Proof-of-Work and Proof-of-Stake consensus algorithms in crypto currencies: essence, principles, comparison, prospects. Consequences of Ethereum transition from PoW to PoS
One of the most anticipated Ethereum updates in 2018-2019 is the final part called Serenity, which will lead to a change in the consensus algorithm from Proof-of-Work to Proof-of-Stake. For miners, this will mean the end of classic mining (proof of work) and the transition to receiving interest for the very possession of the coin (proof of stake). There is no definitive answer to whether this is good or bad. Although the PoS algorithm is considered more interesting from a technical point of view, it can lead to centralization and pricing problem. What are PoW and PoS: essence, differences, advantages and disadvantages – you will find the answers in this review.
PoW or PoS: brief overview of consensus algorithms
In the spring of 2017, the developers of Ethereum unveiled some details of the future Casper protocol. The release of the first part took place in November 2017. One of the main proposed changes to the protocol will be the transition from the Proof-of-Work to Proof-of-Stake consensus algorithm. This is most relevant for those engaged in mining. Although the second part of the protocol may be postponed again, we need to understand what the difference is between these algorithms and what changes the miners should expect. But before we do this, let us discuss the consensus algorithms and their types
What is consensus algorithm
In any network based on blockchain, two types of messages are transmitted: transactions (money transfers) and blocks that consist of these transactions. In order to make a transaction, the user does not need any consent of other participants of the system, it is sufficient only to know the key (the password that identifies the owner of the wallet). The blocks, whose order is confirmed by consensus in the transaction log, are a different matter. The problem with the network is that simultaneous resending of the transaction is possible between the nodes.
An example of a situation called double spending. John has 1 bitcoin, which he wants to send, but he sends it simultaneously to Alexander and Kelly. And if Alexander and Kelly do not coordinate these transactions with each other (i.e. they do not know that a simultaneous transfer was made), then a network problem arises. This is why all participants of the network coordinate the transaction logs, which will make Oleg's operations successful, and the second will be recognized as incorrect.
The essence of the problem is clear, but solving it technically is a difficult issue.
Byzantine consensus
Byzantine consensus is a common definition of the task of interaction of several network participants among themselves, which are located remotely and receiving a task from a single center. In this case, some participants in the network, including the center itself, may be intruders. In other words, the Byzantine protocol algorithm must provide communication between remote network participants and eliminate fraudulent transactions, i.e. ensure transaction security.
The idea of the Byzantine consensus appeared in the 80s of the last century. It goes as follows (you'll need some imagination). Byzantium on the eve of the battle. The Byzantine army, for example, consists of 4 legions, which are located at a distance from each other. At a certain time, each of the legions' generals receives orders from the guiding center to attack or retreat. The situation develops as follows:
● If all legions attack - they win;
● If all legions retreat - they save the people (also a successful outcome);
● If some legions attack and some retreat - the army is defeated.
The task is clear, but who can guarantee that there are no traitors among the generals who will give a different order? And who can guarantee that the commander-in-chief himself will not turn out to be a traitor who sent different orders to different generals? Conclusion: generals must exchange information with each other in order to eliminate false data. More precisely, they must exchange information about the number of warriors in the legions loyal to Byzantium, and draw conclusions about the number of warriors in the traitor legions. The problem assumes that with the number of generals being N, N-1 may turn out to be traitors.
The consensus principle is that, as a result of the exchange of information, all the faithful generalscome to the same decision, ignoring the data from the traitor general. Let's return to the example. The information exchange principle is as follows:
● each general sends information about the number of warriors in his legion to three other generals. And the traitor sends each general different numbers for disinformation. This is similar tospam, DDoS-attacks, and false transactions in crypto currencies;
● each general generates a block in which he indicates all four numbers received, indicating who exactly they were received from and sends this block to other generals;
● As a result, each general has 4 blocks with figures on the number of warriors in each legion. And it is logical that for three generals the numbers will be the same in all three blocks and only one will have discrepancies.
Thus, loyal generals come to an agreement, excluding the opinion of the traitor. The example is simplified, but it clearly demonstrates how network participants come to a single solution by excluding false data.
Proof-of-Work consensus
The Byzantine consensus has a serious problem - the generals know who the information is coming from. It means there is no anonymity, which is essential for crypto currencies. In the 1990s, a version of the consensus algorithm that preserves anonymity was proposed. We eill not go into it now, but it comes down to the fact that all calculations (analysis of information transferred to each other on the network) are made by the computer. In order to join the network, each user must perform a specific task (perform a calculation that is impossible for a person, but possible for a computer), proving that it is a real user.
The Proof-of-Work algorithm itself is the calculations that the computer conducts at the moment of mining by simultaneously blocking false chains and finding the correct transactions.
