshi Nakamoto, was to eliminate centralized control of money. Accordingly, Bitcoin was to play the role of a peer-to-peer electronic cash system.
For decentralization to work, the blockchain needs a consensus algorithm. The algorithm helps to democratize the functioning of a blockchain. Over the years, various algorithms emerged and caught traction among blockchain developers.
Proof-Of-Work (POW): The Original Consensus Algorithm
Bitcoin is the pioneer cryptocurrency and has stuck with the original consensus algorithm. Proof-of-Work is a piece of data that is difficult to produce but easy to verify.
The process is deliberately time-consuming, and there is plenty of trial and error. Computers try to produce the Proof-of-Work in a random process that ultimately verifies Bitcoin transactions. The Bitcoin blockchain deploys the Hashcash Proof-of-Work system.
Proof-of-Work is necessary to add the next block of Bitcoin transactions to the blockchain. Miners must compute a “hash” (an alphanumeric string). This hash contains a certain number of zeros at the beginning, known as the “difficulty.”
The hard part is finding a valid hash. Computers with high processing power have an advantage because it is resource-intensive. Consequently, POW consumes a relatively high amount of electricity.
When a miner finds a valid hash, they broadcast its solution. If this solution is the first to reach the majority of the network for that block, the validator earns the block rewards.
At press time, the Bitcoin block rewards are 6.25 BTC, down from 50 BTC in the first epoch.
One Bitcoin is remarkably valuable, and miners like VBit Mining see the economic sense in mining the pioneer coin.
Mining difficulty constantly adjusts to ensure that new blocks come after roughly every 10 minutes. There is a low probability for an individual computer to generate a successful Proof-of-Work, making it unpredictable and entrenching decentralization.
More details go into the mining process. Regardless, this brief overview outlines the essence of this algorithm. Bitcoin’s SHA-256 proof-of-work scheme ensures that it is decentralized and scarce. These two qualities are the foundation of this incredible asset.
Proof-of Stake (PoS) and Delegated Proof-of-Stake (dPoS)
Ethereum fans will know a lot about Proof-of-Stake (PoS). After all, the smart contracting platform is transitioning from POW to this consensus algorithm. Proof-of-Stake came to prominence as an energy-efficient alternative to POW.
Staking is the essence of this algorithm. Network participants can mine and validate block transactions depending on how many coins they hold.
As a result, miners get compensation depending on how much they stake. This arrangement supposedly eliminates the incentive to attack the network because it is staking is more lucrative long-term.
Miners mine a percentage of transactions proportional to their ownership stake. This model reduces the randomness of POW but is more energy-efficient.
That said, PoS networks will defend themselves that a miner will need 51 percent of the network coins to launch a successful attack. Attacking the network would also diminish the value of the coin they stake, making it counterproductive.
Delegated Proof-of-Stake adds a twist to PoS. In dPoS, the network adds a voting and delegation mechanism that makes the process more democratic. The objective of dPoS is to create irrefutable agreements from the digital democratic system. Token holders have a say in blockchain changes.
Notably, the voting power still depends on the number of altcoins someone possesses. Accordingly, dPoS ensures that the blockchain network attains a level of self-governance from participants.
Proof-of-Work Has the Security Edge
Both these systems claim to be better than Proof-of-Work.
Their main argument is the energy efficiency they provide. However, an attacker needing only 51 percent of the coin to take over the network is a remote problem.
Admittedly, it is highly improbable for an extensive network like Ethereum.
In contrast, controlling the majority of Bitcoin mining hashrate is very difficult. It is a significantly more expensive operation than taking over POS systems and cannot happen overnight. The fact that Bitcoin mining needs robust infrastructure should not be a disadvantage but rather a security edge.
POS systems can also lead to hoarding. The more coins a person has, the more power they wield.
For Bitcoin, holding a billion dollars worth of Bitcoin does not give you disproportional control over the mining direction of the blockchain.
Yes, more powerful equipment at scale gives some institutional miners an edge. However, it does not provide them with the kind of power that large holders have in PoS and dPoS.
For dPoS, validation cartels can make a blockchain less decentralized and vulnerable to minority control.
Accordingly, the success of dPoS or PoS governance depends on the people who vote in and run the systems. Proof-of-Work is battle-tested and entrenches decentralization.
The sheer computational power that goes into validating blocks makes the Bitcoin network more secure and reduces the incentive for malicious actors to attack.
Higher costs of setup and running mining rigs are actually advantageous in promoting decentralization.
POW Power Consumption Is an Opportunity
Just because POW consumes significant electricity doesn’t mean that miners should sacrifice decentralization. The false binary choice between Bitcoin mining and environmental protection is a narrative you will hear a lot.
Certain sections of the media and activist world are running the narrative that Bitcoin mining is an environmental catastrophe. This tag line has caught on with Microsoft founder Bill Gates among those who have aimed criticism at Bitcoin for environmental reasons.
Bitcoin mining is a global affair.
People who try to paint this activity as a concentrated singular effort that sucks the life out of power grids and releases as much CO2 as the transportation sector have an agenda.
There are Bitcoin mining farms that indeed use coal and dirty fuels. However, these don’t account for all mining operations. They could be a minority, but sensational headlines sell better.
Green Bitcoin mining is an incredible opportunity. The logic is simple. You have Bitcoin mining entrepreneurs who need a constant supply of cheap power, ready to invest significantly to start. On the other hand, thousands of underutilized renewable electricity sources need the demand and investment that Bitcoin mining provides.
They fit like a glove. Besides, Bitcoin mining is global and can fuel a green energy boom unlike anything before. China has outlined its displeasure at Bitcoin’s consumption of electricity from coal. This move could become a blessing in disguise as miners will move to other jurisdictions and try to avoid past mistakes.
VBit Mining Helps To Secure Bitcoin
Proof-of-Work mining offers the most decentralization and security of any consensus algorithm. Bitcoin miners play a vital role in securing the network by running powerful computers that create hashes.
VBit Mining plays this role as a miner. Our data centers contain elite Antminer mining rigs from Bitmain, to whom we have a direct line. We leverage this direct line to resell the latest Bitcoin mining equipment.
We also offer hosting facilities for prospective miners looking to participate in this potentially lucrative venture. Hosting takes care of electricity and cooling costs, which make Bitcoin mining virtually untenable at home.
At all times, the user owns their hardware and can have it shipped to their location. Bitcoin mining is dynamic and competitive. Users need to learn as much as they can before getting started.
Visit the VBit Mining Shop Page to learn more about mining!