Author: Marcin Rzetecki

Categories
Blockchain Financial Services Technology

Proof of work versus proof of stake: Comparing major consensus mechanisms

Quantum computer. Machine Learning. Network structure of technology. Blockchain technology concept. Digital background. Neural network.

Consensus plays a crucial role in our day to day activities. Without it, we cannot make decisions on important issues affecting our countries, businesses, and families. Consider a scenario where there is a pressing issue to solve, and the whole nation lacks a mutual understanding. In such a scenario, lawmakers have to reason and come up with a mutual agreement to address the issue. There is no other democratic way around it.

The same principle applies to blockchain networks that use consensus mechanisms to enable participants to agree on various activities of a network, like transactions, forking, and voting. Without a consensus algorithm, a blockchain system cannot be an immutable database. Lack of consensus in a blockchain network would make the entire ecosystem of no use since miners or validators would be unable to process and verify transactions. I’ll compare and contrast the two major types of consensus mechanisms: proof-of-work and proof-of-stake. Before that, let’s define what a blockchain consensus algorithm is and the importance of a consensus mechanism.

Proof of work versus proof of stake: Comparing major consensus mechanisms

Table of contents:

What is a blockchain consensus algorithm?

A consensus algorithm enables members of a blockchain ecosystem to agree and commit new data to the blockchain. Consensus algorithms are essential for blockchain ecosystems since they lack central authorities. Because of the decentralized nature, nodes (also known as miners or validators) are responsible for maintaining blockchain systems through consensus algorithms. This ensures that participants conform to the set rules and regulations, achieving trustless transactions. In cryptocurrency transactions, this ensures that users can only spend their coins once.

The importance of consensus mechanisms

In this part, we will discuss the primary roles of consensus mechanisms to help us gain a better understanding of how blockchain algorithms work.
Facilitating a unified agreement : Centralized networks rely on third parties to run. But, consensus algorithms enable blockchain systems to operate without the need for members to trust each other. In other words, consensus algorithms achieve a unified agreement between network participants, ensuring that every transaction is valid and the database is up to date.
Aligning economic incentives : Since decentralized networks regulate themselves, it is vital to align the interests of the members/stakeholders to achieve optimal functionality. Consensus mechanisms employ economic incentives to reward users for proper conduct.
Ensuring fairness and equity : Consensus algorithms also ensure that justice and equity prevail among network users. Anyone can join an ecosystem — a public blockchain in this case — and all members should exercise equal voting rights.
Preventing doubles spending : Double spending is one of the major risks threatening digital payments as it affects the value of digital assets adversely, rendering them worthless in the long run. Consensus algorithms prevent double spending by guaranteeing that only verified and valid transactions make it into the public blockchain records.
Ensuring a fault-tolerant network : By warranting that a system is fault-tolerant, consistent, and dependable, a consensus algorithm enables a blockchain to continue functioning even in the face of severe threats and failures.

What is proof of work?

While the PoW mechanism existed way in the ’90s, Satoshi Nakamoto popularized the concept with the invention of Bitcoin in 2009. The Bitcoin network was the first significant use case of the PoW consensus mechanism. PoW is blockchain’s original consensus mechanism.
Early on in blockchain’s development, PoW was the most reliable method for blockchain consensus. It spearheaded the implementation of the decentralized vision and eliminated third-parties at the same time to guarantee valid network transactions. Nevertheless, as the technology continued to gain momentum, the drawbacks of this mechanism were increasingly apparent. Sometimes, it’s impossible to solve them.

How does proof of work function?

