The advent of Bitcoin gave birth to a new paradigm known as a blockchain, which had the potential to provide a wide range of services without requiring a central authority to regulate and assure the system's security and integrity. The safety and validity of each transaction were ensured by the consensus protocol, which is an essential component of any Blockchain network. And two of the most well-known consensus mechanisms of the crypto world are proof of work and proof of stake.
Consensus algorithms are required for blockchain networks to function effectively since they check each and every transaction that is secured. In this article, we’ll learn about the various aspects and differences between proof of stake vs proof of work. But let’s start by understanding what consensus mechanism means.
At the core of any cryptocurrency, is a network of computers that ensure the safety and validity of each transaction in a blockchain and helps to gain the necessary agreement among distributed operations or multi-agent systems, such as cryptocurrencies, on a single data value or a single network state. This network is known as a consensus mechanism.
When it comes to blockchain technology and crypto, the two most prominent consensus mechanisms are:
- Proof Of Work
- Proof Of Stake
And what function do they perform?
In simple terms, they both govern how transactions among users are validated and put on a blockchain's public ledger without the involvement of a third party.
Now that we know what consensus mechanism is and how it works, it’s time to delve into the two most important mechanisms: proof of stake vs proof of work.
Proof Of Work
In the 1990s, Proof of Work (PoW) was created as a way to combat email spam.
Proof of work (PoW) is a widely used consensus technique in cryptocurrency networks such as Bitcoin (BTC) and Litecoin (LTC). It requires a participating node to demonstrate that the work they have completed and submitted qualifies them to add new transactions to the blockchain.
The network demands a large amount of computing power, which is why it's termed "proof of work." Virtual miners from all around the world compete to be the first to solve a maths challenge to protect and verify proof-of-work blockchains. The winner receives a fixed sum of cryptocurrency in exchange for updating the blockchain with the most recent confirmed transactions.
Pros Of Proof Of Work
Proof of work provides a lot of benefits, especially for a simple but extremely valuable cryptocurrency like Bitcoin.
- Keeps the decentralized blockchain safe.
- The rising value of crypto tempts more miners to join the network, and this in turn boosts the power and security of the system.
- Because of the computing power required, tampering with the blockchain of a valued cryptocurrency is unfeasible for any individual or organization.
Cons Of Proof Of Work
- Consumes a lot of energy.
- A time-consuming procedure that may struggle to scale to handle a large number of transactions.
Proof Of Stake
Proof of Stake (PoS) was developed to overcome the over-dependence of Proof of Work (PoW) on energy that was required for blockchain ordering.
Proof of stake (PoS) is a popular consensus technique that originated as a low-cost, low-energy alternative to the proof of work (PoW) process. Ethereum 2.0, Algorand, Cardano, Tezos, and other (usually newer) cryptocurrencies are all powered by proof of stake.
It implies entrusting the maintenance of the public ledger to a participant node in proportion to the number of virtual currency tokens it owns. However, this has the drawback of encouraging hoarding rather than consumption of crypto coins.
Pros Of Proof Of Stake
- An energy-efficient alternative to proof of stake
- Quick transaction speed.
- Low-cost transactions.
- Participation does not demand the use of any specific software or hardware equipment.
Cons Of Proof Of Stake
- Not as secured and reliable as PoW.
- Certain PoS cryptocurrencies demand that staked funds be held for a specific amount of time.
Proof Of Stake Vs. Proof Of Work: A Comparison
Understanding the differences between proof of stake vs proof of work might help you better evaluate available cryptocurrencies for your portfolio.
Proof Of Work Vs. Proof Of Stake: Blockchain Order
Blockchain is a system that consists of block series (groups of transactions), all arranged in chronological order as per the transaction order.
The genesis block or the first block of the blockchain is also termed block 0. This is the first block in a PoW blockchain and is hardcoded into the program and does not relate to a prior block. The following blocks in PoW uploaded to the blockchain always refer back to the prior blocks and contain a copy of the entire updated ledger.
A PoS blockchain, like a PoW blockchain, is a system that consists of a series of blocks that are arranged in chronological order based on the transactions they contain. The process of blockchain order is similar for PoW and PoS, but it’s worth noting that with PoS cryptocurrencies, no one competes for the right to contribute blocks. As a result, rather than being mined, the blocks are frequently referred to as 'forged' or 'minted'.
Proof Of Work Vs. Proof Of Stake: Energy Usage
PoW Miners solve difficult mathematical equations (called hashing) to obtain the privilege to produce a new block and add it to the blockchain by obtaining a random number, nonce. This is done using specialized ASIC hardware devices, and it is a tremendously energy-intensive activity because miners need hundreds of thousands of them to win the race for each block.
PoS cryptocurrency blockchains use a lot less energy than PoW crypto blockchains, thus they're cheaper to run. However, for pool operators and validators, it is still lucrative since transaction throughput is significantly higher, and even with a reduced transaction price, those who manage the network are still fairly compensated.
Proof Of Work Vs. Proof Of Stake: Participants
A PoW system combines processing power and encryption to establish consensus and ensure the legality of transactions recorded on the blockchain.
In order to produce new blocks, miners compete to generate the correct answer to mathematical problems during the hashing process. They do it by attempting to guess a hash, which is a string of randomly generated integers. When this is combined with the data in the block and processed through a hash function computer, the output must match the protocol's criteria.
In a Proof-of-Stake (PoS) system, all users who own a certain token can participate in a consensus method. Anyone may become a validator or a block maker in a network with reduced obstacles.
In PoS networks, the admission requirements for staking pools or validators are that users must hold a certain quantity of tokens and lock them for a period of time as a stake. When validators utilize malicious tactics like double-signing or coordinated attacks on the network, they risk losing the staked amount.
Proof Of Work Vs. Proof Of Stake: Rewards
The block reward is a new coin given to a miner by the blockchain for each valid and approved block.
The block reward is lowered after a particular number of blocks have been discovered in some cryptocurrencies, for example, Bitcoin. However, once a specific number of blocks have been mined, this value is decreased by half every four years in a process known as halving, which is documented in the Bitcoin protocol's source code.
Users that submit a legitimate block onto the blockchain are rewarded in PoS networks. The payouts vary depending on the blockchain. Some only have transaction fees, while others have a specific intense budget for the first couple of years until the network is run-in and there are enough transactions to support the validator's costs.
Bonus Question: Will PoS Replace PoW?
A proof of work (POW) method was created to fill the void left by the lack of a central authority. And as the Bitcoin market expanded, different consensus models were proposed to address some of the issues with the original concept. Some were created as a replacement for POW, vowing not to jeopardize the system's safety and integrity. One of the most well-known alternatives was proof of stake (POS), which intended to meet the demands of the community while also addressing the issues that come with POW.
The Bottom Line
Overall, the clash between proof of stake vs proof of work is slowly becoming a burning topic, especially with Ethereum’s transition to Ethereum 2.0.
Proof of work might be used to distribute money to the community at the start of a blockchain and then switched to POS after that. In reality, however, Proof of stake appears to be on its way to becoming the de facto norm for blockchain technology, while POW is losing its position as the default consensus model for each new blockchain.
Whatever it might be, the ultimate objective of a successful blockchain network should be to solve the so-called blockchain problems of security, decentralization, and scalability.