If you have Cryptocurrensy, most of you have heard the words like “PoW” and ”PoS”. Those words are not so difficult, but important to understand the system of Cryptocurrency. It’s better to keep in mind. This time I will explain about PoS and also difference from PoW.
The Ideas You should Know to Understand PoS
PoS is a kind of “mining system”. But to understand it better, you should know about PoW first. It’s because PoS is created to resolve the disadvantages of PoW.
What is PoW?
PoW stands for “Proof of Work”.
PoW is a system which “intentionally” increase the amount of calculation for mining. The reason why it “intentionally” makes the vast amount of calculation is to prevent falsification by applying massive time and electric power to calculate.
As mentioned above, when you generate blocks, you need calculation processing for mining. If the calculation is too easy, the risk of falsification will be higher. To lower this risk, it “wastefully” increases the amount of computation.
Besides, the mechanism of PoW itself is deterrent against falsification. Suppose that Company A owns a lot of high-performance computers and ensures enormous electric power. In this case, Company A may be able to falsify the Blockchain using those computers and electricity.
Even when you try to falsify the Blockchain, PoW requires huge machine power and electric power, so it is more profitable to do honest mining than falsification. From this point of view also, PoW prevents fraudulent acts such as falsification.
Disadvantages of PoW
- It requires enormous amount of electricity.
- The minor with stronger machine power has advantage.
- 51% attack
・Electricity and Machine Power
First of all, enormous amount of calculation is required for PoW, it requires massive electric power. And also it requires high performance computer to do the calculation processing, so minors who own stronger machine power have advantage.
This means a company or an organization which is able to use cheap electricity and possesses many high-performance computers can monopolize the mining market. If an organization has a monopoly on Cryptocurrency, the market will lack liquidity and fairness.
Please imagine the case above, “Company A owns a lot of high-performance computers and ensures enormous electric power.” And suppose that Company A possesses 51% of the calculation amount of the whole world. This means Company A can generate a block in 51% probability by being successful in calculation processing.
Then this company can generate the longest Blockchain (most blocks). If a Blockchain branches in some ways, the “longer” branch is considered as “correct”, so Company A is able to create dishonest records as many as it wants.
As I mentioned above that the idea, “honest mining is better than dishonest activity,” is the root of PoW, but physically dishonest behavior is possible, which is a risk of PoW.
What is PoS?
PoS stands for “Proof of stake.” As I mentioned above, PoW is “Proof of Work”, so the difference is “Work” and “Stake”. This is the essential difference of PoW and PoS, so please keep this in your mind and read through this section.
The Features of PoS
PoS is the system that adopts the elements of “the stockpile of the coin (Cryptocurrency)” and “holding period of the coin” into mining system and make improvement. PoS has roughly 2 patterns.
The first pattern is to define conditions advantageous for mining with “the amount of coin possessed × the number of years holding coins”. In other words, if you possess more coins and hold longer years, your mining will be easier.
The second pattern is to define easiness of mining only by “the amount of coins possessed”, regardless of “the number of years holding coins”. This means the minor who owns more coins are easier to succeed in mining.
・Electricity and Machine Power
PoS is not a system that “the fastest person who did calculation processing” will be the successful minor, like PoW, but it depends on “the number of years holding coins” and “the amount of coins held”. It doesn’t require enormous amount of electricity or high-performance computers. Therefore, PoS can reduce the risk of coin concentration to a certain organization or company.
Although PoS didn’t solve the whole risk of 51% attack, it is less likely to happen with PoS than PoW. This is because of the element, “the amount of coin possession”, first of all there is a high hurdle to “hold a lot of coins”.
The disadvantages of PoS
On the other hand, PoS has some minor disadvantages. The biggest disadvantage could be “low fluidity”. In the case of PoS, if you hold more coins, you’ll get advantage for mining. Adversely, more people may want to keep holding it, without transaction.
If this happens, liquidity will be impaired as coins circulate in the market decrease. Also, if owners holding a lot of coins sell them at once, the price of the coin drops.
Because of this disadvantage of PoS, there are coins that still adopt PoW, instead of adopting PoS.
As we saw in this article, PoS and PoW are not as difficult as they seem to be. Also, depending on which system the coin adopts, the future supply and demand balance of the coin will change. Let’s use it as one of the selecting criteria to choose a Cryptocurrency once you understand those 2 systems.