Proof of Work vs. Proof of Stake: Beginner's Guide!! 👨‍🏫

cryptocurrencies owe their successes to the financial incentives which underlie their various consensus mechanisms most crypto consensus mechanisms fall into the categories proof of work or proof of stake now over the last few months there's been a lot of debate over the efficiency security and sustainability of these two consensus mechanisms some would lead you to believe that this debate has been settled but it turns out that proof of work and proof of stake each have their own benefits and drawbacks today i'm going to take a close look at these consensus mechanisms and how they work so stick around to the end if you want to know which one i think is better and why [Music] before we hash things out there's a disclaimer i need to tout financial advice is fantastic but this video isn't it everything you see here is just meant to expand your knowledge sphere if you need help with your cache contact someone who's licensed to do that if this is your first time in my neighborhood my name is guy and i reckon my crypto content is pretty good that's because i strive to make the highest quality crypto content that will ever cross your eyes coins tokens news defy exchanges tutorials technical analysis and such when it comes to crypto there's no such thing as too much if you can't get enough of crypto stuff subscribe to the channel and ping that notification bell come on it's not that tough i've even left timestamps in the video timeline that you can use to get around feel free to skip ahead but remember that watching the whole way through will help this video get found now that you're in the loop let's compare these two consensus groups to understand proof of work and proof of stake you need to be familiar with the concept of consensus now consensus in cryptocurrency is not all that different from consensus in real life i'll build on an example i used in a recent video to help you understand imagine you're trying to decide whether to go to the movies or to a restaurant with a group of friends let's say there's 10 of you in total in this case you have a dilemma and you need to reach consensus on what to do there are various consensus thresholds you could use to reach an agreement so for instance you could use a simple majority rule at least six people need to vote for one of these activities for all of you to then go and do it alternatively you could say that nine of the ten people present must vote in favor of the activity because you want to make sure everyone has a good time if you wanted to go one step further you could say that nine in your friend group must vote for the same activity and confirm they still want to do it 30 minutes later to be extra sure you'll all have fun now consensus in cryptocurrency follows the same principles except its computers coming to a consensus aka an agreement about whether a transaction is valid or not usually the consensus threshold is more than half or 51 the primary difference is that cryptocurrency consensus mechanisms have built-in financial incentives to make sure valid transactions are confirmed so let's go back to the friend group example to illustrate why this is important to recap your group of ten is deciding on whether to go to the movies or to a restaurant suppose you've agreed that a simple six out of ten majority vote determines where you all go and it looked like it's going to be the movies there's just one problem though and that's that one of your friends really doesn't want to go to the movies maybe they're jaded from too many superheroes maybe they're just hungry now realizing that they're about to lose the majority vote they come up with a clever idea they invite three of their friends who are around the corner to join your group of ten in the parking lot where you're all hanging out surprise surprise those three additional friends all want to go to the restaurant and their three additional votes means the majority vote consensus threshold has swung in favor of going to the restaurant it's seven versus six naturally those who voted in favor of going to the movies start to object saying that this isn't fair but your sly little friend smirks and says you said majority vote rules are rules now this same risk of consensus manipulation is constantly present on cryptocurrency blockchains the difference is that the participants on a cryptocurrency blockchain are deciding on whether to approve millions sometimes billions of dollars of transactions so the stakes are much higher this creates a huge incentive for someone to connect additional computers to a cryptocurrency blockchain to manipulate these transactions to their benefit in the same way your hypothetical sneaky friend did with his additional friends while you could solve the issue involving friends by simply preventing additional friends from participating in the vote on cryptocurrency blockchains you want to connect as many computers as possible this is because the more computers there are connected to a network the more secure it is especially if those computers are distributed around the world this means there's only one solution and that's to have some sort of skin in the game to incentivize computers connected to cryptocurrency networks to validate transactions properly proof of work and proof of stake are how most cryptocurrency blockchains achieve this goal now i'll continue using the friends example to keep these consensus mechanisms as simple as possible proof of work has its roots in a mechanism that was invented in 1993 to combat email spam it wasn't until 1999 though that the mechanism became known as proof of work and it never really got used for its original purpose instead a clever entity who goes by the pseudonym satoshi nagamoto realized in 2008 that this odd proof-of-work mechanism was perfect for ensuring the security of a distributed digital payments network here's how proof of work works any computer that wants to process transactions on a proof-of-work cryptocurrency blockchain like bitcoins