![3.2 Proof of Work (PoW) and Proof of Stake (PoS)
Proof of Work (PoW) Proof of Stake (PoS)
Definition
The proof of work is the security algorithm in
this algorithm a computational challenge
termed mining is performed which is imposed
by PoW protocol [3]. This security algorithm
was later on adapted by Hal Finney in 2004
through the idea of “reusable proof of work”
using the SHA-256 hashing algorithm.
The process of solving the computational
challenge termed as minting is done here
which is imposed by the Proof of Stake
protocol. In this nodes of the network work
together to add the records and then a voting
process takes place which is done for
accepting a block in the blockchain [3].
Advantage
Proof of work provides a decentralized way
through which users can verify their
transactions, provide a high-security level, and
allow miners to earn rewards related to
cryptocurrency [46].
The advantages of proof of stake are that it
provides a comparatively fast and less
expensive transaction processing, it consumes
less energy and it doesn’t require any
expensive equipment to participate in the
process [47].
Disadvantage
The major drawback of proof of work is that it
becomes very inefficient with large
transactions because of slow speed and also it
consumes very high energy in mining and also
it is quite expensive because mining requires
some equipment which is quite expensive [46].
Some drawbacks in this are that it doesn’t
provide as much security as proof of work,
sometimes a validator that has a large holding
can influence the process of validation, and
also in PoS, and it is required to lock some
stacked coins for some time [47].](https://image.slidesharecdn.com/1910990335ppt-240127140413-5f1efddf/85/1910990335_ppt-on-blockchain-and-its-issue-ppt-8-320.jpg)
1910990335_ppt on blockchain and its issue.ppt
- 1. Blockchain- overview, applications, and challenges in the financial sector Dated: 21-04-2023 Department of Computer Science and Engineering, Chitkara University, Punjab Name Vvinayak Bansal Sem 8th
- 3. INDEX 1. Introduction 2. How Blockchain Works? 3. Overview of Blockchain 3.1 Structure of Blockchain 3.2 Proof of Work (PoW) and Proof of Stake (PoS) 3.3 Development Framework of Blockchain 3.4 Features of Blockchain 4. Applications of Blockchain 5. Shortcomings of Blockchain 6. Future Scope 7. Conclusion
- 4. 1. Introduction Blockchain, sometimes known as distributed ledger technology (DLT) converts any document completely unalterable and is visible to everyone in the network and all this is done using a network termed as decentralized network and also by using hash functions. To understand working of block-chain easily we can compare it with how to google docs works. The main difference in the working of google docs and blockchain is that the data on the blockchain can’t be modified which increases the security of the data. To understand the working let us take an example of two nodes that are doing transactions these two nodes will announce the transaction to every node in the network and these transactions will be stored in a block that has limited data storage once these blocks get filled these nodes in the network start doing Proof of Work (PoW) which starts doing the calculation and this process is arduous to solve so it prevents the data from getting hacked or tampered by any third party and once this calculation part is done then Proof of Stake (PoS) which checks the accuracy of the calculation and once the calculations gets majority vote of accuracy the block gets accepted and the nodes to move to next transactions. As mentioned in the above example the blockchain is widely used in financial sectors in bitcoin and is also revolutionizing various sectors. Similarly, we can use blockchain in our daily lives like in healthcare or social media. Let’s take an example of social media today the approximate world population is 8 billion people and almost 5 billion people have social media accounts and post about their daily lives and events. All these social media platforms are controlled in a centralized structure which means that the data is centrally controlled by a third party . This data is very much prone to get stolen or sold without the permission of the owner to support this argument of mine I would like all of you to focus on the scandal in which Facebook one of the major social media platforms was involved in March 2018 people used an application published on social media platform that collects data about public & that information was sent to the Cambridge Analytica and then they used that data for political goal without the permission of the owners of data. To eradicate this problem one app was launched which is named Steemit which is based on the decentralized manner same as blockchain and currently, this app has around 1 million users worldwide. Similarly, we can also use blockchain in healthcare fields where the data of patients can be transferred securely within the hospital or different hospitals without the help of a third party which makes the data secure and also prevents the data from getting stolen or sold and also protects the integrity of the patient.
