Types of Blockchains: PoW, PoS, and Private


Not all blockchains are the same; their various consensus mechanisms have different implications for accessibility, security, and long-term viability.

Summary

The design of blockchain systems varies significantly, notably in terms of the consensus mechanisms used to accomplish the critical duty of validating network data. Proof of Work (PoW), Proof of Stake (PoS), and methods employed by private and consortium blockchains are the most prevalent consensus processes.

Each design has various ramifications for the security, accessibility, and long-term viability of the underlying blockchain.

Contents

Blockchain Types

While many people think of blockchain as a single technology, there is a lot of variance in how different blockchain networks work. The sort of consensus mechanism used by each blockchain is a fundamental distinction.

A consensus mechanism is a method through which a dispersed network comes to an agreement on network information, such as whether transactions are valid and in what sequence they should occur.

The consensus mechanism is also important for securing the blockchain network against hostile actors such as hackers.

To provide consensus, most public blockchain networks currently use Proof of Work (PoW) or Proof of Stake (PoS), whereas private — or ‘permissioned’ — blockchains and Distributed Ledger Technologies (DLTs) can be organized in a variety of ways to emphasize speed, security, and scalability.

To have a better grasp of the various implementations, we’ll look at the most common blockchain consensus mechanisms:

>>The Best Bitcoin and Cryptocurrency Exchange Guide<<

Proof-of-Work Blockchains

The PoW consensus process, which was introduced first by Bitcoin, is one of the most extensively used mechanisms in the blockchain. Miners and the electricity they need to do the calculations that verify BTC transactions are the defining components of PoW systems.

Miners use computer hardware to run network nodes that use computational power to solve mathematical challenges known as proofs of work algorithmically.

The miner who solves the riddle first confirms the blockchain’s most recent block of transactions. The successful miner then broadcasts the new block to all other nodes, who subsequently verify its accuracy and add it to their copy of the blockchain, creating a verifiable data record for the entire network.

This verification procedure denotes consensus. A new block can only be added to the network after this data has been confirmed. Miners receive newly minted cryptocurrency, the block reward, (in the case of Bitcoin, they receive BTC) for being the first to validate a new block of data and add it to the PoW blockchain.

Proof-of-Work Blockchains strive to produce blocks at regular intervals; for example, Bitcoin generates one block every ten minutes. Because the process of proving labor is so energy-intensive, PoW networks are constrained in terms of speed and scalability.

Furthermore, PoW networks are coded to be more or less difficult depending on the network’s processing power.

Computational power can be thought of as a form of competition: more computational power means more competition, which means more difficult proofs of work.

Despite their speed and scalability restrictions, PoW blockchains have typically given better security while maintaining significant decentralization. Because PoW systems are dispersed, it is very difficult for a malicious actor to acquire control of the blockchain by controlling the majority of the network’s computing power. Hardware, electricity, and computing costs are usually too expensive.

However, the same characteristics that make PoW blockchains secure also make it difficult to join the network as a node. Operating a mining rig and paying for the associated hardware and electricity costs is too expensive for the average user, and mining on many major networks has been monopolized by large-scale mining operators who have amassed influence in network governance.

Another disadvantage of PoW networks is that they are energy-intensive and consequently harmful to the environment. The computing power required to solve proofs of work necessitates a massive quantity of electricity.

The Bitcoin network, for example, has the same annual carbon footprint as New Zealand and consumes the same amount of electricity as Chile. Solving these problems has been a major focus of blockchain technology development, and additional solutions have now been developed.

>>Cryptocurrency Trading Guide for Beginners<<

Proof-of-Stake Blockchains

PoS is the second most common consensus mechanism, and it addresses many of the issues that plague PoW blockchains, such as slowness, scalability, wasteful energy usage, and a high entry barrier.

Polkadot, EOSIO, and Cardano are examples of contemporary industry-leading PoS blockchains. Ethereum, which was created as a PoW blockchain, is in the process of migrating to Ethereum 2.0, a PoS blockchain.

PoS blockchains use validators instead of miners to validate transactions. Validators are network node operators who validate data in the same way that PoW systems do, but without the need for an energy-intensive computing procedure. Validators “stake” part of the blockchain’s native tokens to become eligible for selection as a validator node, rather than laboring to solve proofs of work.

To serve as collateral, the potential validator will stake crypto coins native to the blockchain.

When a PoS blockchain’s data in a transaction block needs to be validated, the system chooses a validator at random to confirm the data. While validators are picked at random, some factors, such as the number of tokens pledged, might increase the likelihood of a validator being chosen.

When a block is confirmed, the validator is usually rewarded with network transaction fees, and the process starts over.

By asking validators to stake their tokens, Proof-of-Stake blockchains keep the network secure and validators honest. Validators who act intentionally or incompetently lose their stake and network access through a process known as “slashing.”

This incentive structure ensures that validators benefit more from following the rules than from breaching them. There are numerous variants on how this procedure works in general.

The barrier to entry for validators on PoS blockchains is arguably lower because they do not have to invest in expensive gear or pay significant electricity bills. You must, however, have a substantial amount of crypto to stake if you want to become a validator.

This sum varies with every blockchain, however, it can amount to thousands of dollars in tokens. Because the amount of influence validators have over the network is generally related to the value of their stake, PoS blockchains have been condemned as plutocratic.

PoS blockchains are arguably better for the environment than PoW networks in terms of sustainability because they utilize substantially less electricity.

As a result, proponents suggest that future blockchain initiatives should prioritize using PoS consensus mechanisms.

The Delegated Proof of Stake (or DPoS) concept is a popular extension of the Proof of Stake concept, in which network users chose delegates to validate the next block. Witnesses or block producers are other terms for delegates. You vote for delegates using DPoS by putting your tokens into a staking pool and attaching them to a specific delegate.

DPoS supporters argue that it is a more decentralized and egalitarian way to reach consensus than Proof of Stake alone.

>>Buying Bitcoin with PayPal (Beginner’s Guide)<<

Private and Consortium Blockchains

Public and decentralized blockchains that use PoW and PoS consensus algorithms are common. However, there are two more types of blockchains: consortium and private blockchains.

A private blockchain is one that is managed by a centralized institution that defines who has access to the blockchain, who can validate transactions, and who can view the data stored on it.

A consortium blockchain is a distributed ledger that is maintained by a number of entities, each of which runs a network node, participates in consensus, and has access to certain types of data. This sort of blockchain technology is commonly referred to as Distributed Ledger Technology due to the absence of decentralization in these networks.

Enterprises that wish to adopt blockchain architecture but want to keep specific information private for regulatory or competitive reasons generally use private and consortium blockchains.

Censorship-resistant public blockchains such as Bitcoin and Ethereum provide large ecosystems for the development of apps and platforms.

Consortium blockchains, on the other hand, may have faster transaction processing times and are easier to alter, but they are private networks with limited use outside of the consortium.

Quorum, developed by JPMorgan Chase, is a private, permissioned version of the Ethereum network aimed at facilitating interbank data sharing. Consortium blockchains are currently being developed in a number of industries, including insurance, food distribution, and financial services, and are even being used to prototype central bank digital currencies (CBDCs) all over the world.

Not all blockchains are created equal, and different consensus mechanisms have varying implications for accessibility, security, and long-term viability.

Similarly, not every blockchain type is perfectly suited for every use case. Public blockchains, for example, are secure and censorship-resistant, but their transparency makes them unsuitable for businesses. While PoW has been the primary consensus mechanism in the realm of blockchain since the debut of Bitcoin in 2009, PoS, DPoS, and DLT are rapidly gaining favor.