What's the difference between proof of stake and proof of work?

  • The Ethereum frontier network currently uses a proof of work (PoW) consensus algorithm, while a future version of the network plans to utilise a proof of stake (PoS) algorithm instead. What's the difference between these two types of algorithm?

    This is a sort of test question, since it could fit either on this stack exchange or the bitcoin stack exchange. I'm curious to see whether we consider this on- or off-topic.

    I think it is definitely on topic, the POS transition is a major network feature

  • The goal of a consensus algorithm in a public blockchain network is to let many different users agree on the current state of the blockchain even though they don't trust each other or any central authority. This is a challenging problem, and until the Bitcoin network was launched, it had remained unsolved.

    Bitcoin's solution was to use something called Proof of Work (or "mining", or "hashing"), where participating users worked to solve difficult mathematical problems, and then published the solutions. Because it takes real-world resources like computers and electricity to find these solutions, there's no way to "cheat" and pretend that you represent a bigger portion of the mining power on the network than you actually do. As a result, PoW algorithms are able to use the number and difficulty of solutions being found to measure how much of the network agrees on the current state of the blockchain. The only way to prevent the legitimate users from coming to agreement about the state of the blockchain is to control enough of the total computing power that you can pretend the group disagrees with itself, or even that your opinion is the real consensus and all the other users are lying about the state of the blockchain. That requirement for resources is a good thing, because it means that interfering with the group's consensus takes a lot of resources (a.k.a. money).

    Unfortunately, PoW consensus algorithms as we presently know them require a constant, ongoing expenditure of resources just to work normally. The work has to be done regardless of whether someone is trying to interfere or not, and someone has to pay for it. Most existing PoW blockchains, such as Bitcoin, pay for these costs with the pre-agreed creation of coins, also known as inflation. This salary has to be doled out whether or not anyone is attacking, which seems quite inefficient. Motivated by this and other considerations, a new solution to the problem of decentralised consensus was proposed, referred to as Proof of Stake.

    In this new algorithm, agreement within the blockchain would be measured not on the basis of how much computing power agrees with the current state, but instead on the basis of how much digital currency agrees with the current state. The owners of this digital currency hold a financial stake in the success of the blockchain that tracks it, which is where we get the name for the algorithm.

    ..it would be most interesting if you could expand on the aspect of "how much digital currency agrees with the current state" since at first glance this seems to point towards another form of centralisation..

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Content dated before 7/24/2021 11:53 AM