needs to essentially make a correct guess of an extremely random number in order to earn the right to do so this costs time and energy to do now in the friend decision dilemma let's use the example of giving a crossword puzzle to all your friends in the group and saying that whoever solves it first gets to vote on what everyone does again time and energy the likelihood that a computer will solve this arbitrary problem increases with its hashing power which is basically a fancy term for computing power the more hash power you have the higher the likelihood that you'll correctly guess the number and get the opportunity to produce a bitcoin blog containing transactions in the context of crossword puzzles computing power would be intelligence the more intelligent you are the faster you'll be able to solve the crossword puzzle and get a vote to incentivize people to join a proof-of-work cryptocurrency blockchain they earn fees from the transactions in each block plus a block reward in that cryptocurrency's native coin in this case btc now in the aforementioned example the incentive for solving the crossword puzzle is the ability to vote on what everyone gets to do every time a random number is guessed correctly and a new block containing transactions is minted a new random number is generated which must again be guests from scratch to earn the right to process transactions in the next block this would be akin to handing out a new crossword puzzle every single time someone solves the current one to get a vote note that in this case the same friend is allowed to vote more than once so long as they are the first to solve the crossword puzzle in each round now to ensure that some supercomputer doesn't always guess the random number before anyone else bitcoin adjusts its network difficulty based on how much computing power is connected to it this is similar to increasing the difficulty of the crossword puzzles to make sure it's not always the same friend in your group getting the vote this hash rate adjustment makes it very expensive for someone to attack a proof-of-work cryptocurrency because they would have to buy a lot of very powerful computers and pay for all the energy they then consume the closest thing for our example would be the cost of genetically engineering a brain to make it insanely good at solving crossword puzzles it would be a very costly thing to do compared to the reward but i suppose it depends on the movie you're going to see right anyways since not everyone is able to afford the computing and energy costs to guess insanely random numbers and produce blocks alone individual computers can pool their computing power together and split the reward if they manage to guess the random number and produce a block this is akin to allowing friends to help each other with the crossword puzzles to increase their chances of getting a vote it also allows them to compete with the brainiac in your bunch now if someone wanted to attack a proof-of-work cryptocurrency they would need more than just powerful computers and lots of energy they would also need to be continuously producing faulty blocks to ensure their faulty transactions go through this is because as soon as someone else produces a conflicting set of transactions on a proof-of-work blockchain the blockchain temporarily forks and all the other computers continue building on the longest chain this longest chain is hard to maintain for an entity that's manipulating the network in the same way that it would be hard for the same friend to solve increasingly difficult crossword puzzles enough times in a row to get his way now if this sounds tedious and arbitrary it's because it is the idea of work exists exclusively as a means of protecting a cryptocurrency from manipulation by the computers connected to its blockchain now proof of stake seeks to do the same with much less hassle interestingly enough proof of stake was first proposed on the bitcoin talk forum in july 2011 by user quantum mechanic as an alternative consensus mechanism for bitcoin here's how proof-of-stake works instead of using large amounts of computing power and energy to guess a random number and process transactions a cryptocurrency coin is staked i.e locked on the blockchain to earn the right to do so the length of time a cryptocurrency must be staked to process transactions can vary as can the minimum amount of coins or tokens a computer must lock up as a stake logically the more cryptocurrency you stake the more likely you are to process transactions and create a block now in terms of our friend's example it would be like saying that the friends who put the most money in a shared jar have the highest chance of getting a vote maybe the minimum amount of time they have to leave their money in that jar is two voting rounds and the minimum amount of money they have to put down to participate is ten dollars this alone would not make for a very secure system which is why proof-of-stake consensus mechanisms employ some degree of randomness to determine which computer gets to produce a block containing transactions the example equivalent of this would be to give varying degrees of loaded dice to friends in proportion to how much money they committed to their vote even though the ones who put down more are likely to roll high thanks to their dice it's not guaranteed that they'll roll higher than everyone else every time now another neat feature employed by proof-of-stake consensus mechanisms is something called slashing basically if a computer tries to break the rules of the blockchain in some way some of the cryptocoins they staked will be destroyed now recall that sneaky friend from earlier if they happen to be some rich kid who is trying to win votes by using them and perhaps their friends money as a stake to get better dice you could take his cash and throw it down the parking lot drain as a punishment for breaking the rules however it's possible that your friendship circle is okay with delegated staking now in cryptocurrency this is when users who