Proof of work and proof of stake are algorithms the crypto network uses to keep the blockchain safe and allow users to add new crypto transactions. Although they serve a similar purpose, the two have some differences.
Since cryptocurrency is decentralized, computers must verify transactions to confirm they are legitimate. Both proof-of-work and proof of stake make sure transactions are safe by making them challenging and expensive for users who want to commit fraud.
To achieve this, users must prove they have supplied a resource to the blockchain. This resource could be energy, computing power, or even money.
What differentiates “proof of work” from “proof of stake” is how their blockchain algorithm selects and qualifies users for adding transactions to the blockchain.
Proof of work is the original method used to achieve consensus in cryptocurrency, and Bitcoin first introduced it. It is closely linked to mining, which involves a network requiring immense processing power. This is why it is called “proof of work.”
Virtual miners worldwide race to solve a complex math puzzle to verify and secure proof-of-work blockchains. The network rewards the winner with a predetermined amount of cryptocurrency and gets to update the blockchain with the latest verified transactions.
Proof of work is beneficial in many ways, particularly for a valuable digital asset like Bitcoin. It is a tried-and-true and reliable method for maintaining a decentralized, trustworthy blockchain.
When a coin’s value goes up, new miners are motivated to become members of a network, boosting its strength and reliability. Due to the significant level of computing power required, it also becomes infeasible for any person or business to meddle with the blockchain of a valuable coin.
But, it is a resource-intensive operation that many find it difficult to scale to deal with the large volume of transactions that blockchains that support smart contracts, like Ethereum, may produce. Other techniques have thus been created, with proof of stake as the potentially most known system.
PoW needs computers that use large amounts of electricity, which can slow down transaction times as the cryptocurrency network grows. Nonetheless, the blockchain network remains secure since a bad actor must take over at least 51% of the network’s computing power.
If a blockchain is forked, meaning the community changes its protocol and the chain splits into a new blockchain, the history of the original blockchain moves in a new direction to avoid duplicate transactions or spending.
Miners can support the newer forked network or stick with the original one, making it even more difficult for a bad actor to control 51% or more because they would have to split their computing resources and support both blockchains.
A blockchain is a series of blocks arranged chronologically based on a transaction order, known as blockchain ordering. The first block in a PoW blockchain is called the “genesis block,” and subsequent blocks always refer to prior blocks, containing a complete and updated ledger copy.
To amend the ledger with new entries, PoW algorithms select who gets to do it through a competitive race, where miners use computational resources to submit legitimate blocks that fit the network’s regulations.
This ledger keeps track of all transactions, preventing users from spending their funds twice, and is distributed to avoid tampering.
Users identify tampering using hashes, which act as proof-of-work, and nodes verify transactions to prevent double-spending. PoW makes double-spending incredibly difficult by making it expensive to monopolize the network’s processing capacity.
When hashing to create fresh blocks, miners race to come up with the right solution to math puzzles. The network is broadcasted by the miners who win the hash, enabling other miners to verify that the solution is valid.
In the event that the block is valid, the blockchain is updated, and the miner is paid the block reward. 6.25 bitcoins are the latest transaction reward for bitcoin mining. For the purpose of generating agreement and ensuring the authenticity of operations saved to the blockchain, the PoW algorithm mixes computer resources and encryption.
In 2011, the network introduced a new idea to solve the problems of the PoW consensus mechanism, which required a lot of computational power to run the blockchain network. This approach is the proof-of-stake consensus mechanism, which works based on the number of cryptocurrency tokens users own.
So, instead of performing work to validate transactions, users only need to prove that they have a certain amount of tokens on the blockchain to participate in the validation process. This helps reduce the energy and computing resources required to maintain the network.
For example, if miner A has 30 coins, miner B has 50 coins, miner C has 75 coins, and miner D has 15 coins, then miner C with 75 coins will have the priority to validate the next block. Unlike the PoW system, the miner will receive transaction fees instead of block rewards.
The first block in a PoS blockchain is called the “genesis block,” and it’s hard-coded into the program. Blocks added later to the chain use the genesis block’s data to update the ledger and record transactions.
In PoS networks, miners don’t compete for the right to add blocks. Instead, they “mint” or “forge” blocks. Unlike PoW blockchains, PoS blockchains don’t restrict who can propose blocks based on energy usage.
Proof-of-stake eliminates the need for mining, which makes it more energy-efficient. You also don’t need top-of-the-line technology to create new blocks in PoS.
Proof-of-stake has many advantages over proof-of-work, including more network nodes, better governance norms, and less centralization. Participants must stake a certain sum of the network’s cryptocurrencies in a signed agreement in order to contribute to the PoS bitcoin protocol block addition process.