In PoW, miners must solve cryptographic puzzles to verify transactions. We can compare it to a race where runners are contending for an award. The race of this blockchain competition is referred to as a hash. For every confirmed transaction, miners are compensated with the network’s native cryptocurrency and a transaction fee.
It is important to note that blockchain puzzles are quite complex, and high computational power is needed to solve them. Below is a summary of the execution of the PoW consensus mechanism.
A new transaction is sent to a network.
Mining rigs begin to look for a hash value that aligns with that of the transaction.
The first to discover the hash gets a reward in cryptocurrency.
A new block is created, which comprises the recently completed transaction.
A section of each new hash bears the hash value of the last completed transaction in the block. This deters miners from confirming fraudulent transactions and the issue of double-spending. The complexity of a PoW puzzle is based on the number of nodes in a network. It is directly proportional to the computational power needed to solve it. This creates some severe consequences for a blockchain network using the PoW consensus mechanism. We will discuss these issues later with the proof-of-stake mechanism.

What is proof of stake?

As a result of the issues arising from the PoW mechanism, the blockchain developers started searching for a more economical method of reaching a consensus. Scott Nadal and Sunny King proposed the concept of proof of stake in 2012.
Currently, the Ethereum community is moving toward a PoS consensus mechanism through the Casper update. It aims to solve the problems of the PoW mechanism and those of PoS itself. For a comprehensive analysis concerning the Ethereum network developments, you can refer to this guide for more insights.
In proof of stake, computation power is replaced by currency power — the number of coins a node holds in its wallet. In a layman language, the ability to confirm a transaction depends on your network “stake.” Besides, miners are replaced by validators or forgers in PoS. Instead of mining coins in each transaction, all coins are minted by the developers during the network’s launch.

How does proof of stake work?

Instead of competing to be the first validator, the proof of stake mechanism picks a validator based on their stake in the blockchain. Assume you own tokens worth 25% of the block in your wallet, you will have the power to confirm 25% of the block only. When the Casper version launches, we will experience the reality of validator pools.
So far, we have learned what PoW and PoS are and how they function. Now, let us compare and contrast them.

Comparing PoW and PoS

There are concerns regarding the general security of the PoS protocol as it does not use real-world resources for validation. There is no cost required to create a new block on top of both branches in case of a temporary fork. This is a nothing at stake attack. On the other hand, PoW consumes electricity to mine blocks. Developers are still uncertain whether PoS protocols can offer the same security assurances over an extended period that Bitcoin, with its PoW mechanism, has provided for almost eleven years now.

Proof of work Proof of stake
  • Distributed consensus among untrusted and unknown nodes
  • Distributed consensus among untrusted and unknown nodes
  • Incentives are rewarded within the system for work done outside the system
  • Incentives are rewarded within the system for escrow inside the system
  • Relatively high cost of input with high returns
  • Low cost of input with low returns
  • Slow transaction rates
  • Fast transaction rates
  • Low efficiency that requires more power
  • High efficiency that requires less power

Another contrast between a proof of work and proof of stake protocol is that all validating nodes must be identifiable in a PoS protocol. The staked tokens are responsible for any network misconduct. On the other hand, a PoW mechanism does not require miners or nodes to be identifiable. As a matter of fact, it is a PoW aspect, that if a node receives a block, there are no further details regarding the miner of the block. What is essential is that the block and all its transactions are legit. You must trust the math to trust PoW.

Conclusion

Although proof of work protocols secure blockchain networks, it also negatively affects scalability and transaction output. Centralized establishments majorly run the PoW consensus mechanism, and its energy consumption is not sustainable.
While the proof of stake protocol offers less security, the validators use their own digital assets to the stake, forcing participants to have skin in the game. The mechanism also has recommendable scalability and transaction throughput.
The future of PoS relies on the up-and-coming shift of the Ethereum network. If the second biggest blockchain network can successfully transition to proof of stake and still exhibit the security of their ecosystem with the assistance of the novel Casper mechanism, it will convince the entire blockchain community about its power comparatively new Proof of Stake consensus mechanism.

Related posts:

Categories
Blockchain Financial Services

Top 10 crypto exchanges for trading cryptocurrencies

Buying digital currencies begins with finding the right exchange that meets your needs. There are more than 2,500 exchanges to choose from, with varying charges, identity verification requirements, and user experience. In this guide, we will review the top ten crypto exchanges for buying and trading cryptocurrencies.

