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What is the difference between Proof-of-Work, Proof-of-Stake and Delegated Proof-of-Stake?
If you've spent any time in the cryptocurrency community, you may have heard the terms Proof-of-Work (PoW), Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS).
But what do they actually mean?
In this article, we’re going to explore:
- the meaning of these terms
- how they relate to blockchain and mining
- how they’re used to validate transactions
- how people can use them to own cryptocurrency
What is mining?
Proof-of-Work (PoW), Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS) have their origins in cryptocurrency mining.
Rather than purchasing cryptocurrency on exchanges, mining allows prospective cryptocurrency owners to attempt to validate a transaction and get rewarded.
PoW, PoS and and DPoS are all ways of mining cryptocurrency. But each enables mining in a very different way.
Cryptocurrency does not require a third party (ie a bank) to confirm the value of a currency. Instead, the currencies rely on trusted consensus in the crypto community to define the value of a currency or transaction.
This community-based approach is what makes PoS, PoW and DPoS so important to cryptocurrency value and to its holders: they are each considered a consensus algorithm.
What is Proof-of-Work?
Proof-of-Work (PoW) serves two primary purposes:
- To provide security by preventing and deterring cyber attacks, such as DDoS.
- To allow miners to validate and provide consensus for a transaction in a blockchain without third-party involvement.
PoW works by providing a way for miners to solve complex math algorithms, which are essentially difficult puzzles.
This process is open to the public, but the complexity of a transaction makes it extremely difficult to validate the code. The process of doing so becomes a race, with miners working to verify the validity of the code.
The first miner to solve the puzzle in the block is rewarded with ownership of the block. This validation also creates consensus for the transaction.
The greatest benefit of PoW is that it provides security for a transaction. Blockchain transactions are so complex that they deter would-be hackers from attempting to solve them, given the time, energy and effort required to do so.
The downside of PoW is that it consumes massive amounts of energy. One study in 2015 found that the amount of energy required to solve a single bitcoin transaction was equivalent to the energy consumption of more than 1.5 average American households per day.
The high-energy consumption can also have a negative impact on the value of cryptocurrency. Because energy costs are paid in fiat, the expenses related to PoW can drive down the value of cryptocurrency.
A couple of famous cryptocurrencies that are PoW:
What is Proof-of-Stake (PoS)?
Like PoW, Proof-of-Stake (PoS) is way to both validate and provide consensus for a transaction. PoW rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks.
But with Proof-of-Stake, the creator of a new block is chosen based on investment in a specific currency – how much stake does the person have in the currency.
More stake, more power.
To be clear: Stake is not defined solely by the amount of a currency a person owns. It is also measured by the length of ownership (among other factors).
So, for example, if a person recently purchased a large amount of a cryptocurrency, his stake in the currency will likely be less than that of someone who has owned the currency for a longer period of time.
PoS rewards a miner for their commitment to the currency.
In the PoS system, an algorithm identifies the miner with the highest stake in the currency. You can think of it as working in the reverse of PoW (in which a miner solves a transaction).
The value of staking is that PoS creates security for a transaction. The high cost of purchasing and owning large amounts of a cryptocurrency, coupled with being rewarded by a PoS algorithm for the length of time that it is owned, deters hackers because they are unlikely to pay substantial sums for a currency and then hang on to them for a long period of time.
PoS has emerged as the primary alternative to PoW mainly because it requires so much less energy. This diminished energy cost makes PoS an appealing alternative to miners and cryptocurrency owners.
Serious miners are now able to gain value in cryptocurrency without the energy and time expenses of PoW.
Some of the first PoS cryptocurrencies were:
- Nav Coin
What is Delegated Proof-of-Stake (DPoS)?
Delegated Proof-of-Stake (DPoS ) closely resembles PoS with the addition of a strong community-based factor. Like PoS, DPoS relies on miners to have significant stake in the currency.
In addition, it also requires community validation of any individual’s ownership stake in the currency.
The goal of DPoS is to make the management of the network more efficient by having a small group of people control it.
The way this works in most cryptocurrency communities is that the community votes to create a group of individuals to run the network – these people are often called Witnesses.
Usually there are 100 Witnesses in a network, each of whom are paid for their service. The top 20 witnesses who possess the most stake in the currency and are supported by the community have the most authority over the network and are often paid a salary.
Similar to a company’s Board of Directors, DPoS provides community members governance over who represents their interests in the cryptocurrency.
Members’ voting strength is determined by the number of tokens they hold, so those with more tokens have a stronger vote than those with fewer tokens. DPoS allows community members to vote out individuals who are negatively impacting the community (for instance, if someone is not protecting the security of the cryptocurrency).
These three consensus algorithms are just the beginning of ways that the cryptocurrency community can provide security, validation and ownership of currencies.
As cryptocurrencies grow, security becomes paramount and communities evolve, while individuals will likely come up with new ways to ensure that these currencies are protected and valued property. The most committed people will therefore be rewarded with cryptocurrency ownership.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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