Proof of work and proof of stake are two different algorithms used in blockchain networks to reach distributed consensus. The main difference is that proof of work requires miners to use significant computational power, while proof of stake requires users to show ownership of a specific amount of cryptocurrency.
Although there are differences in how these work, they both serve the same purpose.
There are a lot of technical terms used in explaining these two different ways of verifying transactions within a cryptocurrency network. After reading this article, you'll have a basic understanding of each and why they are so crucial.
What is Proof of Stake
Proof of stake (PoS) is an algorithm used by a cryptocurrency blockchain network to achieve distributed consensus. Distributed consensus is accurately updating the blockchain with new transactions and blocks. It ensures network integrity by confirming the validity of new blocks before they are added to the chain. This system prevents malicious users from tampering with the ledger (for example, by spending Bitcoins they do not own).
In cryptocurrencies that use Proof of Stake, the creator of the next block is chosen via various combinations of random selection. And just like Proof of Work (PoW), PoS is used to confirm transactions and produce new blocks on the chain. The PoS protocol chooses a validator node to review the block when transactions are processed. It's the validator's task to check if the transactions are accurate. If they are, the block is added to the blockchain, and the reward is distributed. However, if a validator adds a block with inaccurate information, they lose some of their staked money.
PoS was first implemented in 2012 by Peercoin, a cryptocurrency created to address some of the problems seen in Bitcoin and other proof-of-work cryptocurrencies.
Energy efficiency. The proof-of-work system is inefficient in energy consumption as miners burn a lot of energy to solve cryptographic puzzles. A PoS system eliminates such heavy computing, thus reducing energy consumption.
Ease of participation. The high entry barrier and colossal capital requirement in PoW systems are barriers for many interested individuals to participate in mining activities. With PoS, it becomes easier for anyone with some stake in the network to participate and earn rewards.
Security. Another advantage of a PoS system is potentially more secure than a traditional blockchain with Proof-of-Work consensus. In a PoS system, validators are invested in the network and have an incentive to act honestly as there is value at stake. In comparison, a Proof-of-Work system has miners who may be less interested in maintaining the network's overall health if they can earn rewards from dishonest behavior.
While the proof-of-stake consensus algorithm has many advantages, it also has some disadvantages.
Security. The main issue with PoS is security, even though we just listed it as an advantage as well. Theoretically, if someone owns 51% or more of the cryptocurrency, that person would have complete control over the network, making it possible to manipulate or stop all transactions. Another security concern is that since the creator of a block is chosen in a pseudo-random way, it becomes predictable who will create the next block after some time. This enables an attack where an attacker waits for their turn to create a block.
Centralization Risk. Another issue is that proof of stake favors those with more funds over those with less. Since one needs to hold coins to mine or validate transactions and earn rewards, ownership becomes increasingly concentrated among fewer people. This may be more secure than proof-of-work in some ways, but it also moves power into the hands of wealthy individuals who can invest large sums into servers or other high-end hardware for running full nodes.
What is Proof of Work
Proof of Work is an algorithm that cryptocurrency uses to verify transactions. Cryptocurrencies use this mechanism to prevent people from duplicating and altering transactions. Participants solve cryptographic puzzles to validate transactions and also create new blocks. In turn, they receive rewards in the form of that cryptocurrency.
Proof of Work requires miners to put in a significant amount of computing power to verify a transaction and add it to the blockchain. For their efforts, miners are rewarded with coins from the blockchain they help maintain.
To maintain a distributed consensus on the network, all participants must agree on all the transactions that have ever happened to reach a consensus. By using a PoW algorithm, new changes can be added to a blockchain without the need for a mediator like a bank.
It's secure. Proof of Work is the safest form of reaching consensus and does not rely on a trusted third party. It is impossible to attack the network without spending significant resources (e.g., electricity). In addition, if you want to make such an attack possible, you would need to control over 51% of all mining power on the network.
