If you’re relatively new to the world of cryptocurrencies, then you may have heard of Proof of Stake, Proof of Work, or Proof of Authority.
But what is Proof of Stake, Proof of Work, and Proof of Authority?
Simply put, Proof of Stake, Proof of Work, and Proof of Authority are protocols used to achieve consensus, agreement, and validation of a transaction or transactions on a blockchain.
However, it’s likely that some of these terms are still unknown to you, and since it’s very important to know what each one means in order to better decide which crypto asset to invest in, we’ll analyze in detail the different consensus mechanisms available today:
Proof of Work, Proof of Stake, and Proof of Authority.
What is Proof of Work?
Proof of Work (PoW) consists of a series of expensive computer calculations that must be performed to create a new transactions record (block) in a decentralized database called, blockchain.
This is known as “mining,” and it has two purposes:
- Verify the legitimacy of a transaction, avoiding double spending.
- Create new cryptocurrencies and reward miners for their verification work.
This system works in the form of a computer algorithm and allows the existence of a trustless distributed consensus.
This means that if you want to send and/or receive money from another person, you don’t need to trust the service of any intermediary who verifies the legitimacy of the transactions – be it a bank, Visa or PayPal.
With Bitcoin and other cryptocurrencies, everyone has a copy of the main register called blockchain, so anyone can verify the records of the operations.
How does Proof of Work work?
When someone performs a transaction on the blockchain, the network – specifically the mining nodes – must perform a series of operations:
- Organize each transaction together with others in what is known as a “block.”
- Solve a mathematical problem (Proof of Work) to verify that these transactions are legitimate.
- Give a reward to the first miner who solves the mathematical problem of a specific block.
- Store each verified block in the public database.
What the blockchain does through the PoW algorithm, is trying to detect possible manipulations in the blocks – by malicious users – by means of a hash, a long row of unique and unalterable numbers that is the proof of the work accomplished.
What work?
That each transaction is unique and was correctly validated by most of the nodes that make up the blockchain.
If any transaction had been manipulated at some point in the chain, a completely different hash would be generated, causing a ripple effect throughout the chain, producing a different hash on all subsequent transactions.
The result would be an unrecognizable blockchain that is not in consensus with the public and distributed version that most nodes have, making that chain rejected by all.
Some Proof of Work coins
Bitcoin (BTC)
Created in 2008 by the mysterious Satoshi Nakamoto, it’s the most famous cryptocurrency. Its value hasn’t stopped growing.
Ethereum (ETH)
Decentralized platform for the creation of smart contracts and decentralized applications (dApps) that has its own currency, Ether.
Litecoin (LTC)
It’s a currency very similar to Bitcoin, but its platform is faster when making transactions.
Pros and cons of Proof of Work
Advantages of Proof of Work
- Eliminates the figure of a trusted third party, which allows decentralization
- It makes hacking the blockchain extremely difficult due to the large amount of computing power required to do so
Disadvantages of Proof of Work
- High energy consumption – as much as a small country
- The large amount of hardware resources needed today to mine centralizes the mining power in a few privileged groups
- If 51% of the nodes agree, they could force changes in the network.
- Slowness in processing transactions
- Poor scalability
Is Proof of Work halal?
Is Proof of Work halal? Yes. Proof of Work is halal. Even though there has been debate among some scholars that the Bitcoin network PoW protocol utilizes high energy consumption, we can still say that the technology and function of the Proof of Work protocol is halal as the miner is providing a service by securing the blockchain network.
And in regard to the high energy consumption argument of Bitcoin’s Proof of Work protocol made by some scholars, the counterargument is that the banking and gold industries consume more energy than the Bitcoin network yet we do not have a blanket ruling saying that the entire banking and gold industry is haram.
Here is a great article that touches on this subject, Is Cryptocurrency Mining Halal? UPDATE.
What is Proof of Stake?
As with Proof of Work, Proof of Stake (PoS) is a consensus algorithm designed to reach the same goal: achieving network consensus to validate transactions and avoid double-spending. But PoS does this in a different way.
In a PoS-based system, there are also miners (validators), but they don’t compete with each other through the computing power of their computers; in PoS, the algorithm assigns computing power based on the percentage of cryptocurrencies that each miner retains on the network.
This means that the higher the percentage of cryptocurrencies that the miner owns, the higher the percentage that they can extract from a block.
Of course, the validators will be rewarded for their participation in the process, always based on the percentage of participation they have.
If a validator tries to cheat the system, it’ll punish them by taking away a high percentage of their cryptocurrencies and even ban them from the network. In this way, validators are forced to work honestly for the benefit of the community and their own.
Some Proof of Stake coins
Ethereum 2.0 (ETH)
Although Ethereum still uses a PoW mechanism today, the next big update (Eth 2.0), will remove PoW to implement PoS.
Cardano (ADA)
Cardano is a platform very similar to Ethereum in its basic premises, but with important improvements to blockchain technology, incorporating PoS natively.
Tron (TRX)
Another of the most important cryptocurrencies that incorporate smart contracts and dApps. With Tron, you can also earn staking rewards.
