What You Need To Know To Understand Blockchain Technology Part 10

Proof of work and proof of stake.


The main drawback of the proof-of-work consensus algorithm, not just on the Bitcoin network but on other cryptocurrency networks, too, is that essentially miners are spending a lot of money on hardware and electricity to play a lottery that makes a proof-of-work network secure and that it.

The computations that miners are performing are not contributing to any scientific projects or social good in any other way than keeping a blockchain network secure.


Proof-of-work algorithms at work

However, the proof-of-work algorithm obviously has a lot of advantages because the network has been working since 2009, has survived all kinds of attacks and forks, yet is still the biggest by market capitalization.

With the way proof-of-work keeps changing the difficulty and the amount of “work” that miners have to do to create blocks of the blockchain, the network is constantly adjusting itself to be processing transactions at somewhat of a constant speed.

The speed of block creation is important for transactions that are occurring on the network because the Bitcoin network deems a transaction as valid after six confirmations. A confirmation is an inclusion of a transaction into a block of the blockchain, either via a direct inclusion or via a hash. This is how confirmations work on many blockchain networks, not just on the Bitcoin network. When a transaction becomes a part of a block on the blockchain, it gets one confirmation. The next block of a blockchain contains the hash for the previous block, which is why when a network adds another block, the transaction gets a second confirmation.


Transaction confirmations on blockchain networks

The rule about transactions on blockchains is very simple: when a transaction doesn’t have any confirmations, there is always a risk of double spending. The more confirmations a transaction has, the less the risk of users trying to send the same money to several people. At the same time, all merchants and payment providers are free to create their own rules as to how many confirmations they require for their systems to treat transactions as valid.

On the Bitcoin network, because the network aims to create a block of the blockchain every 10 minutes, six confirmations would on average take an hour. This being said, there is a difference between transactions being confirmed and money becoming spendable on blockchain networks and the protocol of the network accepting a transaction. The original rule in the Bitcoin protocol was that the protocol would consider transactions to be valid after one hundred transactions.


Proof-of-stake algorithms

Proof-of-stake is a blockchain consensus algorithm works very differently from proof-of-stake. In proof-of-stake, certain members of a blockchain network get to create blocks of the blockchain depending on their stake in the network. Typically, this stake is financial, meaning that the members get a chance to create a block and the probability of that chance is equal to the stake on the network. Here’s a very simple example of how this works. Let’s say there is a blockchain network that has ten coins and four members. Member A has 1 coin, member B has 2 coins, member C has 3 coins and member D has 4 coins. If the network is running on a proof-of-stake algorithm, member A will get a 10% chance of winning the right to create a block (1 coin out of 10 is 10%), member B will get a 20% chance (2 coins out of 10 are 20%), member C will get a 30% chance (3 coins out of 10 are 30%), and member D will get a 40% chance (4 coins out of 10 is 40%).

For computer software, adjusting the chances of winning is a trivial task. If one of the members or more of the members choose to give away or sell their coins, then they stop participating in the drawing and the probabilities would change in favor of the members that still hold the coins.