Modern cryptocurrencies have several differences in the principles of production, operating features and other parameters. Often this is all due to the difference in the data processing algorithm. The main mining of electronic coins and the disclosure of blocks is carried out by the efforts of miners, who are rewarded for their work. This reward is accrued to a certain participant in the information processing process who was able to check the required number of transactions, collect a new information block from this data and connect it to the general chain. Cryptocurrency developers had to create such a tool that would help provide protection against various abuses, such as uncontrolled production of coins and the formation of blocks without confirmation. Special mechanisms have been developed to confirm the evidence carried out. These are several algorithms used in different cryptocurrencies. They are based on solving a mathematical problem with a high level of complexity, but at the same time it is quite solvable. In this case, the verification of the decision should be carried out much easier and faster than the decision process itself.

Proof of Work

One of the most common algorithms is Proof of Work, which is used in many electronic coins that occupy leading positions in the world ranking. The history of the appearance of this mechanism begins in 1993. It was created to protect users from email spam. At that time, there was not yet the very word combination that exists now, but the principle itself has already been developed. The name Proof-of-Work appeared only in 1999. For the first time in practice, PoW was used in 1997. The reason for the launch was the same spam. When the Bitcoin creator faced the problem of introducing additional protection, the choice of the system was obvious. He used the above algorithm, which has already worked several times in the HashCash project, which has successfully proven its effectiveness and efficiency. SHA-256, which was the leader in 2008, was used to calculate the hash function.

What is Proof of Work?

This algorithm is used to mine Bitcoin and other cryptocurrencies that are based on it. Here you need to find the hash of the block title. It consists of the hash of the previous block as well as the block of transactions . The hash starts with a number of zeros. The solution to this problem is a confirmation of finding the block. Taking into account the fact that an irreversible hash function is involved here, the solution to the problem is possible only using the standard brute force method. This satisfies all the requirements, since the task becomes quite difficult to solve, and the check is carried out as simply and quickly as possible.

Nuances of using PoW

One of the most important nuances of the functioning of the algorithm that is used in the blockchain is the mechanism for actively changing the complexity of the task. Despite the fact that the anti-spam engine is built in the same way, the complexity of the solution is constant. If you remove the dynamic change in difficulty from Proof of Work, then the emission of cryptocurrency will become uncontrollable. This is due to the increase in the total processing power of the chain, which will inevitably lead to the release of a very large number of coins.

Due to the constant change in complexity, leading to its increase, it is possible to maintain an average search time for solutions of about 10 minutes, despite the increasing power of the network. Due to the monotony of the problems involved in the selection method, the complexity is governed by the number of zeros at the beginning of the hash. This situation leads to an increase in the cost of resources to find a solution. Too high energy consumption of the task has created conditions for the need to search for a new algorithm. Proof of Stake has become an alternative, where it is necessary to prove not the carrying out of calculations, but the fact of owning a cryptocurrency.

Proof of Work benefits

The algorithm provides a fairly high degree of safety for the operation of the circuit. This is enough to curb the constant growth in the number of nodes and the rapid development of the power of miners equipment. Thus, if someone decides to launch an attack on this blockchain , then he needs to have most of the computing power of the entire network. In theory, this is quite possible, but in practice it is not feasible. It is required to grow to 51% of the total, which is a very large indicator. If the attacker reaches this value, then he will be able to receive almost all new coins, without taking into account the rest. Even if we assume that someone decides to invest in equipment in order to reach 51% of the power and conduct an effective attack, it will be economically unprofitable for the fraudster himself.

Attacks on the chain are also possible for double spending, which is carried out using forks. This does not require controlling most of the circuits power. But it also requires a lot of resources, which makes this type of fraud unprofitable. Attackers need to maintain the fork long enough so that it does not devalue. It is almost impossible to do this on your own.

Disadvantages of Proof of Work

The main problem with this algorithm is that the calculations become more complex over time. Even in the presence of modern technical equipment with high power, mining is rather slow and with high energy costs. Accordingly, users have to constantly invest in new equipment, as well as monitor energy costs, since at a certain stage it may turn out that they will turn out to be higher than the reward for mining. Adding new blocks becomes too costly for users.

