Enter the Blockchain — Pocket Guide for Newcomers by Mickey Maler
Episode 1 — PoW and PoS Algorithms
A foreword
You are about to learn how Blockchain works. It won’t be an easy journey,
but we will handle that together. Article after article as a block after a block we will accumulate our chain of know-how and philosophy behinds it. Welcome to Mick Academy, and tighten your seatbelts, my friends.
“I would like you to consider the following, using a very simple analogy for a BlockChain, the invention of the wheel, initially uses were very limited, however eventually it permeated every aspect of the industrial revolution! Now I am not suggesting that Blockchain is significant as the invention of the wheel, that honour belongs to the internet, the blockchain may be likened to the pneumatic tyre, just another step in the evolution of the wheel, we at this stage have no idea how significant it really is at this point in time, a lot will depend on what can be built on or around this technology only time will tell!”
Wayne Bruyns
The first thing we need to talk about before we will take another step into Blockchain theory is an element known as a PoW.
PoW means Proof of Work, and that’s the area where mining (a process which makes the heart of Blockchain to beat) does its KUNG-FU and its also a backbone of the main Cryptocurrency, Bitcoin, as well as many other blockchains. Miners are people who run the ASIC machines or powerful computer systems with tons of powerful hardware (CPUs, GPUs), which they use for solving difficult mathematical challenges (mining) and by doing this, they allow a user from one side of the world to send a transaction to another person from the opposite side of the planet in minutes. For every transaction you will make, you need to incentivize the miners to process your transaction by giving something (a fee) to the miners. Without miners, there would be no Blockchain at all, but let’s talk about miners later.
PoW rests on the popular Practical Byzantine Fault-Tolerant algorithm that allows transactions to be safely committed according to the given state (read more about PBFT here). An alternative to PoW is PoS, Proof-of-Stake. There are other consensus protocols such as RAFT, DPoS (Delegated PoS), and Paxos, but we are not going into that slippery slope of comparing them to each other, because they will be seen as standard plumbing over time. One of the drawbacks of the Proof-of-Work algorithm is that it is not environmentally friendly, because it requires large amounts of processing power from specialized machines that generate excessive energy.
PoW’s security assumption is that more than 50% of the hashing power is controlled by honest nodes. With such an assumption, the rule for consensus is that the longest chain will be the canonical one, and thus PoW consensus is also called chain-based consensus.
Easy way how to deliver a principle of PoW is when you imagine a man who wants to send his money from one bank to another bank of his choice.
To make this happen, bank A has to create a communication order, and servers of bank A will take care of this transaction. However, there are no servers like this in the world of cryptocurrencies, and that’s why this issue is taken care of by “miners” who help by providing their hardware computation power to make this transaction happened. The more computation power you grant to BTC/ETH or any different network (blockchain) the more significant reward you obtain over time. Basically, Proof-of-Work is a lottery system where you try to guess a random number as quickly as possible. You simply need to perform these guesses to get your money from point A to point B. That’s why it is called a proof of work, baby.
A strong contender to the PoW will be the OIS algorithm which relies on the concept of virtual mining and token-based voting, a process that does not require the intensity of computer processing as PoW, and one that promises to reach security in a more cost-effective manner (This know-how has been used in the book “Business Blockchain,” and I really recommend you to read it if you want to get some severe blockchain education). Since I mention Ethereum, maybe I should tell you that ETH wants to transcend from PoW to PoS.
Maybe you could hear something about PoS also. PoS, which means Proof of Stake in plain English, has nothing to do with mining using hardware at all (but yeah, there is a way how you can earn some coins even with proof of stake). This principle works like you are the accumulator and your task is to hold as many coins of current cryptocurrency as possible. By doing this, you are rewarded by coin provider because you help with stabilization of currency price, and also you help to create the effect of the decentralization (unless you are Chinese democracy institute and your task is to protect the freedom of all the Chinese people by taking their coin into your custody where it could be safer). This is how MasterNodes work. You hold 10 000 coins in your wallet, and you are obtaining dividends for doing so. PoS is more gentle to our nature and its philosophy works more against potential “51% attacks” and possible “double spend”. The most important thing to emphasize about POS Is the way in which the transactions are validated by the nodes that holders stake. You are holding, staking validating (and taking rewards).
PoS also leads to a MasterNode network, where Node is a copy of the current state of the particular blockchain, but more about MasterNodes later.
As a summary of this article, please bear in my the main ideology of PoW or PoS: “ It is the process to establish the consensus in distributed networks via an algorithm (with potentially malicious actors).”
Consensus means that we all need to agree to a particular state on the blockchain (more about this later) and validate it. When a new block attends to be added into blockchain structure, all miners try to “mine” it first.
Now you can read a short explanation of my expert who is no one else than my friend Dan Lipert.
Dan: The key thing to remember about Proof-of-Work is that you need very powerful processors in order to try and guess the correct solution to the Proof-of-Work puzzle as quickly as possible. Many other miners are doing the same, trying to guess the answer as well, and whoever guesses it first “wins” and gets to choose the transactions that get processed, as well as receives the “block reward” in the form of new cryptocurrency. Why is cryptocurrency so secure? It’s because these systems cost millions of dollars to set up and maintain, and therefore a serious amount of resources is being spent to ensure the security of cryptocurrency ledgers. Proof-of-Stake tries to emulate this by skipping the middleman in the form of hardware manufacturers and go straight to tokenized mining shares. However, many believe that nothing is secure as Proof-of-Work, so do your own research!
Thank you so much for your attention and let’s meet again with another episode about Blockchain technology that comes out next week!
Cheers,
Mick