- 5. 2. How Blockchain Works? Figure 1: Working of blockchain
- 6. 3. Overview of blockchain As defined by the Don and Alex Tapscott in 2016 in there article Blockchain Revolution they said that “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value” . Now understand it in simple way as the name itself suggest a blockchain is formed by linking a series of blocks with each other these blocks use timestamps to record the data of transactions or other stuff and use a hash function to link the new block with the previous one because each new block formed has the hash value of the previous block. The basic components of a blockchain are the following as shown in figure 1: 1. Block : It stores the data of the user. 2. Chain: A linear sequence with which blocks are linked together. 3. Node: This component acts as the storage unit which stores the vast data of the blockchains. 4. Miner: Miner is a person who performs all types of cryptographic transactions whether creating a cryptocurrency or verifying a new transaction or adding a new block everything is performed by miners. 5. Transaction: A transaction is usually signed and made by external accounts. The role of these transactions is to send messages to the accounts that have made the contract and also their role is to create contracts 6. Hash Codes: This are vital features that are used for security. 7. Consensus: A set of defined protocols that are used to ensure that there is only one single copy of the data present with each node in the blockchain Block Chain Node Miner Transaction Hash Consensus Figure 2: blockchain basic components
- 7. 3.1 Structure of Blockchain A basic blockchain structure consists of Header, Hash value of the previous block, Timestamp, Nonce and Merkel Root as shown in figure 2: 1. Header: A header in the block is the portion that contains all the information regarding the block like the various components from which a blockchain is formed. 2. Hash Value: This value helps in connecting previous block with the new block. In short, we can say that this value is the reference to the parent block. 3. Timestamp: It is defined as the string of characters that contains the time and data of a transaction and also helps in finding a particular transaction. 4. Nonce: A nonce is a number that can be used only once and is the central part of performing proof of work in the block this value is checked with the live value to see if it is equal or smaller to the current target. 5. Merkel Root: This is a data-structure which stores each and every transaction in block by producing a digital signature for it. By using this signature a person can check whether transaction is added into the block or not. Figure 3: Structure of blockchain
- 8. 3.2 Proof of Work (PoW) and Proof of Stake (PoS) Proof of Work (PoW) Proof of Stake (PoS) Definition The proof of work is the security algorithm in this algorithm a computational challenge termed mining is performed which is imposed by PoW protocol [3]. This security algorithm was later on adapted by Hal Finney in 2004 through the idea of “reusable proof of work” using the SHA-256 hashing algorithm. The process of solving the computational challenge termed as minting is done here which is imposed by the Proof of Stake protocol. In this nodes of the network work together to add the records and then a voting process takes place which is done for accepting a block in the blockchain [3]. Advantage Proof of work provides a decentralized way through which users can verify their transactions, provide a high-security level, and allow miners to earn rewards related to cryptocurrency [46]. The advantages of proof of stake are that it provides a comparatively fast and less expensive transaction processing, it consumes less energy and it doesn’t require any expensive equipment to participate in the process [47]. Disadvantage The major drawback of proof of work is that it becomes very inefficient with large transactions because of slow speed and also it consumes very high energy in mining and also it is quite expensive because mining requires some equipment which is quite expensive [46]. Some drawbacks in this are that it doesn’t provide as much security as proof of work, sometimes a validator that has a large holding can influence the process of validation, and also in PoS, and it is required to lock some stacked coins for some time [47].
- 9. 3.3 Development Framework of Blockchain The development framework of blockchain is categorized in three different types and these types are Public Network, Private Network and Permissioned Network and these frameworks are shown in the figure 3 : 1. Public Network: This network can be seen as a very good example when we talk about the decentralized network in which any user can participate at any stage. Any user at any stage can read, write or check what is going on in the blockchain network which helps in achieving the decentralized way which often comes into talk when someone talks about blockchain. This type of blockchain network is extremely valuable as they are very important for any system that works on the principle of the decentralized network. 2. Private Network: This network is shared among only trusted parties and people can join only through invitations where it is checked whether they are allowed to join this network or not. In this, only the selected user could maintain the ledger and the owner of the network has the right to override, edit or delete the entries that he might think are not necessary. 3. Permissioned Network: This network is visible to everyone in the chain but participation in this network is controlled. In this network, a user can only perform particular functions that are granted to him by the administrator. The plus point of this network it allows anyone join the network after doing the verification of id and allows those users to read, write and perform other stuff on the information. Type of development framework Public Network Private Network Permissioned Network Figure 4: Development Framework of Blockchain