Before that, let us define what a crypto exchange is and what features you should consider when choosing a crypto exchange. For seasoned traders looking for an all-in-one dashboard to track their crypto earnings, CoinTracking is an excellent choice.
 

Top 10 crypto exchanges for trading cryptocurrencies

Table of contents:

 

What is a crypto exchange?

Crypto exchanges are platforms where you can buy, sell, or exchange cryptocurrencies for other digital assets or fiat currency, like the U.S. dollars. If you want to venture into professional crypto trading and have access to advanced trading tools, you will likely require a verified crypto exchange account.
If you simply want to make the occasional, straightforward trade, there are also websites you can use, which do not need an account.

Aspects to consider when choosing a cryptocurrency exchange

It is essential to carry out due diligence before you start trading. Here are some of the primary aspects you should consider when choosing a crypto exchange.

Reputation

The best way to learn about an exchange is to read reviews from individual users and well-known blockchain blogs. You can also inquire more about a particular exchange on forums such as BitcoinTalk, or Reddit.

Trading fees

Most crypto exchanges openly display their fees on their websites. Ensure you check on deposit, transaction, and withdrawal fees. Fees can differ substantially depending on the exchange you choose.

Payment methods

Does your preferred exchange accept credit card, debit card, wire transfer, or PayPal as a payment method? Does it allow trading with U.S. dollars or euros? It is advisable to choose an exchange with a wide variety of payment methods.

Verification requirements

Most crypto exchanges, especially in the U.S. and Europe, require users to verify their identities to make deposits and withdrawals, while others will let you remain anonymous. While verification, which can take up to a few days, might seem hectic, it protects the exchange against all sorts of scams and money laundering activities.

Geographical Restrictions

Some user functions provided by exchanges are only accessible from particular geographic locations. Ensure that your preferred exchange allows full access to all platform features and services in your country.

Track your success

If you’re trading on several different platforms or in many different cryptocurrencies, this can get complex very fast. Keeping track of all the profits and losses whether it’s for personal reasons, or tax reasons is easy with CoinTracking.

The top 10 crypto exchanges to trade cryptocurrencies

Coinbase

Coinbase was designed to be the most trusted name in the crypto market, and in this regard, it is more or less unrivaled in the marketplace. It is an American company and is FDIC insured for U.S. deposits up to $250,000. It’s also compliant with EU financial regulations.
Besides, Coinbase is backed by significant mainstream investors, like banks and investment funds.
This level of trust ensures that Coinbase is the exchange of choice for most cryptocurrency traders and investors. It has a simple user interface to accommodate both crypto professionals and newbies.
However, this emphasis on trust means that Coinbase has a limited number of listed coins, although it has listed all the major cryptocurrencies. Access is restricted to a relatively small number of countries.
Regarding security, Coinbase boasts of an excellent track record, with less than 5% of its customer’s funds stored in hot wallets. Coupled with its insure-policy, Coinbase is one of the safest exchanges for crypto investors.

Binance

Binance was founded by Changpeng Zhao (CZ), a professional Chinese software developer who previously designed systems for the Tokyo Stock Exchange and developed futures trading software for Bloomberg’s Tradebook.
It is the preferred exchange for coin-to-coin crypto trading with some of the biggest numbers of available coin pairs and trading volumes in the cryptocurrency market.
Nevertheless, the exchange is known for its low trading and withdrawal charges. Trading fees are discounted if the user is holding the Binance Coin (BNB).
In 2017, Binance emerged as the exchange with the largest trading volume, mainly due to its wide variety of digital assets. Early this year, to sustain its impressive growth, Binance started margin trading, which is now available for BTC, ETH, XRP, BNB, and TRX.

