What is PoW, PoS, and Other Consensus Algorithms

02/19/2018

Quide by the team kript.io
Consensus algorithms are designed to reach agreement among distributed systems. Solving the consensus problem is vital for making a shared public ledger operate on a global scale.

In Blockchain, consensus algorithms ensure that each next block is the one and only true version. They provide reliability in a network and prevent system failure. At the moment, the most famous consensus algorithms in the crypto world are PoW and PoS. Nevertheless, there are several alternative algorithms which can also be applied to Blockchain.
Proof-of-Work (PoW)
PoW is a protocol that requires proving that work of some kind was successfully done. This algorithm rewards miners who solve mathematical problems to validate transactions and create new blocks. Miners must do the work before their blocks are accepted by others. The primary goal of PoW is securing cryptocurrency network and preventing cyber-attacks.

The system uses Bitcoin. The idea of this algorithm was originally published in 1993, yet the term PoW appeared later in 1999. The proof-of-work can be considered as the most prominent idea behind Bitcoin as it allows trustless and distributed consensus. However, the main drawback of PoW is high energy consumption. Another concern is that in case a currency's price or reward amount drop down, then fewer people have the motivation to mine. Hence, the security of the system will be significantly reduced.

Example: Bitcoin.
Proof-of-Stake (PoS)
A PoS is a protocol that requires users who have a lot of coins (high stake) to determine the next block. There is no block reward in the PoS system, and miners take the transaction fees instead. The idea of PoS was first suggested in 2011. The first cryptocurrency that started using this method was Peercoin. The critical problem with PoS links with a risk of achieving a monopoly of the currency. Yet, there are several methods to prevent that. Another crucial problem of PoS is so-called "nothing-at-stake." It includes the possibility of simultaneous signing of several competing forks by validators to maximize their block output or the chance of double-spending by the past owners of the stake that do not have current ownership of the currency.

Example: Peercoin.
PoW vs. PoS
PoS and PoW have similar purposes, but the process to reach them is slightly different. The main distinction between PoW and PoS is that PoW requires burning an external resource (mining hardware). The ways to validate transactions and achieve the consensus are also contrasting.
Delegated Proof-of-Stake (DPoS)
DPoS is a method of securing a network with attempts to solve the problems of both PoW and PoS systems. DPoS allows voting to resolve consensus issues in a fair and democratic way. All network parameters can be adjusted by elected delegates. Thus, the model ensures deterministic selection of block producers and allows instant confirmation of transactions. This consensus protocol is designed to offset the negative effects of centralization and protect all participants against unwanted regulatory interference.

Example: BitShares.
Proof-of-Activity (PoA)
PoA is a hybrid protocol that combines both PoW and PoS. In PoA miners have to solve a cryptographic puzzle. Mined blocks do not contain any transactions, so the winning block will only include a header and the miner's reward address. The winning block is signed by a random group of validators. This block is considered to be approved after all validators sign it. The chance of becoming a validator increases for those who have more coins in the system. PoA combines drawbacks of both PoW and PoS algorithms since too much energy is required for block mining. There is also a possibility of double signing by validators.

Example: Digital Note.
Proof-of-Burn (PoB)
PoB protocol ensures burning coins by sending them to the address where they become irrevocable. Burning coins allows earning the privilege to mine on the system based on a random selection process. Depending on PoB implementation, miners may burn either the native currency or other cryptocurrencies. The more coins they burn, the better chance they have to be selected to mine the next block. The weak point of PoB protocol is that it wastes a lot of resources as the more coins the user burns, the more mining power he or she gets.

Example: Slimcoin.
Proof-of-Capacity (PoC)
Proof-of-capacity is a protocol which requires from miners to provide space on a hard drive. This algorithm generates large datasets that are stored on the miners' hard drives. The more space is provided by the miner, the better is the chance of mining the next block and earning the block reward. Proof-of-storage and proof-of-space are one of the variations of PoC. However, Proof-of-capacity has the similar drawback as PoS called "nothing-at-stake."

Example: Burstcoin.

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