Although there are now thousands of cryptocurrencies in existence, it can be difficult to look past two of the oldest and most-used ones: Bitcoin and Ethereum.
Between the two, they corner about 70% of the entire market capitalisation (market cap) of crypto. Generally, they always have.
While price is just one aspect of the story of why Bitcoin and Ethereum deservedly occupy the role of crypto top dogs, they each couldn’t be more different from each other.
Since September 2022, their differences became even more apparent when Ethereum completed its multi-year upgrade, discarding the Proof-of-Work (PoW) consensus mechanism for the Proof-of-Stake (PoS) consensus mechanism
To learn more about PoW and PoS and how they make decentralised consensus possible in blockchain-based crypto, read this Learn Crypto article: ‘Ultimate guide to crypto consensus mechanisms’.
Ever since talk of “the Flippening” happened in the run-up to the crypto bull run of 2017, there have always been arguments for why Bitcoin will never be displaced by Ethereum.
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are both consensus algorithms that are used to validate transactions and add new blocks to a blockchain. The key difference between the two is how they validate transactions and create new blocks. PoS relies on crypto staking, while PoW relies on solving complex computational problems called mining.
Most of the cryptocurrencies on the market use either PoW or PoS, with some variations
The most well-known PoW cryptocurrency is Bitcoin, while the preeminent PoS asset is Ethereum.
In this article, we take the camp of Bitcoin, defined by its PoW consensus mechanism.
Proof-of-Work involves solving complex mathematical puzzles using computational power. PoW is a consensus algorithm used in blockchain technology to ensure the integrity of the network and prevent double-spending in cryptocurrencies.
In PoW, miners compete to solve complex mathematical puzzles.
The first miner to solve the puzzle is rewarded with newly-minted cryptocurrency and transaction fees.
PoW is considered to be highly secure because it requires a significant amount of computational power to confirm transactions and create new blocks. This means that it is difficult for attackers to manipulate the blockchain.
PoW uses a hash function, which takes an input and produces a fixed-size output. It is a one-way function, which means it is impossible to reverse the output to deduce the input.
As the blockchain is distributed across the nodes of the network, consensus must be reached on each block that is added to the chain.
Nodes that have been tampered with or are maliciously attempting to subvert the blockchain will see their new blocks rejected by legitimate nodes, making it difficult for attackers to manipulate the data.
Nodes that perform the work to validate blocks receive a reward for doing so. This encourages nodes to act in the best interest of the network and not to undermine its security.
Overall, PoW relies on a combination of cryptographic security measures and incentive alignment to maintain the integrity of the blockchain network.
In PoW, the miner who is the first to solve the mathematical problem is deemed to be the valid block that will be added to the blockchain. The effort and computational power required for miners to solve the problem ensure the security and fairness of the network.
PoW allows for a fair distribution of rewards among network participants. It rewards those who contribute computational power to the network, as opposed to those who have more coins or money
Under PoW consensus, thousands of mining programs work on one block until the hash is solved, then move to the next block. With this structure, every miner has an equal opportunity to solve the problem and add a new block to the chain.
In theory, anyone can take part in mining using PoW, so long as they have the necessary hardware and software. This makes PoW a fair consensus mechanism by design, as every miner has an equal opportunity to solve the puzzle and earn the reward.
Since the idea behind PoW is to require computational work in order to add a new block to the blockchain, a certain amount of computational work must be done to solve the mathematical puzzle.
By requiring miners to do this work, the blockchain is protected from spam attacks because it becomes prohibitively expensive to spam the network with large numbers of transactions.
This is because each transaction requires a small amount of computational work to be included in the next block.
To spam the network with a large number of transactions, an attacker would need to produce a massive amount of computational work, which would be costly and time-consuming.
Additionally, the PoW mechanism ensures that the blockchain is secure because once a block is added to the chain, it cannot be altered without redoing the computational work for all subsequent blocks. This makes it very difficult for an attacker to tamper with the blockchain, because they would need to redo the computational work for all blocks in the chain, which becomes more challenging as the chain grows in size.
The PoW mechanism provides powerful protection against spam attacks because it requires a significant amount of computational work to add new transactions to the blockchain. This makes it expensive for attackers to spam the network and allows the blockchain to remain secure and tamper-proof.
From a security perspective, it’s difficult to argue that there is a more secure form of cryptography for blockchain than Bitcoin’s PoW.
If consider how resilient a decentralised network is to potential attacks, we can break it down into two main factors: how much it costs to attack the network, and the network’s ability to react to that attack.
For a PoW network, an attacker would need to gather 51% of the network’s entire computing power. This happens to be economically unfeasible today, as that cost, in terms of specialised mining hardware and electricity, is beyond the financial capacity of most governments and corporations.
In fact, because PoW’s computing power increases over time, it becomes more and more expensive even to consider such an attack.
On the other hand, if this unlikely scenario of a 51% attack does happen, network recovery would demand an incredible effort of reorganisation from honest miners. Because a successful attack allows the attacker to censor all transactions, honest miners wouldn’t get block rewards, leaving them disincentivised to operate, making the attacker gain an even stronger hold over the computing majority.
To regain control, honest miners would have to work together, operating at a temporary loss to coordinate and identify the attacker, censoring their transactions, and getting the entire network to ignore the new chain, to render it worthless.
This is a huge undertaking of social coordination and logistical cooperation.
Proof-of-Stake suggests that recovery could be easier, and that is the subject of an accompanying article: Is PoS better than PoW?
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