Proof Of Crypto

Dominik Olech
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There are plenty of cryptocurrencies right now. And they all are very different from each other. One of the main differences between them is the way of verifying transactions.

Why do cryptocurrencies need so-called proofs? As the name suggests, it is evidence of the actual worth of asset which cryptocurrency is accepted by other members of the blockchain network. That’s why we called them consensus mechanisms. At the course of time, developers proposed many ideas for creating those proofs. We are presenting some of them here, both most common and still new concepts in the crypto industry.

Proof of work – where it all began

This is by far the most common of all consensus models used in the cryptocurrency industry. Why? Because the very first cryptocurrency uses it. Bitcoin is using proof of work to generate new blocks in its blockchain network. It’s also a popular method for other coins.

But the whole concept is much older than cryptocurrencies – the idea has been described by Cynthia Dwork and Moni Naor in their work “Pricing via Processing or Combatting Junk Mail” in 1993. As you can guess from the name of the article, the initial idea of PoW was focused mostly on fighting with spam and denial-of-service (DoS) attacks. In 1999, Markus Jakobsson and Ari Juels had formalized the term and in this form proof of work was used by Satoshi Nakamoto.

In proof of work, the verification process demands to provide a computer processing power to resolve some mathematical tasks needed for block verification. Successfully done task legitimate the transaction and ensure that a block generated that way is unique. The finally acquired piece of data is both hard to obtain and easy to verify, which make up its overall value. 

In the nutshell when you’re buying a Bitcoin, you’re paying for the computing work used to mine blocks in the whole network. This process guarantees that the coin is not double spend. However, PoW has some disadvantages too, which leads us to another popular proof with a different approach.

Proof of stake – a more elegant way 

Using proof of work to generate cryptocurrency creates two major problems. First, the whole process demands computing power on a significant level, which is growing with every mined block. This excludes people without proper software for mining. Moreover, coins are distributed between miners randomly – a winner is a person who has mined the last block in the chain.

Another problem depends on resources. Maintaining such a network is consuming an unbelievable amount of energy. According to some sources, in comparison to energy consumption by countries, Bitcoin needs more power than the whole Austria! It is a serious threat to the global climate – but we will take a closer look into it in one of our future articles.

That’s why developers came up with other ideas. The most popular one is proof of stake. In its very basic form, the next block owner is generated not by miners but redistributed for coin owners – so-called stakeholders. So the proof is not the work done by computing machines, but the amount of owned coins. 

Such solution creates the potential for a dangerous situation where the acquisition of new coins is monopolized by the biggest stakeholders. That’s why selecting which one of them will be rewarded have to be somehow regulated. Crypto developers presented many different ideas for this process.

Peercoin, first-ever cryptocurrency based on proof of stake, resolve the problem with the idea of coin age. Validating new transactions uses a similar system as proof of work, but instead of the value of the work done, it values the time. Peercoin concept is based on the number calculated from multiplying the amount of owned coins by the number of days those coins have been held in the wallet. The higher the age the higher the chance of being rewarded with a new coin.

Proof of burn – a crypto sacrifice 

The best way to describe this concept is to compare it with proof of work. In PoW, you need to sacrifice the computing power to maintain an operation required to prove the value of the mined block. PoB works similar – but in this case, you’re giving away your coins. 

To acquire new ones, you need to send some of the coins already in possession to a specific, verifiably unspendable public address – so-called “eater address”. By this action, you show your involvement into developing of the blockchain network. Moreover, assets spent that way are unusable – which leads to an increase in the overall value of cryptocurrency.

Although the burned coins come from classic proof-of-work, such solution limits the overall use of electricity in the process of developing a cryptocurrency.

Proof of capacity – size does matter

It is a variation of proof of work, which uses a straightforward trick. It replaces computing power with the memory or disk space to solve provided tasks needed for block verification. That’s why this method is also called proof of space.

How exactly does it work? In standard proof of work, computing power is being used to look for the possible resolution of the mathematical problem. In proof of space, potential solutions are generated on free disk space. The more memory you have the higher is the chance for storing a correct solution value on your disk.

Proof of capacity, as much as proof of burn, is one of the proposed solutions to limit energy consumption – and this is its main advantage. Although they don’t change one thing: the success of mining depends on the software you have. The most known coin using this method is Burstcoin.

Proof of authority – the best solution for private companies

One of the most important aspects of the cryptocurrency idea is decentralization. This noble idea, however, causes some significant problems with the overall scalability of the blockchain network. Every transaction needs to be verified by a distributed network of nodes – and reaching consensus by them usually takes some time. 

In private, oriented on corporations, blockchain projects, such delay is undesirable. And that’s where the PoA comes in. This concept leaves the idea of a decentralized network to provide better scalability and faster transactions. To achieve it, PoA relay on reputation-based consensus algorithm, which limits the number of block validators to arbitrarily selected ones. 

Somehow, this solution may seem similar to the proof of stake. But the decentralized nature of PoS doesn’t work well with closed interior systems in companies. Proof of authority resolves this problem – even if it is not so well suited to the cryptocurrency world on its own.. In the end, a well-organized blockchain based on this idea is possible – and one of the best examples of it is Azure, Microsoft cloud computing platform. But one success doesn’t mean that this solution is flawless.

Proof of reputation – prove your value

Although proof of authority has resolved the problem of scalability, it also creates a space for possible abuses. In the end, the choice of validators is arbitral and might not always be the best for the whole network. That’s why this system has to be regulated somehow – and GoChain has proposed such a solution.

In proof of reputation, the participant responsible for network security has to show a proper reputation, which ensures that he is ready to face any potential financial consequences in the case of fraud or any other abuse. It ensures that the authoritative nodes operating in the network are reliable, and the overall safety of the whole project is secured. And such assurance is an essential argument for companies planning to go into blockchain technology.

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