Proof of Work: The Better Cryptocurrency Model
The two key mechanisms for updating and maintaining the blockchain are Proof of Work( POW) and Proof of Stake (POS). Ethereum the second biggest cryptocurrency by market capitalization has recently switched from POW to POS, with its developer touting its efficiency and sustainability.
Proof of Work: Bitcoin Model
Bitcoin operates on a POW system, a decentralized trustless network that relies on miners and nodes in the network with dedicated hardware and software. The first miner solves the problem and receives a block reward in newly issued bitcoins and transaction fees. This incentivizes miners to validate transactions and secure the blockchain. This effort creates a natural barrier to entry and prevents a single entity from easily taking control of the blockchain.
Proof of Stake: Ethereum Model
In POS, validators, rather than miners are responsible for constructing the next block. Owners of the cryptocurrency can stake their tokens and become eligible validators. The security of the chain depends on the proportion of honest validators in the committee. Rational validators must weight the cost of validating block legitimacy against potential rewards and penalties.
Nash Equilibrium in Blockchain Mechanisms
Both POW and POS mechanisms involve decision-making based off of the Nash Equilibrium. POW has a zero-profit equilibrium, where miners enter and existed the game based on expected profits. While POS, validators decide whether to validate a block by maximizing payoffs.
Why is POW better than POS?
POW is inherently resistant to a Sybil attack while this is not the case for POS. A sybil attack happens in digital networks where a single entity controls mutiple nodes to comprise the networks. This can happen in Ethereum due the possibility that a single wealthy entity has alot of ethereum as a result can create alot of validators.
Energy Concerns and the Path to Sustainability
One of the most cited criticisms of POW is its energy consumption. While its true the Bitcoin mining consumes a significant amount of energy, this ignores the current efforts towards sustainability. Many mining operations are increasingly powered by renewable energy sources. Furthermore, Bitcoin mining has accelerated renewable technology as there is need for cheaper energy. Moreover, the energy used in POW can be seen as the cost of maintaining a secure, decentralized and trustless financial system.
Future of POW
While alternative methods like POS are gaining popularity, POW remains the primary player. Its proven track record makes it the number one choice when security and trust are priority. The ongoing innovations in renewable energy and mining technologies enhance the sustainability and efficiency of POW systems.