Pros and cons of Proof of Stake
Advantages of Proof of Stake
- Miners don’t need expensive equipment to perform large amounts of complex calculations, which significantly reduces energy, costs, and time in mining.
- In order for an attacker to gain control of the network, he’d need to obtain 51% of all assets on it, for which he’d have to steal from every owner on the network.
- To be part of mining with PoS, you only need an internet connection, a computer, and a stake other than 0 in the cryptocurrency. This allows many more people to participate in the process.
- A blockchain with PoS can process hundreds of thousands of transactions per second, compared to the hundreds of transactions per second that PoW networks can process.
Disadvantages of Proof of Stake
- A rich person could get to centralize the control of a PoS network, since the more assets she can buy, the more control she’ll have over the system. However, this is still up for debate.
Is Proof of Stake halal?
Is Proof of Stake halal? Yes. Proof of Stake is halal. Proof of Stake (PoS) is simply a protocol used to validate transactions and secure a blockchain network by “locking up” or “staking” cryptocurrency on the blockchain for a period of time and then earning cryptocurrency as a reward for staking. This is halal since you are providing a service to secure the blockchain network.
What is Proof of Authority?
Proof of Authority (PoA) is a relatively new consensus protocol used on the blockchain. This protocol is based on the “reputation” factor of the people or entities chosen to participate in a blockchain.
PoA is a practical and efficient solution especially for private blockchains since it makes use of the weight of real identities for the validation of blocks within a blockchain.
In short, here the miners or validators offer their identity and reputation as a guarantee of transparency.
This feature limits the number of validators that can be part of the blockchain, but at the same time, it gives high scalability and speed to the network, not to mention the high level of security.
How does Proof of Authority work?
The first condition in PoA is that validators must be chosen randomly. This is done through a voting system run by other nodes that have prior authorization.
This also serves to prevent the inclusion of malicious nodes that could affect the operation of the system.
Since the identity of a person or institution can be very valuable elements for each entity, each validator must reveal who they are voluntary, in order to establish responsibilities in the operation of the network.
In this way, any attempt to carry out a malicious act against the integrity of the network will fall on that person or institution, something that would undoubtedly damage their reputation and could make them lose a lot of money.
At the same time, and to further increase security and limit the level of damage that a malicious entity can cause, each time a validator has their corresponding turn, they’ll only be able to sign one block at a time of a whole consecutive series.
In addition to this, the system must have the ability to remove from the network any validator that acts dishonestly.
Basically, the PoA consensus renounces the basic premise of decentralization and opts for a model based on trust.
Some Proof of Authority coins
VeChain
VeChain is a blockchain platform that specializes in enterprise supply chain management. VeChain utilizes PoA based on their 101 Authority Master Nodes.
Pros and cons of Proof of Authority
Advantages of Proof of Authority
- It’s a practical and efficient solution for private blockchains
- Allows high scalability and speed of operation on the network
- High level of security through access control
- As it doesn’t require a mining system as in the case of PoW, it’s a model pretty friendly with the environment
Disadvantages of Proof of Authority
- It’s a centralized and distributed model with only a few participants controlling the network
- Validators’ identities are exposed, leaving them vulnerable to malicious third parties
- Facilitates censorship and blocking of any “undesirable” entity
- Any user with malicious intent could be added to the list of signers, compromising the network
Is Proof of Authority halal?
Is Proof of Authority halal? Yes. Proof of Authority is halal. Proof of Authority (PoA) is simply a consensus protocol where the blockchain is secured by the reputation of people or entities who participate on the blockchain. This is halal.
Which is best, Proof of Stake, Proof of Work, or Proof of Authority?
Each consensus mechanism we have mentioned has its advantages and disadvantages, as for which is best, this really depends on factors needed by the organization such as:
- The level and type of security needed for the network
- If the network will be public or private
- The ability to easily scale with the growth of the network
- The priority and desire of the organization to be more eco-friendly
- Which model can offer more incentives to users of the platform
Proof of Work presents a high-security protocol for crypto such as Bitcoin, and the best example is that in its more than ten years of existence, the Bitcoin network has never been successfully attacked. However, the protocol has the problems of low scalability and resource consumption.
On the other hand, the Proof of Stake consensus solves several of the problems that PoW presents, especially in terms of scalability and sustainability, but it’s a technology just beginning to be used and could still present flaws.
For its part, the PoA mechanism presents a certain degree of balance between security, scalability, and efficiency, only that it’s a network not suitable to be used in large public environments.
Due to the problem of climate change, many experts assure that PoW will die in a few years and that the future will remain in the hands of PoS, leaving PoA only for use in some networks for private use. This is still up for debate.
Conclusion
The three security mechanisms that we’ve talked about, are the main players in the crypto ecosystem today. While one is committed to power and safety, the other two are committed to efficiency.
However, no technology is perfect. Although today Proof of Work algorithms are winning the race, tomorrow this could change.
Several large PoS-based projects are very close to being ready for use, such is the case of Ethereum 2.0 and Cardano. A great battle between these technologies may start soon, but it’ll be the users who will determine who will win the battle. The future will tell.
And in the end, Allah knows best.|
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