Kraken

Established nine years ago, Kraken is the biggest exchange in euro volume and liquidity and has partnered with the first crypto bank. The exchange allows users to buy and sell bitcoins and trade between bitcoins and euros, U.S. dollars, Canadian dollars, British Pounds, and Japanese Yen.
Kraken also allows users to trade altcoins, like ether, Monero, Augur REP tokens, Zcash, Litecoin, Stellar lumens, and many more. For experienced traders, Kraken provides margin trading and a variety of other trading tools. Generally, it is the right choice for experienced traders.
Kraken can be accessed by users from the U.S., Canada, Japan, other EU nations, and the rest of the world.

CEX.io

CEX.io is a fiat-to-crypto platform that provides some advanced trading tools while still being very friendly for newbies to use. Again, experienced traders who are new to digital currencies often use CEX.io for the kind of trading they are used to with traditional securities and platforms.
CEX.io permits free bank transfers for verified users and charges a small fee for unverified users using a credit card. The exchange is also known for low trading fees. Most CEX.io customers are drawn to the advanced trading tools that traditional crypto exchanges lack.
CEX.io has a limited offering of listed cryptocurrencies, although it has listed all the major coins. It offers a wide range of coin-to-fiat pairs, including euro, pounds and rubles, which most crypto exchanges do not provide.

LocalBitcoin

LocalBitcoin is a Peer-to-Peer (P2P) crypto exchange with buyers and sellers from different parts of the world. With LocalBitcoin, you can connect with people from your locality and buy or sell bitcoins for fiat, pay via PayPal, Skrill, or mobile money, or even arrange to deposit cash at a bank branch.
LocalBitcoin only charges a trading fee of 1% from sellers who set their exchange rates. To ensure safe trading, LocalBitcoin has put up multiple measures. First, the platform rates each trader with a reputation rank and publicly displays past trades. Secondly, once a deal is requested, the funds are held on LocalBitcoin’s escrow system. They are only released after the seller marks the trade as complete.
Further, if anything goes wrong, LocalBitcoin has a support and conflict resolution team that resolves conflicts between buyers and sellers. It is advisable to check the LocalBitcoin terms and conditions before making any trade.

Coinmama

Coinmama is a reputable exchange with a simple user interface. It offers a quick way to purchase digital assets using fiat money without storing them on a third-party exchange. The platform is suitable for users who just want to buy crypto using fiat quickly and safely.
Often, people make an initial crypto acquisition using Coinmama, and then deposit the acquired coins from their wallets into a crypto-to-crypto platform. The exchange charges relatives high fees for its services; hence, it is ideal for those willing to pay premium charges for speed, discretion, and simplicity.

Changelly

Changelly provides a rare service in the crypto industry: fast and anonymous crypto-to-crypto transfers with no third party holding. The exchange is not meant for investing or trading, but instead as a quick, discrete, and efficient means for exchanging coins in your private wallets.
It works by providing competitive exchange rates for a wide selection of coins and then transfers them directly to your private wallet. For such services, Changelly imposes a higher fee compared to other exchanges, but not so high. The premium charges are for anonymity and simplicity compared to traditional crypto-to-crypto exchanges.

Phemex

Phemex is a newly launched crypto trading exchange that has generated a lot of interest among the crypto community. The exchange posts an average daily trading volume of over $350 million in less than eight months of operation, which is a great achievement for a startup.
Phemex differs much from other exchanges, and it strives to bring professionalism, trust, and efficiency to the crypto market. Currently, Phemex supports trades in perpetual swaps of major coins and plans to list traditional financial products, like S&P 500 stocks, indices, commodities, energy, and many others.
Since it is a new exchange, Phemex supports trading in six crypto pairs, including BTC/USD, ETH/USD, XRP/USD, LINK/USD, XTZ/USD, and LTC/USD, all quoted in BTC and settled in U.S. dollars. It has a simple and intuitive trading platform and is available in both web-based and mobile trading platforms.

Bitfinex

Bitfinex is one of the most advanced fiat-to-crypto and crypto-to-crypto trading platforms, boasting some of the highest liquidity and trading volumes among exchanges. It has fewer competitors regarding crypto traders who aim to embrace advanced trading techniques and trade volumes.
The exchange offers a full range of tools that traders expect from a platform, like advanced order types, margin trading, and a wide range of coins and fiat currency pairs. Bitfinex has experienced two major hacks in the past, but they have paid back all losses to customers and greatly enhanced their security set-up.