The number of crypto assets they’ve staked determines their chances of being chosen to produce the next block.
PoS may use other determining factors besides the amount of stake, such as when a node has staked its money or pure randomization, which doesn’t always favor the wealthiest nodes.
A network fee awarded by blockchain to the user that delivers a legitimate transaction is referred to as a “block reward” in the context of PoS. In PoS, block selection is based on coin ownership, so exchanges offer staking services that allow users to stake crypto for more consistent rewards.
Multiple stakeholders can join a staking pool to pool their computing resources and increase their chances of receiving block rewards by maximizing their staking power while verifying and validating new blocks.
The way a blockchain network agrees on which transactions are valid is known as the consensus mechanism. This process is crucial for the decentralized nature of a blockchain network and ensures that entities in charge of verifying transactions do not centralize.
It must have an operating consensus mechanism to maintain the blockchain’s immutable and trustless characteristics. Different networks require different types of consensus mechanisms.
Proof of Work (PoW) is important for safeguarding, stopping scams, and to build trust in the crypto community. PoW ensures that miners cannot be misled about a transaction, making it difficult to alter the transaction history.
PoW requires a participating node to demonstrate that they have completed and submitted the work, which qualifies them to add new transactions to the blockchain, protecting against any malicious activity. PoW helps identify the most legitimate copy of the blockchain when there are numerous copies on the network.
It also builds a distributed clock, enabling miners to freely join and exit the network while maintaining a consistent operation rate.
On the other hand, PoS is used when the network needs to process transactions faster. Validators typically own a large amount of the token, which encourages them to keep the network safe.
However, there are doubts about the security of PoS and PoW against threats. Therefore, the Chia project has introduced a proof-of-space validation mechanism to safely validate transactions.
Chia uses a proof-of-space and proof-of-time consensus mechanism to resolve centralization issues plaguing PoW and PoS blockchains.
PoW algorithms employ a competitive race to determine who can adjust the ledger. Miners are encouraged to expend computational energy to propose valid blocks that meet the network rules, and nodes, which are computers running the Bitcoin software, validate transactions, prevent double spending, and determine whether proposed blocks should be added to the chain.
To create a new block, miners on a PoW network compete against each other to solve complex mathematical problems in a process called hashing. These puzzles are tough to solve, but it should be easy for the network to verify the correct solution.
Contrary to PoW blockchains, PoS blockchains do not rely solely on computing power and energy consumption to determine who can propose blocks.
PoS advocates claim that it is a more energy-efficient system in which individual nodes take responsibility for creating new blocks instead of competing against each other.
While both PoW mining and PoS minting require energy consumption, mining, and minting nodes are motivated to use the most cost-effective form of electricity, which is often derived from renewable sources such as hydroelectric, wind, or solar power instead of greenhouse-emitting sources like coal.
Additionally, PoS blockchains need specialized hardware (GPUs) like PoW mining equipment (ASICs) and other computing requirements, necessitating production resources. PoS miners must also maintain active internet connections, which demands energy expenditure.
Proof of work (PoW) is a consensus mechanism that requires miners to compete against each other to solve cryptographic equations and confirm each blockchain block quickly.
It prevents attacks by making miners expend resources and rely on consensus rules. However, one major lapse with PoW networks that we have seen is a security breach. With this breach, some users can control more than 50% of the mining power.
This level of control means that these users can prevent transactions from being confirmed by the network. They will also have the ability to spend coins twice and create forks in the blockchain.
On the other hand, proof of stake (PoS) only allows miners to validate blocks if they have provided a “stake” or security deposit. This motivates attackers to confirm legitimate transactions and avoid forking the blockchain since they would lose their stake.
This makes PoS an effective way to prevent cryptocurrency attacks since there is no benefit to attackers disrupting the blockchain to steal or double-spend coins.
Cryptocurrencies like Bitcoin and Ethereum are decentralized, meaning no state or institution is in charge of issuing or regulating them.
This is a fundamental difference between cryptocurrencies and centralized currencies like the U.S. dollar or the Chinese yuan, issued by central banks and distributed to the public through branch banks.
However, the decentralized nature of cryptocurrencies raises the question of how to prevent fraudsters from abusing the system. One such problem is the “double spending” problem, which occurs when someone spends the same amount of cryptocurrency twice.
This could destroy trust in the currency and erode its value. In centralized currencies, this problem is less common because the state has the power to enforce justice and prevent fraud. But decentralized cryptocurrency systems have no central authority to ensure justice.
To address the double spending problem in cryptocurrencies, a consensus protocol proves that a transaction is valid and that no coin is being spent twice. This is essential to maintaining trust and confidence in the currency.
Without such a protocol, the crypto community could question the currency’s value, and people may lose faith in its ability to function as a reliable medium of exchange.