- 10. 3.4 Features of Blockchain Now let us see some of the features that blockchain provides and they are shown in figure 4: 1. Faster Settlement: As we all know that the traditional financing system of banks is very slow when it comes to in settlement of any sort of transaction. The main reason behind this could be that it requires permission from many people which takes a lot of time and sometimes it takes days in settling the transaction but we can reduce this time by blockchain as it performs money settling at a fast pace as compared to the traditional banking system and this helps in saving a lot of time. 2. Transparency: Since there is no interference from any third party and whenever a transaction is done it is announced to every node. So blockchain provides transparency in transactions. 3. Integrity: It is very important to keep the integrity of data which means that data is protected from any sort of unauthorized modifications. And since blockchain provides public verifiability i.e. any user can verify the correctness of the system, anyone can check whether the integrity of data is maintained or not. 4. Immutability: Developing ledgers that can’t be modified by anyone is the major working principle of blockchain. In a centralized system, it is easy to hack their systems and change the data which is not possible in the case of blockchain because in this technology once the block is approved and added to the blockchain then no one can go back and change the data of that block. Also, all the nodes have a copy of the ledger so to change the data one has to change all the copies which are not possible. Faster Settlement Transparency Integrity Immutability Figure 5: Features of Blockchain
- 11. 4. Applications of Blockchain As we have already discussed that blockchain works on a decentralized system. Now let’s see various applications of blockchain in financial sectors. Figure 5 showing uses of blockchain. 1. Cross Border Transactions: Since transferring money from one country to another takes a lots of time and additional charges are also applied on the other hand blockchain helps in making transaction fast and cost-effective. 2. Credit Scores: The data of banks can be changed by hacking there system whereas blockchain provide immutable database that can be seen by anyone to check the credit score of individual and helps in providing loan. 3. Billing System Management: As now almost all companies are using digitalized way of generating invoice so they can use blockchain in that case by simply uploading the invoice on the blockchain. 4. Government Expenses: Now a days government is using digital methods for transaction and regulating taxes of the people and to maintain transparency they could use blockchain. 5. Stock Exchange: In the stock market, a lot of entities are involved like brokers, regulators, and other persons who also see the stock exchange system which makes this process quite expensive in maintenance. With blockchain, we can reduce the intermediates and can make it cost-effective in maintenance. Cross Border Transaction Credit Scores Billing System Government Expenses Stock Exchange Figure 6: Applications of Blockchain
- 12. 5. Shortcomings of Blockchain Blockchain technology has a vast scope of changing our ways in many different ways but this technology still have some shortcomings that are need to be worked on and these shortcomings are described below and also shown in figure 6: 1. Scalability: Blockchain faces difficulty in scalability as it is not able to provide services to many users at the same time. According to a study Visa processes nearly 24,000 transactions per second and MasterCard processes around 5,000 transactions per second but on the other hand, both bitcoin and Ethereum combined can handle only around 20 transactions per second which makes it difficult to meet the needs of such a large number of people that are using blockchain in a very less time. 2. Security: Since this technology is still in the development phase some loopholes make the user vulnerable to cyberattacks and some malware could hack the user’s system and can steal his username and password and can steal all his money or his data. According to a study around $428 million loss has been made due to hacking and other scams. 3. Privacy Issue: Since blockchain provides complete transparency of data or transactions. There comes an issue of privacy leakage although these ledgers are completely immutable due to their transparency privacy of individuals comes at stake. Many people are not adopting this technology because of the fear of losing their privacy. 4. Energy Consumption: The amount of energy required to store such big programs is usually more than the traditional method of money transfer. At the current time the energy we are using to mine a single bitcoin is 1449kWh and due to this adaptation of blockchain is not happening at a large scale. Scalability Security Privacy Issue Energy Consumption Figure 7: Shortcomings of Blockchain
- 13. 6. Future Scope After reading many research papers and doing my own survey the issue that took my attention the most is the issue of energy consumption and privacy issue. So I propose a theoretical solution in which we can use the Proof of Stake (PoS) method instead of the Proof of Work (PoW) by doing this we can solve the issue of high energy consumption because in Proof of Stake, the part is done by the selected persons termed as validators and this makes the process of proof of stake fast, less expensive and consumes less energy. So the enormous amount of 2,045 Terawatt-hours of energy can be reduced and also it will reduce help in reducing the privacy issue as the calculation part will be done by selected validators so the privacy concern will also be reduced. Figure 7 is showing an UML diagram in support of my purposed theory.
- 14. 7. Conclusion Blockchain as an emerging technology can play a very important part in the lives of people, completely changing their way of interacting with different things in their day-to-day life. Firstly, the users now can manage their transactions on their own without any interference from any third party. Blockchain technology will revolutionize the financial sector by providing a more secure way of finance. However, still some issues need to be fixed for the widespread adoption of this technology. These issues are scalability, privacy, energy consumption, and security. Since this technology is still in a very early stage so there is a huge potential in researching this technology so that we can overcome the persisting issues of this technology and adopt this technology widely.