The process of proof-of-work are the following:
- To add a block to the blockchain, the miners need to solve cryptographic puzzles (a mathematical problem) to create or mine a block.
- Solving cryptographic puzzles takes a lot of computing power and thus requires an enormous amount of energy.
- Once a miner solves the puzzle or creates the block, they then present the block to the network so it will be verified.
- When the block is verified it is added to the blockchain and the miners get their block reward.
The process of proof-of-stake are the following:
- Instead of miners, proof-of-stake has validators. Instead of “mining”, validators “forge” or “mint” blocks. A computer node will randomly choose a validator. However, it is not completely random as the validators will need to deposit some of their coins into the network as a “stake” similar to a security deposit. The size of the stake determines the chance of a validator to be chosen to forge the next block.
- Once chosen, the validators need to check all the transactions within the block. Validating means putting a bet on a block that they discover which they think has a high possibility of being added to the blockchain.
- If the validator added a fraudulent block, they lose the deposit they have, but if the block is valid, the validators will get a reward proportionate to their bets. Note that as long as the stake is higher than the “reward”, the validators can be trusted that they will do their job well.
Arguments why proof-of-stake is better:
- Unlike proof-of-work where everyone mines and is currently using a massive amount of energy to operate, proof-of-work only needs a few validators to validate blocks.
- Proof of stake is more decentralized. In proof of work, there are “mining pools” which are a group of people that team up to increase their chances of mining a new block and thus getting the block reward. This is dangerous because if the biggest mining pool merges together, they can start approving fraudulent transactions as they control the majority of the blockchain network.
- Setting up a node for proof-of-stake is also less expensive than proof-of-work as you don't need expensive equipment to validate blocks. This encourages more people to set up a node, making it more decentralized and secure.
Weaknesses of proof-of-stake:
- Proof of stake needs to be careful about choosing the next validators. It should not be completely random as the amount of stake vs the block reward should be considered.
- Proof of stake favors the rich people. The higher “stakes” or bet a person has, the higher chances this person will be chosen to be the next validator and thus getting more rewards and increasing further chances to be chosen to be the next validator.
- A validator that is chosen can potentially not show up and do their job.
There is a number of proposals to address these weaknesses, but a lot of research is needed to understand all of the risks of the proof-of-stake and how to mitigate them.
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