Paycrypto: Proof-Of-Stake Vs Proof-Of-Work

Turkish Journal of Physiotherapy and Rehabilitation; 32(3) ISSN 2651-4451 | e-ISSN 2651-446X

PAYCRYPTO: PROOF-OF-STAKE VS PROOF-OF-WORK

Ms. S Durga Devi1, Mrs. G K Sandhia2 1SRM Institute of Science and Technology, [email protected] 2SRM Institute of Science and Technology, [email protected]

ABSTRACT

Proof-of-work has been the mechanism used to validate transactions on a blockchain for a long period of time. The security of the chain however lies on the computational complexity of the puzzle and thus the energy consumption to solve the problem. Proof-of-stake is an alternate mechanism that could reward participants to deposit their coins. This stake is used as a factor to validate transactions thus finding a energy viable way to approve transactions without compromising security levels of the chain

I. INTRODUCTION Since the conception of cryptocurrencies(Bitcoin 2008), proof-of-work has been the primary mechanism used to achieve consensus on blockchain networks. The idea of proof-of-work has been the key factor in deciding the security and minting model of Bitcoin.

In recent times, due to the inception of an idea called coinage, a different mechanism called proof-of-stake has been proposed. Proof-of-stake since then, has been formalized to build a secure model of peer-to-peer cryptocurrency and minting process. The proof-of-stake concept tries to find a viable mechanism for the future of cryptocurrencies where security of a chain does not depend upon on energy consumption

II. BACKGROUND Exchange of money on the internet relies entirely around financial institutions acting as trusted third parties to facilitate transactions. The model even though seems fit, is still a trust based model. This existence of third party implies increased transaction costs, minimum limit on the amount transacted and rejecting smaller, casual transactions. A limited amount of fraud is acknowledged as inevitable. These expenses and uncertainties can be evaded using physical currencies but no model, until blockchain, existed to execute transactions over the internet without a trusted party.

III. TRANSACTIONS A digital coin is basically a sequence of signatures. Every single holder transfers their coin to another by signing a hash of the earlier transaction and the public key of the receiver and appending this to the tail of the digital coin.

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Turkish Journal of Physiotherapy and Rehabilitation; 32(3) ISSN 2651-4451 | e-ISSN 2651-446X

IV. OVERVIEW OF THE BLOCKCHAIN MODEL Transactions and Blocks are made and appended to a blockchain once 51% of all the participants of a blockchain agree that the transactions in the block are correct. These agreement rules are called consensus guidelines. The term consensus is derived from the word consent. Consensus protocols govern the nodes to confirm, approve and settle the buying and selling and blocks to manage a publicly agreed chain among all the nodes. If an extreme conflict ever happens, it creates a hard fork and divides the chain into two different branches. However, if there are concurrent blocks created by different peers alongside each other then the longest chain will be mutually agreed amongst the chain participants and will be used to append future blocks.

Mining is a concept that is one of the most important ideas of the blockchain model. Fiat currencies are generated by the government regulated banks by publishing them. But digital coins are generated by mining. Miners are needed for building and supporting the blocks and block chain. Mining process governs the production and price rise of the coins.

Consensus rules The rules that help a node decide whether a transaction is correct and thus proceeding to create a block are called consensus rules. Every miner follows these rules to validate the transactions in their pool and append to the blockchain.

Traditionally, the concept of proof-of-work defined these consensus rules. Here Miners mine blocks to validate transactions and obtain rewards. In recent times, proof-of-stake has been preferred due to the computational efficiency it provides without compromising the security of the chain. Here Validators, mint/forge blocks to validate transactions and obtain rewards.

Proof-of-work Mining means production of a unique block by deciding on a cryptographic hash for the block. For proof of work, the block hash must adhere to certain rules to be considered accurate amongst the participants of the chain and thus be added to the chain.

The idea behind this mechanism is to have peers figure out a computationally taxing problem prior to appending a new block to the chain. The peer who first finds a solution to the problem, mines the unique block and sends the confirmation to the fellow participants of the network who can corroborate its accuracy with the data on the block. This is due to the fact that the hash values of newer blocks on a blockchain rely on the earlier hash values in the chain. If a malicious entity tries to alter a single block in the chain, that would alter the blockhash and make the entire blockchain invalid.