It prevents attacks. Even though any attacker can create hundreds of identities and pretend they are nodes in the network, they cannot solve the PoW before legitimate nodes do. They would need more mining hardware than all honest miners combined, which is practically impossible.
It's decentralized. Miners can join or leave the network freely without affecting the overall security of the blockchain. Proof of work is an excellent way to avoid centralization when miners worldwide.
It's rewarding. A proof of work algorithm ensures that all miners have an equal chance to find new blocks and get rewarded. They will only get rewarded if they successfully solve the mathematical puzzle and meet other requirements set by the blockchain. This rewards system makes sure that no one controls more than 50% of the network power by buying mining devices in bulk.
It's unfair. One of the disadvantages of the proof of work system is that the rewards given to miners are sometimes too high for their effort. People who have powerful mining computers can get a lot of coins quickly, which can cause more problems for other users in the future.
Incurs a high cost to produce. To reach consensus, a computer must solve increasingly complex cryptographic problems (and thus use more and more computing power) to validate each new block of transactions. Proof of work is expensive because it involves many computers competing to process a transaction, requiring a lot of energy and computing power. The mining machines which solve the proof of work problems are constantly running computations that have to be paid for.
This can lead to centralization. Since there are so many costs involved in running proof of work systems, this tends to favor those who have more resources in their hands over smaller miners. This has led to larger mining pools where several miners come together to reduce costs. It could lead to centralization in time as only a few entities control most of the network's hash rate.
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PoS vs. PoW: How Transactions are verified
The main difference between Proof-of-Work and Proof-of-Stake is that while the former uses miners to verify transactions, the latter uses validators. Miners are rewarded with cryptocurrency to incentivize them to validate transactions. On the other hand, Validators stake their cryptocurrency to verify transactions. Those who prove successfully receive some of the transaction fees for doing so. In this sense, it is a more economical solution because it does not require miners to solve computationally expensive problems to add blocks to the chain.
PoS vs PoW: Reward distribution
A critical difference between PoW and PoS is how they distribute rewards. In PoW, transactions are validated by the miners who first solve a cryptographic puzzle. This process is called mining, and the computers that do this are known as miners. The first miner to find a solution earns the right to create a new block on the blockchain, earning them new coins for their efforts.
In PoS, the creator of a new block is chosen pseudo-random, but the chance of being selected is proportional to the number of coins held by the miner (their stake). For example, if you own 5% of all coins on that blockchain, you have roughly a 5% chance of being selected to create a new block. The process is designed to make it increasingly difficult to own more than 50% of all coins. If this happens too often, blocks can be created at will by one person/group and invalidate the system.
PoS vs. PoW: Energy Usage
The PoW mining algorithm is a computationally heavy task and requires an incredible amount of electricity to complete. In contrast, PoS does not require computers to perform heavy calculations to add new blocks to the blockchain. PoS usually requires less energy consumption than PoW, making it more environmentally friendly.
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If you're new to the world of cryptocurrency and looking to invest, it can be helpful to understand the difference between Proof of Stake and Proof of Work. These are two competing methods used to secure transactions on a blockchain, but they each have their own positive and negative points. Ultimately, what matters most is that you have educated yourself before investing any money into crypto.
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In proof of stake, validators are selected using an algorithm based on the amount of cryptocurrency they own — or "stake" — in that blockchain's network. The larger the stake someone has, the greater their chances of being selected to validate transactions on the network.
Proof of stake (PoS) is an algorithm used by a cryptocurrency blockchain network to achieve distributed consensus. Distributed consensus is accurately updating the blockchain with new transactions and blocks. It ensures network integrity by confirming the validity of new blocks before they are added to the chain.
Several cryptocurrencies use PoS as their main consensus algorithm, including Cosmos (ATOM), Cardano (ADA), Polkadot (DOT), Solana (SOL), VeChain (VET), and Tezos (XTZ).