Bittrex

Bittrex is a crypto-to-crypto exchange that was built with one priority in mind above all else: security. It holds most of its client funds in cold wallets and has a stable verification system. Apart from safety, it focuses on supporting a wide range of crypto-to-crypto trading pairs, with some of the best trading volumes in the crypto market.
Though Bittrex may not be the number one choice for experienced crypto traders looking to trade major cryptocurrencies, it is undeniably one of the best exchanges for trading less popular tokens.

Conclusion

Leveraging the above crypto exchanges will enable you to invest and trade in almost all cryptocurrencies. However, there are still several other exchanges for trading digital currencies. Therefore, do not limit yourself to the list provided in this article.
In terms of reputation, security, trading fees, payment methods, geographical restrictions, and verification requirements, it is advisable to consider the above crypto exchanges as your trading partners. Remember not to use crypto exchanges as a wallet to HODL your digital assets.
 
Related posts:

Categories
Blockchain Finance Financial Services

Ethereum smart contracts vs. Stellar smart contracts

Ethereum smart contracts vs. Stellar smart contracts is a binary I often have to answer in my consulting work and product design workshops. The answer, of course, is not always so straightforward. What are the pros and cons of each innovative solution and when should you choose one over the other? A lot has to do with the level of decentralization you’d like to achieve and what tradeoffs you’re willing to accept.

TL;DR, Both Ethereum and Stellar are smart contract-enabled blockchains. Ethereum is more decentralized — but slower. Stellar is less decentralized — but faster.

Preliminary explanation

So if you’re considering which blockchain protocol to use, carefully identify your target users’ wants and needs and build your solutions around those.

Smart contracts underpin many of the arguments for the utility of blockchain technology. These computer programs automatically execute specific actions once all the criteria are met.

Public blockchains add a layer of transparency to the type of data moving around. There are many public blockchains nowadays but not all are useful for the same things. At Espeo we primarily work with Ethereum and Stellar ecosystems as guiding public blockchains. Of course, there are others on the market but the specific utility of these two is the main reason for this choice. 

Ethereum is a global, open-source platform for decentralized applications on which you can write code called a smart contract that controls digital value and runs exactly as programmed. Ethereum is the most popular blockchain because of the apps you can write on top of it.

On the other hand, the Stellar blockchain is an open network for storing and moving money. As we can see these two blockchains represent different business values. Ethereum works best for programming smart contracts in business integrations while Stellar facilitates the transfer of funds in a blockchain ecosystem.

Smart contract origins

Legal scholar and cryptographer Nick Szabo invented the smart contract concept which he laid out in a 1996 paper. In it, he defined smart contracts as “a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.”

A smart contract is a self-executing contract made possible by blockchain technologies and enforced by cryptographic coding. 

First, we should know that Stellar blockchain doesn’t have a smart contract as a smart contract language or build in a virtual machine to execute code. A Stellar smart contract is a composition of transactions that are connected and executed using various constraints and is instead optimized for sending, storing and trading value.

Stellar smart contracts

The following are examples of constraints for Stellar smart contracts:

  • Multisignature —  a concept requiring signatures of multiple parties to sign transactions stemming from an account. 
  • Batching / Atomicity — the concept of including multiple operations in one transaction. Atomicity is the guarantee that given a series of operations if one operation fails they all operate if the transaction fails.
  • Sequence —  represented on the Stellar network through sequence number. Using a sequence of numbers in transaction manipulation, it can be guaranteed that specific transactions do not succeed if an alternative transaction is submitted.
  • Time bounds — are limitations on the time period over which a transaction is valid and can be used to represent time in a Stellar smart contract.

Each transaction on the Stellar blockchain is confirmed by a consensus algorithm. The Stellar Consensus Protocol is an evolution of a federated Byzantine agreement.” The FBA protocol has a determined membership list but SCP uses open membership.