In this mechanism, we select nodes to become the validator of a transaction based on the proportion of their computational power. Higher the computational power, faster they can solve the complex Hash puzzle and thus obtain the rewards.

Hash Puzzles To create a block, the node that proposes the block is required to find a nonce such that

H(nonce | previous hash | txn | txn | ….| txn) is very small and falls into a small target space. Here H denotes a hash function(currently used SHA 256). Txn denotes the transaction data.

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Turkish Journal of Physiotherapy and Rehabilitation; 32(3) ISSN 2651-4451 | e-ISSN 2651-446X

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The purpose of a nonce is to make it moderately hard to find a nonce that satisfies required conditions. If the hash function is secure then the only way to solve this hash puzzle(i.e.., find the nonce) is to try enough nonces until success.

This is the computational problem a node is required to solve to produce a block in the proof-of-work mechanism.

Proof-of-stake In this mechanism, the peers who add a block to the chain are called validators and the process is called minting/forging. A random participant is chosen from the chain based on their coinage value and is granted access to add the next block to the blockchain. The rest of the peers then verify the correctness of the block. If the block is accurate the validator obtains the reward and if the block is wrongly validated, the validator loses all/part of his stake.

“Coin age is a way to display how long a coin has been in one's possession in order to prioritize it for use in transactions or mining. It is calculated by multiplying the number of coins by the average amount of time in blocks they have been possessed.”[8]

Using a stake-based validator selection approach, a peer’s probability to be chosen as a validator no longer relies on his/her computational capacity, and thus when PoS mechanism is used the energy consumption is greatly decreased when compared to PoW. The block creation and confirmation pace is kept at comparatively consistent rate by the PoW networks to enforce security because there are a lot of different blocks proposed by miners. In comparison, only one block is created by the chosen participant of the chain in the PoS method, thus the block creation and transaction validation rates are very fast.

In the PoS approach, the chosen validator verifies the correctness of the transaction and transmits the hash through the network. Other nodes approve of the verification and when 51% of the nodes accept the transaction, the block is added to the chain.

The use of coinage assures that honest nodes are preferred to be chosen as the validator since holding stake over a long period of time implies that the node has not lost stake by wrongly approving transactions. As long as the reward for approving the transaction does not exceed the staked value, a node is forced to perform honest verifications.

Proof-of-stake over Proof-of-work Proof-of-work helped implement the idea of blockchain in the real world, however the concept of PoW means that the digital coin is reliant on energy usage, thus involving serious cost upkeep in the working of such mechanisms, which is paid by the users via a mix of coin price increase and gas fees. As the coin production rate slows in the Bitcoin chain, one day it could bring stress on increasing transaction/gas fees to maintain a certain level of security.

Do we really need humongous levels of energy usage to have a decentralized digital coin? Therefore it is crucial, both theoretically and technically, to find a way to maintain these networks such that the security of peer-to-peer digital coins do not have to rely on high energy usage. www.turkjphysiotherrehabil.org 3261

Turkish Journal of Physiotherapy and Rehabilitation; 32(3) ISSN 2651-4451 | e-ISSN 2651-446X

V. COMPLEXITY OF POW The hash is difficult to compute. About 10^20 hashes(and increasing) need to be computed to find the nonce and produce a block. Also not all participants of the chain participate in the approval of transactions. With the increase in complexity of problems, the number of miners reduces and thus the probability of the network being taken over by malicious attackers increase.

Proof of stake method does not depend on the huge computation power thus less energy consumption. It performs based on the asset deposited into the chain. The more cryptocurrency a node deposits, the higher probability it gets to be chosen as the next validator to put the next block on the chain and get the reward.

VI. CONCLUSION This paper provides an analysis of the consensus protocols, the heart of a blockchain network. An overview of the proof-of-work mechanism and proof-of-stake mechanism and the advantages of PoS over PoW. This paper attempts to explain that preserving an acceptable ratio between the rewards for creation of new blocks and the entire network stakes is important to the decentralization of the network.

It is expected that the proof-of-stake model will evolve to be a more potentially competitive form of peer-to-peer cryptocurrency over proof-of-work mechanisms due to the withdrawal of reliance on energy usage, therefore attaining lesser inflation/lesser gas fees at reasonable network security levels.

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