It should be noted that various projects were opened that sought to profitably use too high energy costs from mining farms. One such project was a heated house. All this did not gain much popularity, therefore the application of the algorithm is still energy-consuming. This disadvantage sometimes turns into the fact that the miner spends his resources without receiving anything in return. The peculiarity of the algorithm is that the reward for the found block is received only by the node that was able to solve the problem. Thus, the rest do not receive remuneration and their spent energy resources do not pay off. This applies not only to the consumption of electrical energy, but also to the working life of the equipment.

For ordinary miners who try to do everything on their own and even invest in the development of farms, the Proof-of-Work algorithm is already becoming unprofitable for work. the dominant position in this case is occupied by large data centers or pools, since only they can compete with home mining on the Bitcoin network for several years now.

This situation turns out to be one of the most important shortcomings that contradict the basic principle of cryptocurrency, decentralization. Production resources are concentrated in the largest companies influencing market development. Despite the fact that algorithms are being created that interfere with working with ASIC miners, this is ineffective.

Application of the PoW principle in cryptocurrency

This principle is one of the very first, so it can be found in a large number of modern cryptocurrencies. It is absent mainly in cases where the system does not provide for the release of additional tokens, which indicates the presence of the entire number of coins in the network. Also, Proof of Work is not used in centralized blockchains. It is worth noting that even when choosing alternative algorithms to protect the chain, many developers have used PoW from the very beginning as a reliable and proven method.

Proof-of-Work cryptocurrency mining

Earlier, when cryptocurrencies were just developing and they were not so popular, mining on this algorithm was available to almost everyone who has powerful modern technology. For several years, the situation turned in such a way that loners withdrew from this case due to inappropriateness. Costs exceed revenues, since it becomes almost impossible to open a new block due to competition with large associations. Cryptocurrency mining using this algorithm is carried out mainly by large pools and data centers. There are only a relatively small amount of valuable electronic coins that are mined with ASIC protection in mind, but they are not of interest to large miners. These are isolated cases when miners can mine something without a pool.

PoW currencies

The most famous cryptocurrency that is built on Proof-of-Work is Bitcoin. This is one of the indicators that the algorithm is working reliably and no one has yet managed to beat Bitcoin in terms of reliability or popularity. Almost all the basics of the confirmation principle remain in all other cryptocurrencies in the same form in which they are implemented in Bitcoin. This applies not only to coins that appeared after the hard fork of the original currency, but also to those that were originally created as independent ones. Their developers simply decided not to take risks and use the existing developments, which have been tested over several years of use.

Ethereum cryptocurrency ranks second in the overall ranking of cryptocurrencies in the world. She also applies this principle, although the developers are going to move away from it soon. Ethash is used here, which contains certain differences, but the essence of the confirmation here does not change. The transition plan should be completed gradually and a hybrid Proof-of-Work and Proof-of-Stake system will be applied first for confirmation. Then everything will go to Proof-of-Stake. This transition should help keep from making hard forks in the future.

Monero cryptocurrency also applies this algorithm, but there is protection against ASIC mining. This is one example where such protection is really successfully implemented. It has developed its own protocol, which is called CryptoNight. This allows the built-in instructions of the CPU to be used. If they are used on equipment with fast memory and low frequency, it will be quite costly. The effectiveness of using this cryptocurrency depends not only on how well the algorithm is developed, but also on the extremely high confidentiality of all transactions in the blockchain. It is almost impossible to trace transactions here.

PoW development prospects

The main advantage of PoW lies in its reliability. This allows the consensus algorithm to remain relevant in our time, despite the duration of its work and the problems that arise. Developers looking to introduce something new still use Proof-of-Work to distribute tokens in the early stages . All of this suggests that it is too early to think about a complete replacement of the algorithm. It is more likely that in the future the system will become a hybrid, since the basic principles will remain the same, but innovations will be added to them aimed at correcting the main shortcomings. Experts believe that while the Bitcoin blockchain Proof of Work will remain relevant.

Proof of Stake

The essence of the Proof-of-Stake mining algorithm is to check the correctness of the transaction by taking into account the total share of funds that are located on the users personal wallet. If we look at it from a technical point of view, then such mining will be beneficial for those who have more coins. The use of this algorithm assumes that all cryptocurrency tokens will be on the market at the time of the official opening of the project. This makes commercial coin mining nearly impossible. Platforms that operate on the basis of PoS use blockchain in order to solve specific problems arising in the market. Many technical and financial projects use this particular algorithm. This also applies to payment systems. System participants use tokens to pay commissions, service services, and other purposes. The existing cryptocurrencies operating on this algorithm are successfully placed on exchanges and serve for investments. Proof of Stake is used mainly by those blockchain projects that offer users their own coins.

