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Proof Of Work Vs Proof Of Stake- Comparing Bitcoin, Ethereum, Cardano, & Algorand Protocols

Intro - PoW vs PoS

Just as the Internet has continued to mature over the last few decades, innovative crypto and Blockchain projects continue to build upon the foundation in which Bitcoin provided with the original whitepaper shared just over a decade ago. 

Though the proof of work algorithm which Bitcoin uses has allowed Bitcoin to flourish so far, many believe that proof of stake or PoS is the future of Blockchain tech. 

With more projects turning to PoS as their algorithm of choice, it's important to understand the benefits that PoS provides and the many nuances that differentiate the top PoS projects. 

Though not without its fault, PoS continues to gain mainstream adoption and plays a foundational role in the current state of both Blockchain and crypto. 

What is "Proof of Stake?"

One of the major downsides of PoW, Bitcoin's current algorithm, is that it is incredibly resource intensive. By design, the Bitcoin network requires a vast amount of mining and electrical power to operate as intended. 

Proof of stake, on the other hand, is an alternative method in which a block is determined by how large a stake a person holds rather than the computational power that they produce. 

Because PoS chains leverage stake ownership, it is believed to be far more efficient and faster than PoW systems.  

While both methods can work, PoS continues to grow in popularity among industry leading Blockchain and crypto projects. 

Proof of Work vs Proof of Stake Infographic

With more projects turning to PoS as their algorithm of choice, it's important to understand the benefits that PoS provides and the many nuances that differentiate the top PoS projects. 

Not All PoS Systems Are Created Equal

While leading PoS cryptocurrencies such as EOS and ADA have also seen success within the crypto community, there are a few key concerns with PoS that are important to address. 

Take, for example, one of the most well known Pos projects, EOS, which raised a whopping $4 billion + in their original crowd sale.  

While built with the intention of being a decentralized network, last year it was allegedly discovered that several EOS stakeholders were willing to sell their stake votes for a price. 

According to Coindesk, despite EOS having a constitution that forbids buying votes, it was never officially ratified.

Of course, any project in which vote buying is allowed, ultimately prevents that network from ever being truly decentralized. 

Additionally, because EOS block producers are public, it makes backroom dealings much easier to occur. Even if the majority of the EOS community believe in the project and uses the network as intended, a few bad actors can exploit the network for their personal gain. 

Lastly, another downside of PoS is that users who hold their PoS coins on an exchange essentially forfeit their right to vote. As the popular saying goes, “If you don’t own your private keys, you don’t own your crypto.”  This also opens up the possibility of the exchanges who do hold the private keys for using their stake to influence network decisions, a major potential pitfall in the governance mechanism of these protocols. 

Certainly, the challenges faced by PoS coins aren’t exclusive to EOS, however given EOS’s high profile and large amount of funding raised they continue to remain closely watched under the community microscope.

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Building a Truly Decentralized Economy

Even with the disadvantages of PoS as explored above, projects such as Cardano (ADA) and Algorand (Algo) continue to push forward and work through the kinks. 

The Algorand Foundation is the company in control of the token sale, an entirely separate corporate entity than Algorand, the company building the protocol. Using a format commonly used in the sale of financial instruments, The Algorand Foundation held their first dutch auction on June19th which ended with an Algo selling for a price of $2.40. Click the link above to learn more about the process. 

In short, the Dutch Auction method ensures the market sets the price of the token, rather than selling for a pre-determined amount arbitrarily decided by the company itself. This results in a more fair economy  for network participants, and allows for more opportunity for interested parties to get involved. 

The Future of PoS- Pure Proof of Stake?

Algorand founder, Silvio Micali has publicly stated on Medium, Algorand aims to be the 1st true solution to the infamous Blockchain Trilemma and is on a mission to develop a borderless economy. 

Algorand has developed a unique approach to the standard PoS protocol by using a cryptographic sortition method that chooses block produces and verifiers using a proof that occurs only on the users computer before including a block in the chain. They have dubbed their consensus mechanism "Pure Proof of Stake," having made the protocol more robust via this cryptographic sortition method.

Essentially, on Algorand’s network, the block verifiers are chosen completely at random and are unknown to anyone else until the block has already been verified. 

Algorand’s approach to PoS drastically reduces the chances of any bad actors from successfully attacking the network. And because the block producers are unknown it makes selling votes virtually impossible. 

Designed to finally solve the blockchain "trilemma," Algorand’s network is build to become stronger and more secure as the network grows. As more users come online, the number of proposed block producers and block verifiers grows, making the ability to predict which stakeholders will produce or verify a block more difficult over time. 

Though Algorand has taken the crypto space by storm recently, Cardano has quietly built a reputation as a potential “ETH killer”, given it’s fresh approach to building upon where ETH has fallen flat. 

Most notably Cardano was built using PoS while ETH is in the process of switching from PoW, and many believe if Cardano can execute on their vision, their technology could quickly rival that of ETH. 

Watch our latest interview with Cardano CEO Charles Hoskinson on our You Tube Channel!

Innovation of PoS & PPoS

Although Cardano and Algorand are both relatively new projects, both have top tier teams loaded with both academic and business pedigree.

Charles Hoskinson of IOHK leads the way at Cardano, while Turing Award winning MIT professor, Silvio Micali originally founded Algorand.  

Given what’s at stake in being able to further the current Blockchain tech capabilities, it’s clear that the winners in the race will reap the benefits for many years to come. 

Going forward, as more and more projects build upon a PoS system, innovation within the method will continue to become increasingly crucial. 

As Charles Hoskinson’s playful tweet to Algorand’s Silvio Micali last year makes clear, some of the world’s brightest are working to bring Blockchain tech closer to bridging the gap between hype and reality, and we can’t wait to see what comes next!

charles hoskinson tweet @Silvio Micali

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