Proof of Work & Proof of Stake, Explained

Learn all about the two most important consensus mechanisms Proof Of Work (PoW) and Proof Of Stake (Pos) in our explainer. 

COVERED:

• Introduction
• Proof of Work
• Proof of Stake
• PoW Vs PoS
• Pros of PoW
• Cons of PoW
• Pros of PoS
• Cons of PoS
• Conclusion

INTRODUCTION

Proof-of-Work and Proof-of-Stake are two different mechanisms that are used to validate cryptocurrencies. Both of them are integral components of blockchain technology and security because, in different ways, they help to ensure that users are honest with transactions by incentivizing good actors and making it very difficult and expensive for the bad actors. In this way, these consensus mechanisms reduce the chances of fraud such as double-spending.

Decentralized blockchains like Bitcoin or Ethereum require computers to “prove” their presence in the network for validating transactions and PoW and PoS are the most prominent consensus mechanisms and the key components of blockchain technology and how it works. The significant differences between them are their transaction fees, efficiency and speed.

The CEO and Co-founder of Mudrex, Edul Patel delineated the difference between the two mechanisms by saying, “PoW uses a competitive validation method to confirm transactions. PoS uses randomly selected miners to confirm and add new blocks to the blockchain”

PROOF OF WORK

In Proof-of-Work when transactions are added to a given blockchain network, other computers within the network must validate and approve them before new blocks are created and entered into the blockchain. It requires a computer to solve cryptographic puzzles, putting in ‘work’ to be rewarded with the ability to verify the transactions on the blockchain. It is called cryptocurrency mining, which is similar to a competition. Proof-of-Work provides a way for the blocks to remain “trustless”. This means that no third party is necessary to verify or manage the transactions.

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PROOF OF STAKE

Proof-of-Stake relies on validators who own the coins associated with the blockchain. With PoS, a validator is chosen randomly based in part on how many coins they have locked up in the network, which is also known as Staking. Staking replaces mining as the consensus mechanism in a Proof-of-Stake blockchain. A stake is a fixed amount of funds that are committed to a blockchain by a validator in order to participate in block creation and attestation.

PoW VS PoS

In Proof-of-Work, crypto transactions are verified through mining. In Proof-of-Stake, validators are chosen based on a set of rules depending on the “stake” they have in the blockchain. In either case, the cryptocurrency is designed to be decentralized and distributed which means that the transactions are visible to and verified by computers worldwide.

The function of both these mechanisms is to validate transactions. Proof-of-Work enables agreement on which block to add by requiring network participants to expend large amounts of computational resources on generating new valid blocks. Proof-of-Stake on the other hand uses less energy compared to PoW but does the same work because it was created as an alternative. However, Proof-of-Stake requires participants to stake cryptocurrency in the form of collateral to add a new block in the digital ledger blockchain.

The mining process in Proof-of-Work consensus is energy intensive as it requires a lot of electricity and other resources to verify transactions, create new tokens, and add new blocks to the network. As far as Proof of Stake is concerned, Amit Nayak who is the CEO and co-founder of Sahicoin said, “The PoS mechanism achieves the same with fewer resources and less complexity. Unlike PoW, participants stake a certain amount of crypto and are selected randomly to validate transactions in the PoS system.”

PROS OF PoW

Proof-of-Work is a more decentralized way of validating transactions on a blockchain because it requires more computers and participants across the network to review and approve transactions. To many crypto purists and enthusiasts, the more decentralized the better.

Other benefits include:

• It was intended to stop double-spending attempts.
• It is one of the most secure consensus mechanisms.
• Cryptos based on PoW have more mining power.
• It has a better ability to be decentralized.

CONS OF PoW

Proof-of-Work requires a significant amount of energy to verify transactions. Since the computers on the network must spend a lot of energy and operate a lot, the blockchain is less environmentally friendly than other systems.

Some other cons include,

• Its mining requires extremely powerful hardware.
• It is not affordable for every market participant.
• Energy consumption due to extremely high mining participation is off the charts.
• The majority of mining pools are controlled by single entities.
• Slower transaction speeds and high cost to validate transactions.
• It is prone to 51% attacks.

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PROS OF PoS

Proof of stake offers key advantages compared to Proof-of-Work, experts say. Its faster transaction speeds and more efficient energy requirements allow for blockchains that are more scalable. Thus making it easier for them to find adoption among new users.

On top of that, Proof-of-Stake provides opportunities to earn more crypto. You can lock up your coins in a liquidity pool and receive rewards in the form of more coins. This offers more opportunities to earn passive income.

Other benefits include:

• Proof of sake mechanism is relatively safe from 51% of attacks.
• It doesn’t need expensive hardware for processing.
• Transactions are faster and relatively inexpensive.
• Less energy consuming and provides financial opportunities.
• Environmentally friendly

CONS OF PoS

The main issue with proof-of-stake is that it usually requires an enormous initial investment. You must purchase enough of the native token of that cryptocurrency to qualify to be a validator. This is usually dependent on the size of the network. In theory, people must be wealthy or earn enough money to buy a network stake, leading to an exclusively rich blockchain. As cryptocurrencies rise in market value, this issue could become worse

Other problems include:

• It is harder to truly decentralize the network.
• Less secure than PoW because capturing control of the network is easy as it depends on capital.
• PoS models haven’t been implemented on an elaborate blockchain.
• PoS misses out on many PoW benefits like mining rewards etc.
• Threads like double-spending are executable.

CONCLUSION

Proof-of-Stake and Proof-of-Work both have their own pros and cons. Every system has its strengths and weaknesses, and which one you think is better ultimately depends on your point of view. However, experts are of the opinion that proof-of-stake is a better, more efficient way to operate a blockchain network. Which is probably the reason why Ethereum is transitioning from the traditional PoW to a PoS consensus mechanism through its Ethereum 2.0 upgrade. “Both proof-of-work and proof of stake are mechanisms used across these networks to verify transactions,” says Adam Blumberg, CFP, co-founder and president of Interaxis, a firm that educates financial advisors about crypto assets. “However, for financial systems, proof-of-stake works better.”

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