Stellar takeaways

Transactions on the Stellar blockchain are faster and the fee for a transaction is cheaper than Ethereum. So, Stellar offers new possibilities for business models. IBM, for example, uses Stellar to facilitate cross-border payments. The project is called IBM Blockchain World Wire and seems to be a very promising project. In Espeo Blockchain we use the Stellar blockchain to create P2P payment applications.   

Ethereum smart contracts

The Ethereum blockchain offers nearly endless possibilities to write smart contracts. We can approach many more uses than another blockchain because we can control our written code.  To write Ethereum-based smart contracts there are a few different programming languages: Solidity, which is like JavaScript and the most popular nowadays and Serpent like Python. 

The question is how and why it works. To understand it that we should know two important and related concepts with Ethereum blockchains like the Ethereum Virtual Machine and gas. 

  • The Ethereum Virtual Machine (EVM) is a place where smart contracts run in Ethereum. It is Turing Complete programing language or we can say that it is a distributed global computer where all smart contracts are executed.
  • Each transaction has a cost measured in gas and each gas unit consumed by a transaction must be paid for in Ether, based on a gas/Ether price which changes dynamically. We should know that in each transaction we have a gas limit parameter that is an upper bound on how much gas we can consume. This parameter is used as a safeguard against programming errors that could deplete an account’s funds.

As we can see we have control over our smart contract. It has both good and bad sides. If we are about to create a decentralized application we have way more possibilities using Ethereum, because it offers more than the Stellar blockchain. On the other hand, if our code has a bug, it can be hacked very easily. As in any other blockchain, each smart contract run on the Ethereum blockchain is confirmed by a consensus algorithm. 

Ethereum takeaways

Ethereum is currently a proof-of-work consensus model. In proof of work, miners lend their computing power and compete against each other to complete transactions on the network and get rewarded in cryptocurrency. unsurprisingly, this is very energy-intensive but this algorithm protects the network against hacking.

Real-world applications

There are many different industries and solutions for these industries. When we want to choose blockchain we should ask which blockchain helps us solve problems and grow our business. These questions we can put in public and private blockchains too.  

Ethereum is the most popular blockchain that uses smart contracts. Ethereum is the best choice where we need to set parameters for the smart contracts. The best applications for the Ethereum blockchain are decentralized finance and asset tokenization.

The second very important thing is the ability to create different ERC tokens based on Ethereum. Many of us can say that Ethereum is slow and it’s true. Although, there are tricks to overcome this. However, we should pay attention that it’s the beginning of this technology and Ethereum core developers are working to improve the protocol.

Ethereum has versatile applications in which it outperforms other blockchains. In the real estate industry, we can tokenize real estate, or art opening these investments up to a larger number of people. We can improve and automate this process of fractional ownership as well. Today we have platforms that use Ethereum smart contracts to change ownership of parts of the building.

You deposit fiat or digital currency money and receive tokens that represent part of the building. It looks like a notary’s contract but is faster, automatic and considerably cheaper. Ethereum has an advantage over other blockchains because it has its own tokens such as ERC20, and ERC721 among others.

Conversely, the Stellar blockchain is quite different blockchain for the other applications. The Stellar blockchain doesn’t have smart contracts based on Turing machines. We have an API where we have a number of endpoints to use. 

Stellar and Ethereum – Conclusion

Developers can’t write our own smart contracts as in Ethereum. It’s not wrong because our work could be faster when we use existing methods. The Stellar blockchain is better for industries where we want to transfer assets like cryptocurrency or tokens generated on the Stellar blockchain. A good example it’s a peer-to-peer mobile payment application or payment gateway using Stellar’s cryptocurrency, Lumens. In Espeo Blockchain, we have started work on a peer-to-peer payment system based on Stellar which is the most appropriate solution for this use case. 

Three main things why: very low fee for transactions than other blockchains, very fast transactions and the ability to create our own token which we can use as our asset in the finance ecosystem.

Related posts: