If you have been trying to make sense of the Ethereum VS EOS debate, you’ll most likely have heard about the terms proof-of-stake and proof-of-work. One of the biggest talking points of the EOS VS Ethereum debate is the consensus protocols of both platforms. EOS uses a proof-of-stake (POS) protocol while Ethereum uses a Proof-of-work protocol.
Interestingly, the difference in the consensus system of the two coins is influencing how investors and traders perceive them. For instance, The price of EOS cryptocurrency has jumped 107% this year while Ethereum has lost 10% in the same period.
However, for the average cryptocurrency trader/investor, not much effort has been placed into explaining the key similarities and differences, and why such distinctive features could influence your trading and investment decisions. This piece examines the key features of proof-of-stake VS proof-of-work.
The proof-of-work system works like an international math competition where competitors (called miners) are required to provide solutions to unsolved problems (called blocks). Any of the competitor that first solves the problem is rewarded a prize (called block reward). The competitor (miner) that solves the problem (block) first is required to provide a proof of his solution (proof of work) and the proof is then posted for everybody involved in the competition to see (block established in the blockchain).
In applicable terms, blockchain based transactions happen in a trustless environment – they don’t need the input of a third-party to verify, authorize, or facilitate transactions. When you conduct a transaction such as sending $100 to a friend in a traditional financial institution – you are essentially instructing your bank to debit your account with $100 and credit your friend’s account with $100. The money doesn’t actually move, only the records are changed, and the money remains with the bank until your friend makes an actual withdrawal.
In the blockchain ecosystem, you don’t need banks or any other financial institutions to make/edit records. The decentralized peer-to-peer nature of cryptocurrencies creates a situation where transferred funds actually move from your account into the recipient’s account. Nonetheless, the transactions are protected with encrypted algorithms that must be solved/decrypted to verify the authenticity of the transactions. Miners provide the processing power of their mining rigs to solving the encrypted algorithms for transactions and the transactions once validated are stored on the blockchain.
A popular proof-of-work coin is Ethereum; others include Bitcoin, Monero, and Litecoin. One of the major limitations of the PoW is the increased possibility of a selfish mining attack in which an attacker chooses to reveal mined blocks to waste computational processing resources. It requires a 51% of the network’s computing power to gain control of a PoW network, while such an attack is impossible on established blockchains such as Bitcoin, a committed and resourceful attacker can pull off a majority attack on small blockchains.
It is somewhat hard to explain a proof of stake in non-technical terms; so, I’ll use same analogy of solving maths problems. In the proof of stake system, all miners (called forgers in Proof of stake) are competing to solve the encryption algorithms that validate transactions. However, instead of having all miners delve in the question-solving activity to see who solves the question first, miners who have a much money to enter the competition (stake) for a longer period get a preference in solving the problem over newer miners who haven’t invested as much money in the competition – yea, it doesn’t really sound like a competition again.
So, imagine playing the lottery – now your chances of winning the lottery increases with the more tickets you buy (stake) – but in the case, how long you’ve been buying tickets also influences your odds of winning.
In a proof-of-stake consensus, forgers are chosen to build new blocks based on the size of their stake in the blockchain and the age of such stake in the network. For instance, 600,000 units of the EOS cryptocurrency will give you a better chance to create the next block over someone that has 200,000 EOS. More so, having 600,000 EOS for one year will improve your odds over another forger that has held 600,000 EOS for 2 months.
In a PoS concept, forgers are rewarded for their troubles with the transactions levied on the trade since they don’t get have any reason to compete with other miners to record transactions. Some notable examples of PoS coins include EOS, QTUM, Ardor and Cardano. One of the key selling points of the PoS system is that it is inherently defended against the 51% majority attack that besets Proof-of-Work systems.
The key limitation of the proof-of-stake system is that it could be potentially hard to achieve consensus because forgers don’t have anything to lose by voting, making it hard to reach a consensus if they vote on multiple blockchain histories. Another problem with the PoS system is that the only way to own coins is to buy/acquire them from someone that already owns them. Since no new coins are mined, the token supply is mostly controlled by the people that bought it after the original coin distribution and they could easily manipulate prices if they corner enough tokens to move the markets.