Cryptocurrencies suffer from a major problem: Scalability. Creation of an efficient decentralised network isn’t something that could be done overnight. Moreover, the problem becomes more difficult when we realise that the solution isn’t defined or even ideated. Different researchers are approaching the issue from different angles, expecting to come across the carpe diem that could revolutionise the crypto sphere.
At the heart of the scaling problem lies the concern of the consensus mechanism, which refers to how different nodes of the decentralised network agree on what’s happening and work with people from the other hemisphere of the world whom they don’t even know about to maintain the network’s consistency.
There are different ways to find the solution, formulated by integrating engineering and economics to secure the network. The engineering part to write codes ensuring that the network realises what is happening without leaving any possibility of exploitation while the economics part to formulate incentives for people to keep the network active without letting them exploit it.
Point of Work
Point of Work mechanism uses cryptocurrencies miners to uncover blocks and add them into the existing blockchain. Cryptocurrency miners have to solve complex math problems with computing power to uncover blocks and adding them into the blockchain. In exchange of their efforts, they are rewarded with a bitcoin and the blocks thus added is used in carrying out bitcoin transactions.
Although the mechanism is ideal theoretically, it is not possible in the real world as the amount of computing power required to solve the math problem is available with not much people making the system unworthwhile.
While economically, people are motivated to solve problem as the cryptocurrency they are getting quite valuable but such cryptocurrencies need to remain scare regardless the amount of energy is poured into the network. This requirement is achieved by increasing or decreasing the difficulty of the problem depending on how many machines are trying to solve them.
Thus, the system is left out with ample of inefficiencies in itself as it mechanism utilises a lot of energy to just mine the blocks rather than conducting transactions.
Bitcoin which works on the same system is trying to fill the gaps left by the mechanism with its Lighting Mechanism while other cryptocurrencies are abandoning the mechanism for good to look out for alternative consensus mechanism, basically anything other than Proof of Work.
Proof of Stake
As a consensus mechanism, Proof of Stake is one of the most popular and promising system existing today. The system lets go cryptocurrencies miners for staking. In this system, the user keeps the proof-of-stake cryptocurrency into a tailor-made PC wallet and connects it to the network thereby automatically becoming a node and now the processing power of the computer is used in conducting transactions along the network. In exchange for doing so, the user earns interest on their stake which is usually cryptocurrencies.
Now the system is efficient and scalable as the power is used to directly process transactions rather than solving math problems. However, the mechanism suffers from the problem of what we can call, it makes “rich people richer”, it heavily relies on unpredictable economic theory and manipulating people’s mindset to safeguard the network from exploitation.
In such a condition, the only advantage of Proof of Work mechanism is that, it has been tried and tested in real world and theoretically it is competent in keeping the network decentralised and secure.