Being involved in the world of blockchain and cryptocurrency means that you’ll regularly come across algorithmic terms. Primarily, there are three types of algorithms used for cryptocurrency projects:
  • POW (Proof-of-Work)
  • POS (Proof-of-Stake)
  • POI (Proof-of-Importance)
While deciding for whether to invest in a cryptocurrency project or not, one of the decisive factors to consider should be the algorithm it’s based on. Below we’ll be mentioning the critical pointers of each of these terms along with what separates one from the other.

Proof-of-Work (POW)

Satoshi Nakamoto, the creator of Bitcoin, pioneered the Proof-of-Work as a mechanism. After which many cryptocurrencies, including Ethereum, based their network on the same algorithm. The computers involved in maintaining the security of the network work to solve a mathematical puzzle known as a hash. Although the task is quite straightforward for a computer, it’s intensely repetitive. Thus, it requires exceptional computation power. Therefore, proving that they’ve done the necessary ‘work’ to register a data block into the network.  In the recent years, the POW algorithm has been criticised because of the high initial investment and the environmental cost attached to it. The POW, theoretically, is also prone to what is known as the 51% attack. It’s a situation wherein a miner controls more 51% of the computational power of a network and thus can change the data within each block.

Proof-of-Stake (POS)

The tremendous amount of computational power required makes POW both expensive and energy-intensive. An alternative algorithm — Proof-of-Stake — has gained popularity in the recent years. Unlike POW, the POS approach requires no specialized hardware in-order to participate in the network. POS takes the path of letting the coin stake of a particular user determine the likelihood of them adding the next block of transactions to the blockchain. To influence the network fraudulently, a person will have to own 50 percent of the coins on the network. An attempt to buy such an amount will exorbitantly push the price up; thus rendering the entire effort futile. NxT pioneered the POS system. Nowadays, this algorithmic approach is often used by crowdsale-funded platforms, wherein tokens are distributed based on investments made.

Proof-of-Importance (POI)

With POI, the dependency is neither on the amount of ‘work’ nor the amount of ‘stake’ you hold. POI, as an algorithm, takes a more holistic approach to considering the overall productivity of a user in the network. The reward, as per POI approach, should be based on the contribution of a user to the network in all capacities. The staking of the block, therefore, is based on multiple factors including reputation, overall balance, and the number of transactions done through or from a particular address. Through these factors, the network determines how ‘useful’ the member is to the network. NEM was the first cryptocurrency project to implement POI as an algorithm to its platform. Increasingly, people are finding ways and combinations of both POS and POW with POI to create an algorithm that makes it tremendously expensive to attack the network but rewards those who protect it generously.