The main task of PoS is to hash information about transactions carried out by users. This is required to confirm the correctness of the operation. After confirmation, the chain is updated. Hashing refers to the processes in which a large number of tasks are solved. The result is a huge load on the computer.

The number of assigned tasks, as well as the time to complete them, show the complexity of the operation. This is the main indicator of mining efficiency. General indicators of the level of complexity and performance of the equipment used demonstrate the payback of mining cryptocurrency. All nodes have their own difficulty level. Before starting work, you can check all this using special crypto-calculators.

The average level of difficulty in mining coins developed using the Proof of Stake algorithm is inversely related to the number of coins the user has. For example, the cryptocurrency mining pool was created by the developers themselves, which allowed them to own 55% of all coins. This ensures the minimum complexity of the miners work in this project, which in turn provides a high probability of predicting who will open a new block.

Compared with the direct competitor, the Proof of Work algorithm, there is no load on the power of the miners computer. It is for this reason that the participants in the system are called forgers. They will receive a reward in the form of a certain percentage of the commission for completing the procedures. The amount of profit is calculated based on the age of the coin. To calculate this indicator, the total number of coins is taken and multiplied by the storage time of one user. For example, if one forger has 350 electronic coins that he owns for 90 days, then the age would be 31,500.

The introduction of the algorithm is due to the need to improve the energy efficiency of currency mining. If earlier users had to buy modern equipment for work, as well as spend money on electrical energy, now all this has become superfluous. Forgers are required to have a lot of coins in their account, which removes "random people" from the market. Chaotic switching from one currency to another is not welcome here, which can often be seen among investors and miners in the Proof of Work blockchain. This creates a long-term interest of the owners in the development of the project. They are engaged in promoting the direction and attracting new users.

Unlike PoW, it guarantees protection against attack by intruders who can capture 51% of the power. In this situation, they will have to buy all these coins, which is pointless for their actions. All cryptocurrency is already on the market (you can read about the cryptocurrency market here ). It should be noted that Proof of Stake, based on its principle, gradually leads to the centralization of the system. Large coin holders carry out the procedures as profitably as possible for themselves, which helps to influence the exchange rate in an interesting direction for them. Newbies are purchased with cryptocurrency at a high cost and, due to the small number of assets, their remuneration is minimal.

How did Proof of Stake come about?

This algorithm was first mentioned in 2011. Then the developers S. Nadal and S. King were engaged in the issue of reducing energy consumption when mining cryptocurrency. There was an active discussion during the forum dedicated to cryptocurrency. Then the functioning of the blockchain cost about 15 thousand dollars for the community for 1 day.

The high energy consumption for the use of the Proof of Work algorithm consisted of a large number of computational operations. Gradually, the load on the system grew, although the calculations did not have any practical significance. All the costs did not have any significant justification, which forced the developers to seriously revise the algorithm. For this reason, the development of another way of proving the fidelity of the transaction began, which became Proof of Stake. In the new system, it was easier to predict who will open a new block, since these were large coin holders and investors with rarely moved savings.

For the first implementation of the new algorithm, the code of the Peercoin cryptocurrency was used. The practical implementation of high energy efficiency has attracted the attention of electronic coin investors. This was the impetus for the appearance of several more coins on the Proof-of-Stake algorithm. Among them are BlackCoin, ShadoeCoin, NXT and others.

Initially, the logical structure of the algorithm provided protection against the dominance of large coin holders. A large amount of cryptocurrency increases the chance of opening a new block, but the coins are in the freezing stage for some time and cannot be used. At first, the owners of 3% of the coins produced 4% of the blocks.

How the Proof-of-Stake algorithm works

The basis for the operation of the algorithm is to reduce the maximum number of checks for fixing the truth of a block in a chain. The characteristic of the limitation is the number of coins in the participants long-term storage. Even with the high power of the technique, which makes it possible to carry out thousands of checks in 1 second, which would allow receiving 10 electronic coins, a user with 5 coins will be able to carry out only five operations during this time. This will provide him with 0.2 coins of profit.