don't want to run their computer 24 7 or who don't have the minimum stake required to join the network can lend their cryptocurrency to another computer to earn a cut of their rewards for simplicity's sake let's just say that these so-called staking pools are like mining pools except they involve pooling capital instead of computing power now one cool thing about proof of stake cryptocurrencies is that this staking process makes it easy to create an unchained governance system that allows stakers to vote on how the cryptocurrency should be changed for example maybe the minimum amount of cryptocurrency a computer needs to stake to process transactions could be lowered to allow for more participation to balance that out the staking lockup period could be extended to ensure the network remains secure as more computers join thanks to that lowered staking minimum not only that but proof of stake makes transactions more efficient since putting down money and rolling loaded dice is faster than solving increasingly complex crossword puzzles this brings me to the advantages and disadvantages of proof of work and proof of stake in theory anyone can connect their computer to a proof-of-work cryptocurrency to process transactions and earn cryptocurrency as a reward for doing so however over the years companies have developed specialized computers called application specific integrated circuit machines or asics for short asics are specifically designed to perform proof of work computations and they can cost a pretty penny not only that but the likelihood that you'll profitably mine a proof-of-work cryptocurrency like bitcoin with a single asic is very slim unless you're willing to shell out millions of dollars to start a large-scale mining operation you'll be stuck joining a mining pool this phenomenon has gradually led to a surprising degree of minor centralization wherein a handful of mining pools control a significant portion of all the computing power on bitcoin and ethereum even though most of these entities are known deciding on any changes to a proof-of-work cryptocurrency is an extremely difficult thing to coordinate this has made it hard for proof-of-work cryptos to keep up with proof-of-stake competitors as they cannot implement improvements very quickly if at all what's worse is that when a new and improved asic is released the older model usually ends up in landfill and this is one of the many environmental concerns about proof-of-work cryptocurrency mining another involves the effects of proof-of-work cryptocurrency mining on climate change something which i debunked in a recent video that you can watch using the link up there in the top right as some of you may recall i highlighted the fact that proof-of-work crypto mining can incentivize the growth and adoption of renewable energy by subsidizing costs this is because miners go to where power is cheapest and that's usually renewable energy but sometimes this can still be an issue especially if it causes energy shortages as it has in countries like iran one of the other major drawbacks of proof-of-work cryptocurrencies is that they are not very fast this is because most of the computing power goes towards guessing these random numbers and not actually processing transactions on the flip side the slower block times and block sizes you often find with proof of work cryptocurrencies means that the size of their blockchains is generally much smaller than proof of state cryptocurrencies this in turn makes it relatively easy for someone to run nodes which store the full transaction history of a cryptocurrency blockchain these nodes play a huge role in maintaining the decentralization of cryptos like bitcoin and ethereum which is something that's often forgotten by zealous proof of stakers they should know that they have their own fair share of issues too in theory anyone can connect their computer to a proof-of-stake cryptocurrency to process transactions and earn crypto as a reward for doing so this is facilitated by the minimal hardware and energy requirements to participate in most proof-of-stake crypto blockchains however most proof-of-stake cryptocurrency blockchains have high thresholds when it comes to the minimum stake you need to put down to connect to it as an independent node moreover most proof-of-stake cryptocurrencies had something called a pre-mine which is where a bunch of coins or tokens are minted in advance and distributed to the team and large investors this is in stark contrast to most proof-of-work cryptocurrencies which had something called a fair launch wherein the community collectively started mining that cryptocurrency from zero consequently most proof of state cryptos are more centralized than bitcoin and ethereum because the average user's only option is to join a staking pool and the largest validators usually belong to the company behind the crypto and its venture capitalist backers moving on other tokenomic issues proof of state cryptocurrencies have are derived from inflation the annual inflation rate of most proof-of-stake cryptos is much higher than most proof-of-work cryptos this inflation is meant to incentivize staking but it essentially turns staking into a requirement as anyone who hoddles their proof of stake coins could see the value of their holdings erode over time besides the unintended consequences of most stakers lazily delegating to the largest staking pools inflationary staking rewards also open the door to taxation in most countries any cryptocurrency earned from staking is taxed as a capital gain if the value of that cryptocurrency happens to fall by the end of the year you could still owe the dollar amount you earned when the inflationary rewards were credited to your account earlier in the year when the price was higher while the proof-of-stake consensus is convenient for creating robust governance structures which facilitate upgrades and changes these governance structures can be an additional attack vector although it may be expensive to buy the cryptocurrency required to