Proof of Service vs Proof of Work — Hashify Newsletter 16.08.22

A blockchain’s fundamental purpose is to provide an immutable and unchallengeable source of information concerning transactions. At the core of any blockchain is a centralised ledger — a single and final record of transactions. How a blockchain goes about achieving this goal is called its algorithm, and the contents of this algorithm create the blockchain trilema:

Each blockchain aims to be both decentralised (resilient against failures in individual nodes), secure (safety of the network) and scalable (transaction quantity), but in order to achieve two of these aims, the other often must be slightly or largely reduced. For example, Bitcoin’s ledger is highly decentralised; being stored on each of its individual nodes. This means that a failure in one of the individual nodes does not compromise the validity of the wider network. However, this approach constrains its ability to handle a large quantity of transactions, increasing the cost and time taken to process transactions, as all individual nodes must update their ledgers for the blockchain to reach consensus of these new transactions. Therefore, the bitcoin network is decentralised and secure, but falters at scalability.

This is where we see the terms ‘proof of work’ and ‘proof of service’ appear. Bitcoin, as the original blockchain, set ‘proof of work’ as the standard, but, as highlighted above, this approach is often unscalable. The nature of a ‘proof of work’ blockchain is that the work of updating and storing the blockchain is completed by ‘miners’ across the globe, who are rewarded for their mining. Proof of service blockchains were created in order to address the ‘scalability crisis’ of early proof of work blockchains like Bitcoin. The first proof of service blockchain ‘Peercoin’ launched in 2012, and provided a blockchain with significantly lower fees than Bitcoin. At the time, Bitcoin’s fees were 3.65% per transaction, whilst Peercoin’s were below 1%. Peercoin, and the other proof of service blockchains to follow, centralise the storage and updating of the ledger and addresses decentralisation via staking. A proof of stake blockchain achieves consensus by paying stakers to validate each transaction. Stakers are required to use their own cryptocurrency as collateral, which would be confiscated if they erroneously validate new transactions. Each transaction which needs to be processed is assigned to stakers based on the volume of currency they have staked and the payment they request for providing the service. The validation of transactions is completed stores and maintains the blockchain — on centralised, energy efficient hardware.

Here is the crux of the issue. Proof of work blockchains are completely decentralised, providing a robust and secure record of transactions. But this approach is power hungry and difficult to scale, as many miners are completing the same work. Proof of service blockchains offer a still secure, but less decentralised, solution to scalability issues. A crypto currency project must decide whether a robust, secure platform is more important than a higher capacity option before using a proof of work blockchain. Hashify collects mining proceeds from the transactions of blockchains which decide to use proof of work blockchains.

We will be posting newsletters on a bi-monthly basis and looking to cover topics from the mechanics of crypto mining to a deep dive on the upcoming ethereum merge. If you would like to see a particular topic covered, drop a comment and we’ll add it to the roster.

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