what is Proof of Work / Proof of Stake ?

This video contains advanced concepts that were discussed in previous videos. If you’re new to Bitcoin we suggest watching the previous videos before this one.

In order for a miner to actually enter his block of transactions into the blockchain he will have to provide an answer, or a proof, to a specific challenge. This proof is difficult to produce but is very easily validated. This is known as Proof of Work.

For example – guessing a combination to a lock is a proof to a challenge. It’s very hard to produce this since you will need to guess many different combinations – but once produced it’s easy to validate. Just enter the combination and see if the lock opens.

Bitcoin uses the proof of work concept in order to make sure that the network isn’t easily manipulated by making mining, the process of inserting blocks into the blockchain, require great computing power.

But the proof of work concept has some downsides as well. First, a lot of computing power and electricity are wasted just for the sake of generating random guesses. Second, if proof of work continues we may run into the “tragedy of the commons” scenario. Let me explain…

In the future, once no more mining bounties will be given, miners will gain only transaction fees. Since including transactions is pretty inexpensive for miners they will accept any fee which will gradually cause people to pay less fees and miners to earn less money. In time fewer miners will mine Bitcoins, the network difficulty will decrease and the Bitcoin network will be more susceptible to 51% attacks.

One alternative suggested to the proof of work concept is the Proof of Stake concept. Rather than requiring a proof to a challenge, a proof of stake system requires to show ownership of a certain amount of money. Meaning the more Bitcoins you own the more mining power you have.

This eliminates the need for expensive mining rigs as calculations are pretty simple to prove you own a certain percent from the total amount of Bitcoins available. Just imagine that mining rigs have been replaced by coins, and if you own 1% of the total amount of Bitcoin available you can mine 1% of the transactions.

This methods forces miners to have a stake in the Bitcoin network and hopefully will deter people from abusing their mining power (since they will be devaluing their own coins). Today Bitcoin has yet to implement the proof of stake concept but other altcoins like Peercoin have already implemented some kind of version of it.

For a more detailed explanation about Proof of Work visit this link.

For more information about Proof of Work VS. Proof of Stake.

For an active discussion in BitcoinTalk about POW Vs. POS.

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Brandon
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Brandon

Good read, Ofir!

Evan Nelson
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Evan Nelson

Neither POS or POW are that good and the fact that most coins are experimenting with a mixed system should tell us that you can’t rely on just one of them. Each has its own advantages and disadvantages, but together they can have a positive impact for any coin, including Bitcoin. Just my 2 cents.

Jessica
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Jessica

Ofir, how do you create these videos? Is there a special software or is it done in house?

Olivia
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Olivia

Great article and video as always, Ofir! Thanks for
trying to explain this to newbies like myself!

Luke
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Luke

I feel that adopting only proof of stake for Bitcoins would be a huge mistake! If they don’t combine POS with proof of work, then the whole community will break in a matter of months because you can’t have a good sized community without offering the opportunity to mine. With just POS, a lot less people will be able to mine and that would reduce the whole community to thousands of people instead of tens of thousands.

Tyler Gonzalez
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Tyler Gonzalez

It’s interesting to see the differences between Proof of Work and Proof of Stake. I now understand what each of them means and I feel proof of stake should be implemented immediately for Bitcoins. It would drastically reduce any kind of abuse in the system.

Ralph
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Ralph

When you post or publish your proof of work, are the other miners able to see it and maybe even verify it? If this is the case, then they would be able to see whether or not your answer was good. Am I right about this or am I not even close?

Luke Jameson
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Luke Jameson

Reading what you said here I got a little curious about what proof of work means and what it is used for. Doing a little research I found out that proof of work protocols are actually used for deterring spam email! Pretty cool!

Caleb
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Caleb

Most proof of work or answers as they are also called, are quite difficult to solve in my opinion and I have a hard time doing this. I know that this is done to prevent scams and hacking, but I wish there was some easier way to do this.