corrupt the network by manipulating transactions sometimes the threshold to do the same via governance is much lower now in all fairness most proof-of-stake governance processes have fail-safes in place to prevent this from happening and even employ slashing as a means to manage bad actors speaking of slashing it's worth pointing out that most proof-of-stake cryptos do not currently have slashing enabled this seems to be because wealthy individual investors and institutions don't like the idea that their stakes could be slashed over unexpected downtime something which is not a risk when mining a proof-of-work cryptocurrency this is obviously a problem because slashing is one of the main ways proof of stake cryptos protect their blockchains from manipulation still there's no question that the proof-of-stake setup is more efficient when it comes to processing transactions most proof-of-stake cryptos are thousands of times faster than most proof-of-work cryptos now funnily enough this leads to another issue related to blockchain size and storage even though most proof-of-stake blockchains have only been around for a few years many of them have blockchain sizes that are multiple times larger than the bitcoin blockchain what's more is that most proof-of-stake cryptos do not require the computers connected to them to store the entire transaction history instead many of them rely on cloud storage from tech giants such as amazon and google to store their full blockchain histories this point of centralization can become a huge problem if there's ever any issue on these sorts of proof-of-stake blockchains you could even argue this nullifies their decentralization entirely now that said some proof-of-stake cryptocurrencies such as solana have worked around this issue by storing their blockchain data on decentralized data storage cryptocurrency networks it's likely that other proof-of-stake cryptos will adopt similar solutions for their blockchain storage in the future after all it seems that the crypto space is headed in a proof-of-stake direction for better or for worse now for the big moment proof of work or proof of stake which one is better well i'll start by saying that neither of these two consensus mechanisms is perfect proof of work is more resilient to manipulation because it's hard to buy the hardware necessary to do so for an extended period of time especially with thousands of nodes keeping track of the real transaction history still it's only a matter of time before proof-of-work cryptocurrency mining becomes centralized and it wouldn't be all that hard to whip up a few thousand nodes to convince the network that faulty transactions are legitimate proof-of-stake cryptocurrencies have the same issue in this regard and i would argue that it's much worse because of the pre-mine many proof-of-stake cryptos had most proof-of-stake cryptos are centralized out of the gates and their governance processes are only going to make things worse lazy staking is one thing but imagine what will happen when only a few parties are calling the shots for a cryptocurrency as large as ethereum when it transitions to proof of stake the larger proof-of-stake crypto blockchains become the more value bad actors will stand gain and they won't have to go hunting for any asics or cheap energy to do it they could buy out a proof-of-stake crypto from the comfort of their own yacht or government office as flawed as proof of work cryptos are at least it requires much more than capital to decide the direction of the project all the stakeholders involved have to agree or else they'll just fork the chain now this might stifle innovation but it simultaneously protects these cryptocurrencies from governance takeovers in my mind the long-term success of proof-of-work cryptos depends on asic resistance and the cost of energy both of these can easily be addressed and some proof-of-work cryptos do just that the long-term success of proof-of-stake cryptos depends on an equitable distribution of supply and the ability to store their massive transaction histories in a decentralized way as i mentioned a few moments ago there is no shortage of decentralized storage solutions however an equitable distribution of supply is something rare amongst proof-of-stake cryptos and i reckon it's going to become even more rare as institutions continue to invest so what's your view on the battle of the blockchain staking or working drop me a comment with your thoughts and drop me a like on your way down if you learned something new today be sure to subscribe to the channel as well and remember to ping that notification bell if you want to know what i get up to behind the scenes follow me on twitter instagram and tick tock to see you can also join my free telegram channel where i give you all the daily crypto market updates you need it's like a shorter version of my weekly newsletter where i detail the tools tips and tricks you can use to get an edge in this crazy crypto market now i know it's summer but it can be cold with all that air conditioning on that's why you should head on over to the coin bureau merch store and get yourself a hoodie just like this one you can find your way there using the link in the description which is also where you'll find all the other goodies i've just mentioned that's all for today folks thank you all so much for watching and remember to keep calm and hodl on you

Channel: Coin Bureau

Views: 228,558

Keywords: Blockchain, Proof of Stake, Proof of Work, Ethereum, Bitcoin, Consensus, Staking, Slashing, Bitcoin Mining, ASIC, Cryptocurreny, Crypto

Id: 08vnE2_cAeQ

Length: 24min 37sec (1477 seconds)

Published: Thu Jun 24 2021

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[u/IDEAL-cardano-pool]

For those wondering how Cardano's consensus mechanism (Proof of Stake) works in comparison to the consensus mechanism of Bitcoin (Proof of Work) :)

[u/NationalMoment2398]

Where does Cardano store their data?

[u/Hollycowness]

This explanation is what I’ve been looking for all this time, amazing!!