Ted Cruz (R-TX) – a crypto-supportive Republican senator – believes a US Central Bank Digital Currency (CBDC) is likely to become a reality. The politician believes both the Federal Reserve and the White House currently want one, and that the Democratic party won’t vote against its issuance. In an interview published by What Bitcoin Did on Friday, Cruz discussed the current political climate surrounding crypto. In general, the senator believes Democrats are more opposed to the industry than Republicans, due…
Today, blockchains serve as the primary drivers of all crypto transaction operations in a digital asset. Its foundation is based on different aspects, such as privacy and transparency.
Within the blockchain network reside nodes that act as the actual transaction validators. The presence of nodes explains the decentralized nature of cryptocurrencies since no single entity owns the system.
Therefore, node operators oversee every transactional process as they also own a copy of the distributed ledger. However, the operators work with different blockchain consensus mechanisms, which may have their fair share of pros and cons.
In essence, the mechanisms use different procedures but aim to achieve one goal; to validate every detail recorded on the public ledger is legitimate. This segment intends to highlight the two main mechanisms available on a crypto network, namely, the Proof of Work and Proof of Stake protocols.
Proof of Stake
The Proof of Stake mechanism, popularly dubbed as PoS, is a consensus procedure whereby users become block validators depending on the number of coins he/she owns. Blocks are the transactional details of the specific digital asset.
Hence, if you own a significant amount of coins, the chances of becoming a node operator are bigger. PoS systems do not participate in creating new digital currencies. Instead, the stakers verify the already minted coins used in a transaction and secure their rewards with the transaction charges.
Since there are no mining procedures in the PoS system, users save massive amounts of energy, making it a greener transaction validation method. On top of that, the transactional procedure processes are completed much faster as it doesn’t need to involve all stakers when verifying transactions.
This aspect alone improves the overall scalability levels of digital currencies adopting the PoS protocol. On the contrary, PoS procedures face various criticisms and end up affecting the reputation of a cryptocurrency.
One instance involves a malicious player buying massive amounts of coins to dominate over other system stakers. The other demerit comes in when the same malicious user verifies illegitimate transactions for personal gains. Before you know it, cases of money laundering and financial losses surface the entire crypto space.
On the bright side, most digital asset platforms decided not to overlook the problem, which led them to introduce a solution. In a bid to combat these challenges, most cryptocurrencies set up a standard provision whereby rogue nodes may lose their staked coins or get banned from any staking activity in the future.
How PoS Differs From the Proof of Work Mechanism (PoS vs PoW)
On a Proof of Work (PoW) platform, validators handling transactions are not stakers but miners. To validate transactions in a PoW system, miners must have heavy equipment capable of sustaining an intensive energy amount.
Unlike PoS, which requires nodes to stake and verify, miners compete to solve complex algorithms and validate the transaction batch. The good news is that the algorithms get easier as time goes by.
Installing modernized hardware and computational power is the only way a miner can solve the mathematical equations because no special skills are required to handle the number-crunching activity.
While PoS remunerates its validators with transactional fees, PoW miners receive rewards with the platform’s native currency. For instance, the first miner who solves the equation correctly in the Bitcoin ecosystem gets a BTC portion as a reward.
PoW-based blockchains are more secure, which makes it very difficult to attack the network. Moreover, staging the cyber-attack can drain the user way more than what he/she could retreat with. Below are some of the cons PoW ecosystems experience
Costly to Start
As mentioned earlier, PoS protocols offer a ‘greener solution’ to users who wish to participate as nodes. On the flip side, operating as a miner is quite expensive since the heavy machinery and energy consumption rates could run your pockets dry.
Going by MIT’s technology review, bitcoin’s annual electricity consumption is equivalent to what the whole of Nigeria uses. Therefore, the amount of power you need will be a lot to handle and uneconomical.
51% of attacks occur when miners take over more than 50% of the network’s hash. The perpetrators carrying out the activity typically aim at pulling off specific schemes such as double spending coins. On most occasions, miners can manipulate the network by deciding which transaction to place in the following blocks.
51% of attacks remain a considerable threat to the blockchain network and the affected cryptocurrency. The reason being, once the threat commences, the public will begin to lose trust in the ecosystem.
What follows is an enormous dump scenario that cripples the digital currency platform. Bitcoin Gold is one example of a virtual currency that went through the 51% attack in the past. The suspects stole $18 million via double-spending the coins.
PoS and PoW mechanisms strive to achieve one objective, which entails confirming all transactions in a blockchain. Additionally, both present the possibility of earning a substantial amount of income.
Both protocols encounter their challenges, which, in extreme cases, sabotages the crypto platform altogether. Luckily, digital assets like Ethereum have an impressive invention like the Casper protocol, which discards dishonest nodes on the platform. PoW procedures have gone through numerous tests on most crypto ecosystems.
However, crypto enthusiasts still feel that costly mining requirements should be addressed. Either way, both mechanisms are stabilizing many digital currencies in terms of their transactional functionalities.