Why Crypto Projects Should Move to Proof of Stake Algorithm
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Why Crypto Projects Should Move to Proof of Stake Algorithm

Proof of Stake (PoS) and Proof of Work (PoW) are the two major consensus algorithms in the crypto space. Cynthia Dwork and Moni Naor long developed the Proof of Work algorithm in 1993 with Markus Jakobsson coining the word in 1993. However, the PoW idea was first implemented by Satoshi Nakamoto in 2009 via the Bitcoin blockchain network. PoW played a significant role in propelling Bitcoin to what it is today.

While the PoW consensus provides a high level of security protecting the network connections and systems from denial of service (DoS) attacks, it suffers from immense drawbacks. PoW requires immense energy and computational resources, suffers from scalability issues, and is susceptible to 51% attacks. 

Proof of Stake (PoS) first launched in 2013 via Peercoin and has since grown immensely. PoS introduces a new paradigm for cryptocurrency utility by solving several drawbacks in PoW consensus. PoS consensus mechanism is relatively simple to employ and requires significantly reduced computational power compared to PoS. 

Thanks to the reduced computational burden, PoS consensus confers some advantages to the blockchain network, including faster transaction time and reduced environmental damage. It’s more energy-efficient and enhanced network security.     

With the many benefits offered by PoS consensus, crypto projects should switch to this algorithm and iron out PoW inefficiencies. Already, Ethereum is looking to make a transition from PoW to PoS with Ethereum 2.0 set to be launched later this year. Ethereum’s shift from PoW to PoS will be one of a kind in the crypto space since many blockchain projects have launched on the Ethereum blockchain. 

Here, we look at the reasons why crypto projects should move to Proof-of-Stake algorithms using BitcoinPoS as a case study. 

Consensus Algorithm Explained 

In any distributed computing system or multi-agent systems, there is a consensus problem that hinders the generation of consensus where all nodes can’t agree on a majority value. To solve the consensus problem, distributed computing systems must leverage an ideal consensus algorithm. 

Essentially, a consensus algorithm is a mechanism that allows users or machines to coordinate in a distributed setting. Consensus protocols must be fault-tolerant, i.e., Byzantine Fault Tolerance, to avoid conflicting information that could compromise the network. Consensus algorithms leverage a combination of cryptography and economic incentives to maintain a functional crypto network.  

Proof of Work (PoW) and Proof of Stake (PoS) are the two primary consensus mechanisms in the blockchain space. 

Proof of Work (PoW) 

PoW algorithm is based on the idea that “show us that you did the work, and we’ll let you create the new block”. PoW was first implemented in Bitcoin though the idea has been around for quite some time. 

In PoS, network validators, i.e., miners, compete to solve complex cryptographic puzzles to create a new block and add it to the blockchain. Bitcoin users give the transaction data to a miner, whose job is to validate the transaction and get it included in the next available block. Every block in the blockchain has a unique cryptographic hash and the details of the transaction. 

To create a new block, the miner is required to provide both the transaction data from mempool and the hash value of the last recorded block. Finding the hash of the last recorded block is like solving a cryptographic puzzle, thus quite hard to solve. Miners employ powerful computing hardware, i.e., GPU or ASICs, which require very high amounts of electricity. Miners are rewarded for validating a transaction and creating a new block. No existing block can be modified or deleted. 

Proof of Stake (PoS) 

Proof of Stake (PoS) offers a more efficient alternative to PoW. In PoS, network validators(miners) hold a certain amount of the specified funds on the network to receive transaction validating rights. This is referred to as staking. 

On a PoS network, transaction validators are selected based on the amount of stake as well as the duration of staking. All nodes on the network do not participate in the transaction validation, plus there is no complex cryptographical puzzle to solve. 

Like in PoW, when a block gets added to the blockchain, the validators get a block reward in proportion to their stake as well as a certain amount on the transaction fees specified by the network’s underlying protocol.

PoS networks do not suffer from scalability issues and can process transactions quite faster compared to PoW mechanisms. 

Drawbacks of PoW Consensus 

While PoW offers a relatively high-security level, it suffers from some significant drawbacks that could deter a network’s functionality. Ethereum’s founder Vitalik Buterin deems the PoW algorithm to be too wasteful and costly. 

Here are some downsides of PoW. 

  • The massive strain on the environment– PoW creates a massive strain on the environment thanks to the enormous power required to mine blocks. PoW networks, notably Bitcoin, are a significant contributor to global warming. A 2018 report by Nature on Bitcoin’s contribution to climate change estimated that an increase in Bitcoin adoption levels would significantly contribute to breaching the threshold of 2 degrees Celsius change. 
  • Mining Hardware Centralization– Unlike in PoS, where anybody can stake coins, PoW networks are sort of centralized. This is because mining is complex and competitive, leaving those with the most advanced mining hardware. Those who cannot afford electricity and mining resources are left out against the whole idea of decentralization. 
  • Susceptibility to 51% Attacks– PoW networks are susceptible to 51% attacks since the mining pool has centralized control. This attack can compromise the network by invalidating legitimate transactions and double-spending crypto coins. 

How the PoS Algorithm Solves PoW Drawbacks – A Case of BitcoinPoS 

Launched on the 2nd of May 2020, Bitcoin Proof of Stake – BitcoinPoS – BPS is a peer-to-peer electronic cash system that claims to be the next evolution in Bitcoin technology. BitcoinPoS takes everything about Bitcoin and combines it with a highly efficient, scalable, and flexible Proof of Stake consensus algorithm, making it “faster, more rewarding, and ready for real-life digital currency payments”.

Essentially, BitcoinPoS looks to solve Bitcoin’s problems emanating from its PoW algorithm. BitcoinPoS solves Bitcoin’s major problems, including: 

  • Centralization 

BitcoinPoS solves Bitcoin’s centralization problem by replacing the proof of work algorithm with a Bitcoin proof of stake algorithm. BitcoinPoS employs the PoS algorithm; thus, it’s less dependent on electricity, lower requirements concerning hardware and electricity, and easily accessible. Anyone can become a network validator by staking the minimum amounts of BPS. 

  • Reduces Electricity Consumption and Conserves the Environment 

Bitcoin Proof of Stake reduces Bitcoin’s electricity consumption by up to 99%. If Bitcoin is seeking future currency, it should reduce energy consumption for a cleaner economy. Reducing energy consumption also makes network validation less expensive and open to all. 

Cutting on electricity consumption is the first step in making Bitcoin and blockchain green. In the long run, PoS algorithms will reduce blockchain’s impact on the world and conserve the environment for tomorrow’s generation. 

Security Against 51% Attacks 

Security is a crucial factor in mainstream crypto adoption. Bitcoin’s centralization via enormous mining pools makes it susceptible to 51% attacks. Such an attack could compromise the entire Bitcoin network jeopardizing its billion dollars. Bitcoin Proof of Stake – BitcoinPoS leverages the PoS algorithm, which makes it resistant to 51% attacks. In essence, the PoS algorithm makes network security for mainstream usage. 

Bottom Line 

In the words of Ethereum founder Vitalik Buterin, the PoW algorithm is wasteful and costly. Indeed, PoS offers a better alternative to PoW in regards to mining centralization, environmental degradation, and susceptibility to 51% attacks. Going forward, crypto projects should transit to  Proof of Stake as it has the potential to enable a new generation of enterprise and financial applications to be built on blockchains. Ethereum is leading the pack in switching from PoW to PoS, and every project should soon follow suit.    

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Born in Bucharest, Marius is the founder of Crypto Adventure and Co-founder of Crypto Press. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.