There is something in common between PoS and Pow. Individual nodes perform hashing of the incoming information stream. They try to get a result that is less than the previously set value. Only in this case there are no centralized pools that would be engaged in mining. This makes the market more homogeneous. When coins appear on the market all at once, it is more interesting for investors. They can be immediately distributed among large buyers. The limit is provided for each currency separately and is determined based on the number of "old users" who have significant amounts of coins on their account. Thus, miners can get their profit without serious investments. Due to the fact that there is no real value of the cryptocurrency, as in the previous mining algorithm, rate jumps often occur.

How can you determine the next block opener

There are three main ways to make a forecast. They look like this:

1. A request is made for the current balance of the wallet on the account. This technique is used in the marketplace and requires the account holder to be online at all times. If it is not possible to receive a response to the request in a timely manner, the transaction is canceled.
2. Accounting for the "age of coins", which is a more complex system. The alleged creators of the next block are those who store assets in this cryptocurrency for more than 30 days. This helps to increase the rotation of members to encourage them to mine. As soon as the transaction is confirmed, the age of the coins goes to zero. Thus, he will again have to wait in line for about a month.
3. Random selection. The system randomly selects one of the users with the most coins. Sometimes a form comes into play, according to which the minimum hash of participants is calculated.

To mine in a Proof-of-Stake system, the user does not need to buy expensive equipment. Here you only need to follow five basic steps that will lead to a reward for opening a block. These steps include:

1. Decide on the currency for further work. Based on the fact that there is no physical extraction of currency in the mining algorithm, the user needs to evaluate the current rates, the stability of the work and the development of the project, feedback from other users and other information that would allow making the right choice. Miners often deal with several promising coins at the same time.
2. It is required to register wallets that would be compatible with the selected types of coins. The optimal modern solution would be to open several types of wallets for storing cryptocurrency. It is better to keep the bulk of the funds in rarely used wallets. It is better to keep funds for payment and turnover in other wallets . All of this must be securely encrypted and protected. Multicurrency wallets are often poorly secured.
3. Activating wallets and replenishing them with the required amount of cryptocurrency. There are several different strategies for making money, depending on the currency itself, its algorithm and other features.
4. Installing clients for working with cryptocurrency. After that, you can already wait for the opening of new blocks, which will take about a day. Account registration and other connection processes take a lot of time, so you shouldnt postpone them. The software should be installed on a computer that can be left on at all times.
5. Withdrawal of the received profit. Fordgers earn income as transaction fees. Naturally, this happens in the original currency. It can be kept as an investment or immediately withdrawn and exchanged for other funds.

PoS benefits

The main advantage for users is that there is no need to use powerful computer technology. Coin mining can be carried out on ordinary personal computers.

The main advantage results in low electricity costs, which has been a major problem in PoW mining. Users do not need to install additional boards, coolers, voltage regulators and other types of equipment that contribute to the stable operation of powerful equipment. For modern forgers, it is enough to have a powerful laptop or personal computer, as well as constant access to the Internet.

Cryptocurrency is protected from inflation. Due to the known number of coins that are on the market, there is no need to create new coins, which would lead to a depreciation. Fluctuations are possible only due to dynamic changes in the situation on the exchange, which reduces the number of factors that negatively affect the rate of coins.

Here is the minimum amount of empty cryptocurrency that does not have a significant justification. This provision indirectly affects the cost of energy resources, stabilizing this indicator.

Users have a high level of involvement in the cryptocurrency mining process. For efficient mining, users need to buy a large amount of coins. Possessing large assets, the investor becomes interested in the development and stability of the project. Members of the cryptocurrency community always support it when launching a new coin. In theory, a miner can easily switch from one type of coin to another if he notices that the project is unprofitable. In practice, this will take a certain amount of time, which reduces the efficiency of this process. Also, when transferring funds, the conversion will entail some losses, so switching often becomes unprofitable.

This is a promising algorithm, which may become the main one in the future if mining using other algorithms becomes impossible. An increase in the power of mining equipment will lead to the fact that all coins will be mined even in the most popular chains, despite their complexity. In this case, transactions can only be carried out via PoS.