Distinctive features of Proof-of-Work:
- consensus solves the main problem of anonymous networks - Sybilla attacks. This is a situation where an attacker tries to surround a victim's node, i.e. get access to all the nodes that are nearby. After taking over the information input and output channels, they can transmit false data to the victim. In BTC built on the PoW algorithm, this possibility is neutralized as the victim node selects other nodes randomly, excluding the option of surrounding the victim;
- proof is not transferred to other blocks, i.e. it is impossible to steal it from each other (the proof is the result of calculations on which energy is spent);
- proof cannot be obtained in advance. In each new block there is a link to the previous block, therefore it is possible to calculate each new proof only with the appearance of a new block;
- PoW ensures the fairness of the distribution of reward for a block in accordance with the computer power. If the power (hashrate) is 5% of the network, then the miner creates 5% of the block with the computational process and receives 5% of the reward;
- real resources (electricity) are spent on obtaining proof, therefore the miners are losing the incentive to somehow influence the nodes and transmit false information - there is a risk of losing the invested money.
Proof-of-Stake consensus
The more miners appear in the network, and the more crypto currency is mines, the more power is needed for computational operations. However, there is no benefit from these calculations, except perhaps ensuring the security and anonymity of the network. Attempts to put the energy in the right direction occurred at the early stages of Ripple, where the miners performed calculations necessary for different scientific areas (medicine, robotics, etc.), and for this they received an award from the developers. But this did not work out.
The second problem of mining is unlimited emissions. If Bitcoin has this restriction (and BTC mining is already becoming less profitable as the rewards per block decrease), some coins (for example Ethereum) have no restrictions. And any unrestricted emission is fraught with depreciation.
The Proof-of-Stake consensus algorithm denies the concept of emission. If in the previous algorithm the miner had to prove their presence in the system by calculation, here it is sufficient for the minor to have the crypto currency, i.e. a stake in the common system on which interest is charged. Mining as we know it is replaced by interest.
Other proof algorithms
Most of the existing crypto currencies use PoW and PoS Consensus algorithms. The coins based on PoS are considered more technically advanced. However there are other data protection mechanisms that, although very similar to PoW and PoS, have their own peculiarities:
● Proof-of-Activity - an original symbyosis of PoW and PoS;
● Delegated Proof-of-Stake is a PoS analogue, but with the elements of delegation of votes. Each participant of the system votes for a witness to protect their computer network. The impact on voting is determined by how many tokens a person has (the more tokens, the more influence on the network). This algorithm is used EOS, Lisk, BitShares;
● Proof-of-Burn. A model in which the miner sends coins to an address from which it cannot be reliably withdrawn (burning a coin). Thus, the miner gets the opportunity of eternal mining, the right to which is drawn in the form of a lottery among the owners of burnt coins;
● Proof-of-Capacity. A model based on the popular idea of "disk space as resource". To join the mining process, you need to provide a part of your computer's disk space;
● Proof-of-Storage. A similar version of the previous algorithm with a small difference: the allocated space is included in the shared cloud storage.
The logic of these algorithms is difficult to explain. After all, the purpose of the algorithm is to provide maximum network security with minimal power consumption, at which the PoS is quite successful. Other varieties of algorithms look like attempts to come up with something new and original, but it may not be as effective. These algorithms are also behind PoW and PoS in maturity.
Consequences of Ethereum transition from PoW to PoS
Now let us return to the question which we started this review with: what can the miners expect from the upcoming changes? There is as yet no exact transition plan, and the transition is still being postponed. According to the road map, the beginning of the transition is planned for the 4th stage of Metropolis (Serenity). The transition will be smooth: first 1 transaction of 100 will be checked according to the PoS algorithm, then their number will increase.
The miners themselves do not yet fully understand the consequences the Ethereum transition to the PoS algorithm will have. The criticism toward the algorithm is in relation to the pricing of the crypto currency. If, under the Proof-of-Work algorithm, the minimum cost of a coin is the amount of energy expended on its production, then with Proof-of-Stake, the price of the coin is determined by speculators. If the project is not interesting, the coin price will drop to zero. On the other hand, more coins go to the ICO immediately with the PoS algorithm.
The question remains concerning the amount of commission for the ownership of coins and its comparability with the yield of other instruments. There is an opinion that it will not be high, and therefore the popularity of Ethereum may be affected due to high risks. In this regard, Ethereum Classic has better prospects.
Possible changes:
● Drawdown in the value. As the practice of such changes shows, there is no price increase. Vice versa, interest of miners in the coin is lost, after which a drawdown occurs;
● Change of the mining object. The mining of Ethereum is over. And in order to continue to use your capacities, you will have to choose another coin or try to join a crypto currency project that offers a fee for renting computing capacities (for example, Golem);
● Change in the alignment of forces. Proof-of-stake can lead to the fact that large investors will be able to gather most of the crypto currency, which effectively destroys the advantage of decentralization.
As of now, the concept of the transition to PoS raises more questions than answers. Analysts agree that the transition of Ethereum to a new algorithm (read more here) will have a positive effect, but no one can predict the exact consequences. Crypto currency is a new tool, and all we can do is gain experience the hard way.
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