- Blockchains rely on a consensus mechanism to confirm the present state of the chain for all network participants.
- Networks are moving to the hybrid PoW/PoS model to include the best of both in a single mechanism.
Blockchain networks were designed to eliminate the need for third parties like banks and financial institutions during payments or sending remittances. To remove the trust factor and make a completely decentralised network, the concept of a consensus mechanism was brought into the picture.
Consensus mechanisms serve as a form of agreement between the several participants distributed over a large network on the current state of the blockchain. It is necessary to only validate authentic transactions and add them to the immutable ledger.
The PoW
Bitcoin, the ancestor of all cryptocurrencies, used the Proof of Work (PoW) consensus mechanism. In PoW, as the name suggests, the miners were to present proof that they had spent some computational effort and resources, which had cost them money. Hence, they are authentic nodes and will not compromise the network.
The work is done in the form of solving a cryptographic maths problem and guessing the correct hash rate as required by the network. The miners include transactions in a block and broadcast the block to the whole network. The other miners validate the block and show their approval of the proposed block by including its hash in the next block.
Although the method is highly secure, it can still be compromised by a 51% attack, an event where a single party has control of more than 50% hashing power of the total network. The longer the blockchain, the more secure it is. The miners depend on heavy hardware and computers for PoW and concerns have been raised considering its energy requirements.
Several debates have been held on world stages criticising the high electricity consumption by PoW miners, more than in a country like Chile, which has become a cause for the release of harmful greenhouse gases into the environment. These environmental concerns have made it a less popular choice in the next-gen green world.
The PoS
Later released blockchains were aware of the consequences of PoW and how much attention it could gather among aware users. Even Ethereum, the world’s second-largest network, switched to PoS from the initial PoW through a hard fork in September 2022, The merger became 99.95 % energy efficient.
In the PoS mechanism, the nodes have to stake some coins to take part in the validation process. Hence, they are presenting proof that they have staked their coins into the network and thus they will make better decisions for the network.
The validators (miners in PoW) are randomly selected by the network to validate transactions. The chances of getting selected are proportional to the tokens staked.
The selected validator needs simple hardware to validate blocks and thus reduce high energy consumption.
However, in PoW, the high costs force miners to sell some of their earned block rewards to meet the costs, and thus new coins enter circulation. In PoS, the low-cost results in most of the coins being in the pockets of validators. Ethereum also suffers from the issue of Minimum Extractable Value (MEV) which is a result of the validators having more authority compared to simple network users.
The Hybrid
The PoW/PoS hybrid model is designed to incorporate the best of both mechanisms, namely security and energy efficiency respectively. The model does not rely on either 1 CPU = 1 vote or 1 Token = 1 vote but rather operates on a mixed model.
Here, the PoW miners include transactions in a block and broadcast the block to the whole network. Now, PoS validators vote on the proposed blocks, which they earn by staking coins on the network. The block reward is in the form of 60%, 30%, and 10% going to miners, validators, and development costs, respectively.
Conclusion
Presently, several networks, such as LuxCoin (LUX), Virtacoin Plus (XVP), PeerCoin (PPC), Decred (DCR), NovaCoin (NVC), and others are working on the hybrid model. Although there are several other consensus mechanisms, each is aimed at making the network secure, fairly rewarding the miners, and leaving a minimum carbon footprint.
