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Bitcoin’s proof-of-work algorithm



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More and more energy is flowing into Bitcoin’s security, now on the scale of whole nation-states : According to a study by the University of Cambridge, Bitcoin currently consumes just under 79.06 TWh per year, just over the Philippines (78.30 TWh / year) and Chile (73, 22 TWh / year) and only slightly less than Belgium (82.16 TWh / year). A different consensus model must be forth, so it sounds from many sides of the community. Best of all one that is less energy-intensive while maintaining the same level of safety. For some time now, the solution has been called the Proof of Stake (PoS) from the point of view of the Ethereum Community. Unlike model proof of work (PoW), the model does not rely on computationally intensive hashing of the block header but relies on a staking model. Depending on the PoS algorithm, nodes that have deposited a certain amount of ether (called collateral) vote on the next block. Those who do not follow the consensus rules lose their stake; this should then be an incentive for the nodes to behave according to the rule. But with cryptocurrencies that are capitalized with billions of dollars, you should not be negligent and look carefully. Proof of Work incentivizes miner compliance by making it costly to break the rules. Anyone who cheats by installing double spends in a block, scores in vain. Finally, a double donation contradicts the network rules – such a block would not accept a node. In other words; Dishonest miners consume energy but are not rewarded with the Coinbase Reward. So it’s not worth cheating. This is a bit different from PoS. Staking nodes can theoretically work on a variety of blockchain versions simultaneously; including those that contain illegitimate transactions such as double-spends. Unlike PoW, PoS does not (yet) have a fully developed mechanism to ensure cooperative forging on a single blockchain. It does not seem to matter to opportunistic validators which chain makes the race – the main thing is that the rewards flow. But that’s not all. In addition to the much-discussed Nothing-at-stake problem, further security vulnerabilities such as possible short-range attacks are emerging in the case of PoS cryptocurrency such as peercoin. A short-range attack takes place as follows: An attacker buys his coffee with ether and, after the transaction confirmation has been received by the merchant, impresses with a validator to tinker with a blockchain that does not contain the said transaction. In short, a short-range attack targets the short-term reorganization of the blockchain. Since validators are bribed, it is also called a bribery attack.

While short-range attacks aim at an opportunistic reorganization of the blockchain in order to sneak up on goods and services, a long-range attack is the evil twin of the same idea. Unlike short-range attacks, however, the attacking node does not start in the midst of the blockchain generated at short notice, but rather at its beginning, ie on the Genesis block.

The attacker can thus unnoticed generate a completely new transaction history. As soon as it has overtaken the block height of the actually legitimate Blockchain, he could even replace it. Finally, validators usually start with the longest possible blockchain. With Pow Blockchains, like Bitcoin, such an attack is unthinkable, an attacker would have to do all the proof-of-work calculations since Block One retrospectively – an endeavor with an almost infinite cost. Ultimately, there are still a lot of unresolved issues that can arise with excessive coin accumulation. As a result, validators with some capital naturally have a larger proportion of voting rights and are more likely to be selected as validators more often. Delegated Proof of Stake, Ethereum’s own approach, seems to be able to circumvent this problem fairly reliably. Moreover, with high capitalized coins, it seems unlikely that individual validators can accumulate a significant portion of the coins.

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