Disadvantages of PoS

On the market, you can find a fairly large number of cryptocurrencies that work on a hybrid algorithm. Pure Proof-of-Stake is relatively rare as it has several drawbacks.

One of the main ones is the unfair distribution of coins. The amount of reward for an open block is determined by who has the most of a particular type of cryptocurrency. This does not allow for complete decentralization. It is most profitable to own a large volume of cryptocurrency, which leads to a market monopoly. Developers allocate the entire amount of money even before it reaches the market. Early investors find themselves in the most favorable terms, which does not attract new users. Large investors determine practically all development prospects.

There is a threat of an attack that will be provoked by the largest coin holders. If the cryptocurrency is sold cheap, then coins can be bought in large quantities for a relatively small amount and gain control over most of all the assets of the system. This allows attackers to resort to various manipulations.

The likelihood of conducting parallel transactions. There may be two users in the system, the parameters of which will be the same. By signing the blocks at the same time, both will be correct. Despite the existing shortcomings, the system still has prospects, since the creators are modernizing and working on bugs.

Proof-of-Stake cryptocurrency

At the moment, there are over 60 types of cryptocurrencies that work on this algorithm. Not all of them have gained popularity and gained a strong position in the market.

PeerCoin

This is the very first coin developed with the Proof-of-Stake algorithm. It has existed since 2013. Initially, it worked only on one algorithm, but then the developers made it hybrid. This is due to the presence of weaknesses in the system, which were compensated for by an older and more proven algorithm. The initial distribution of tokens was carried out on a Proof-of-Work basis. Monopoly protection is provided here through the use of the coin age system. Added random blockchain checks here to detect concurrent transactions

BlackCoin

One of the most striking examples of coins that work exclusively on the Proof-of-Stake algorithm. The cryptocurrency entered the market in 2014. An algorithm was used here that prevented the preliminary release of coins. The creator added a mechanism for fair accrual of tokens to users participating in the development of the system. To protect against parallel transactions, random verification was also used here. In later versions of the algorithm, it was removed.

NXT

This cryptocurrency operates on a standard Proof-of-Stake without any additions or changes. 1 billion tokens entered the market at once. They are all distributed among users. Only the last 720 blocks are updated here, which allows you to create protection against concurrent transactions. Transactions are carried out on the basis of user profiles, which differs from standard scripts. This feature creates protection against unauthorized access, although it may cause disclosure of personal data of users.

BitShares

This cryptocurrency uses a modification of the Proof-of-Stake algorithm. The method used here is called “confirmation of selected witnesses”. The participant chooses which nodes will witness the fidelity of the block transaction. The weight of a particular vote, as well as the right to choose, is determined depending on the number of coins in the witnesss account. The entry is made by the winner of the vote. The manager of the network characteristics is determined in the same way.

Prospects for using the Proof-of-Stake algorithm

If we consider the original algorithm, which was proposed in 2012 as an alternative to Proof-of-Work, then it is rarely used in practice. Then the developers did not take into account the high probability of monopolization of the system. This led to the need for its development and creation of hybrid variants. The main hybrid combinations were based on the fact that the features of PoW and PoS were present in one algorithm. The current situation in the cryptocurrency market makes it possible for the algorithm to develop in several directions.

Unification is being made so that the technologies used are suitable for all coins produced. When the entire volume of tokens is on the market, then you need to work on a new protocol that supports the functioning of the platform. Proof-of-Stake modifications must be tailored to specific projects.

To improve safety conditions and overcome shortcomings, one of the directions of development is the formation of more complex hybrid algorithms. Platform developers are improving core algorithms to reduce the risk of system centralization.

Modern projects are often standardized for this particular algorithm. In the future, it can become one of the main standards providing compatibility with many cryptocurrencies. Now functional tokens are in great demand, as otherwise they will be less profitable.

Experts suggest that the most likely prospect for the development of this algorithm will be the use of a large number of its modifications. All of this will become especially relevant when standard coins become unmanned. An example of this is Ethereums attempt to switch to a new algorithm, gradually moving away from the standard. There are already several stable modifications in the cryptocurrency market. Proof of Space - represents obtaining evidence based on disk space. Proof of Storage - obtaining evidence of the presence of the full volume of blocks. These examples are based on several different algorithms. As a rule, they are used in less widespread cryptocurrencies.